I Don’t Know the Odds of an Earthquake, but I Can Imagine Its Outcome
Or, why payoffs from rare events are more important than their likelihood
👋 Hey there! My name is Abhishek. Welcome to a new edition of The Sunday Wisdom! This is the best way to learn new things with the least amount of effort.
It’s a collection of weekly explorations and inquiries into many curiosities, such as business, human nature, society, and life’s big questions. My primary goal is to give you some new perspective to think about things.
Part of the “activation energy” required to start any task comes from the picture you get in your head when you imagine doing it.
It may not be that going for a run is actually costly, but if it feels costly — if the picture in your head looks like a slog — then you will need a bigger expenditure of will to lace up.
“Slowness” seems to make a special contribution to this picture in our heads. As we learn that a task is slow, a special cost accrues to it. Whenever we think of doing the task again, we see how expensive it is, and bail. That’s why speed matters.
Enough talk! On to this week’s essay. It’s about 1,300 words.
One more thing. If you find this issue valuable, can you do me a favour and click the little grey heart? It helps get the word out about this budding newsletter. 😍
Q: Is there a good framework to make decisions amidst uncertainty?
Let’s say that you wanted to start a small business as your family’s primary means of income.
Obviously, there is very real uncertainty as to whether money is going to be coming in enough for you to pay your bills.
So, in the interest of family security, you choose NOT to start your small business, and instead get a job at a big company. Now, that’s the kind of security you can count on. At least you know that a salary is gonna be coming at the end of the month.
Well, no, not exactly!
At any point that company could downsize or cut costs, or the economy could tank. And they may let go of you in an instant. But, even then, it certainly does assume less risk than starting your own business, right?
In any case, you’re hedging your bets. Neither one of the two options are absolutely certain, but the outcome of one decision puts you in a much more favourable position more times out of 100 than the other one, and you choose accordingly.
Today, let’s talk about calculated risks. More precisely, let’s talk about how to put yourself in situations where favourable consequences are much larger than unfavourable ones.
But before we get into that, let’s go back a couple of centuries, during the life and times of René Descartes and Blaise Pascal.
Descartes was a French philosopher, mathematician, and scientist who is widely regarded as the father of modern philosophy. Descartes had a series of profound philosophical insights that led him to develop his famous method of doubt.
This method, which involves systematically doubting everything that can be doubted, is known as Cartesian doubt. It is based on the principle that it is better to accept only those beliefs that are indubitable, or certain beyond all doubt, rather than to accept uncertain beliefs that may be false.
By extension of this logic, Descartes believed that the existence of God could be proven through the use of reason, and he devoted much of his philosophical work to this endeavour. In his Meditations on First Philosophy: Third Meditation, he presents his famous “ontological argument” for the existence of God, which is based on the idea that the concept of God, as a perfect being, contains within it the idea of existence.
In other words, according to Descartes, the very concept of God implies his existence, and therefore God must necessarily exist. Descartes also believed that the existence of God could be proven through the study of nature, and he wrote extensively on the subject of natural theology.
On the other hand, Descartes’ contemporary, Blaise Pascal was a French mathematician, physicist, inventor, writer and Catholic theologian who lived in the 17th century. Pascal’s early work was in the field of mathematics, where he helped develop the modern theory of probabilities and formulated what is now known as Pascal’s Triangle.
In addition to his work in mathematics and physics, Pascal was also a philosopher and theologian who wrote extensively on the nature of God and the relationship between faith and reason.
While Descartes was setting out to prove the existence of an infinite, perfect being with reasons, Pascal on the other hand was trying to address the problem from a different angle.
Pascal recognised that no matter how strong our reasons are, we could never be able to say with absolute certainty whether God exists. His argument was centred around the idea that it really didn’t matter.
According to Pascal, not believing in the almighty was just irrational. He summarised it in a form which is popularly known as Pascal’s Wager: If you don’t believe in God and he doesn’t exist, then you die, and nothing happens. On the other hand, if you don’t believe in God and he does exist, then you just made a huge mistake. It’s going to cost you infinitely. You are now banished to a lake of fire, pushing boulders up a hill, for all of eternity. The bottom line is that you have plenty to lose if he does exist. Hence, your belief in God is justified.
In so many ways, instead of trying to prove the existence of God, Blaise Pascal asked people to hedge their bets like they would do when deciding whether to start a small business or join a big company.
Practically speaking, this argument is not without its shortcomings. Even if Pascal shows how impractical it is to not believe in God, can you really make a conscious choice to believe in something?
What if Pascal said that you should believe in Santa Claus because you have a stocking full of presents to gain and nothing to lose? Could you just, all of a sudden, decide to believe in Santa? Or Allah, or Buddha, or Rama?
You can pretend to believe in something. You can tell yourself something over and over again trying to brainwash yourself into believing something. But when you truly believe something, it’s beyond choice. You just believe it.
Pascal’s wager doesn’t address any of the things that caused the doubt in an agnostic’s mind in the first place.
On top of that, one has to be naïve enough to believe that God would not penalise us for false belief. Unless, of course, one is taking the quite restrictive view of a naïve God. Bertrand Russell was reported to have claimed that God would need to have created fools for Pascal’s argument to work.
But the central idea behind Pascal’s wager has fundamental applications outside of theology. It stands the entire notion of knowledge on its head.
Pascal’s wager eliminates the need for us to understand the probabilities of a rare event. It says that we can rather focus on the payoff and benefits of an event if it takes place at all.
The probabilities of very rare events are not computable, but the effect of an event on us is considerably easier to ascertain. In other words, we can have a clear idea of the consequences of an event, even if we do not know how likely it is to occur.
I don’t know the odds of an earthquake, but I can imagine how my city might be affected by one. Similarly, your small business taking off is a rare event. You may not know the probability of that, but you have a decent idea of what you stand to gain if it takes off.
This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty.
We will never get to know the unknown since, by definition, it is unknown. However, we can always guess how it might affect us, and we should base our decisions around that.
You can build an overall theory of decision making on top of this idea. All you have to do is mitigate the bad consequences.
If your portfolio is exposed to a market crash, the odds of which you can’t compute, all you have to do is buy insurance, or get out and invest the amounts you are not willing to ever lose in less risky securities.
If your small business is likely to fail, then having an emergency fund that can sustain you and your family for years is a sensible call. Another approach could be to start a small business on the side while keeping your day job.
Whatever the situation, your end goal is always this: putting yourself in situations where favourable consequences are much larger than unfavourable ones.
Probability isn’t as important as consequences.
Today I Learned
One day, a fifty-nine-year-old man asked his wife where his wife was. Fred — the pseudonym given to this man by the researchers who wrote up his case in the journal Neurological Science — wasn’t kidding. “On her surprised answer that she was right there,” the researchers wrote, “he firmly denied that she was his wife.”
The problem wasn’t that Fred didn’t recognise his wife’s face. Clearly this woman looked like his wife. But he insisted that she was a “double.” His actual wife, he speculated, had gone out and would return later.
Fred suffered from Capgras delusion, which consists of being convinced that someone — usually a relative, sometimes a close friend — is an imposter. And a very good imposter, an exact replica — on the outside, at least. But not on the inside. This person may look exactly like, say, your mother, but she lacks what we might call essence-of-your-mother.
No one knows for sure what causes Capgras delusion. But a long-standing theory is that it results from a disruption of the connection between a part of the brain involved in visual processing (maybe the fusiform gyrus, which figures in facial recognition) and a part of the brain that processes emotions (such as the amygdala).
What is clear is that there is some shortage of affect, of feeling — the feelings typically evoked by, say, your mother just aren’t there. And if seeing somebody doesn’t make you feel the way seeing your mother makes you feel, how could that person be your mother?
Identifying human beings is something we normally think of as a straightforward act of visual perception. It seems like the kind of thing a computer could do. In fact, computers do a good job of it, just by scanning faces.
But apparently human beings have a more complicated way of identifying things: not just by how they look but by how they make you feel. At least — to judge by Capgras delusion — that seems to be the case when we’re identifying friends and relatives.
Timeless Insight
As a principle, you should be weary of quick fixes that seem to solve a big problem.
It’s bound of have a lot of hidden risks that are likely to cause long term disasters in the future. It is true that simple and easy-to-comprehend business models, medical procedures, financial plans, and growth strategies are highly revered, but that’s only because human beings are gullible.
Einstein warned us about it when he said: Everything should be made as simple as possible, but not simpler.
It cannot be said with certainty if Einstein actually said it, but it makes a lot of sense nonetheless.
Einstein’s ideas and theories could get complex, as was his theory of relativity of which, at least initially, he was the only one who was able to understand the maths completely.
But if one is to fully understand the essence of the theory, then that understanding must be conveyed as simply as possible for the sake of good communication. But making it simplistic just for the sake of communication would make it easily comprehensible, but it won’t convey what the theory actually is.
What I’m Reading
Walk alone, across mountains or through forests. You are nobody to the hills or the thick boughs heavy with greenery. You are no longer a role, or a status, not even an individual, but a body, a body that feels sharp stones on the paths, the caress of long grass and the freshness of the wind. When you walk, the world has neither present nor future: nothing but the cycle of mornings and evenings. Always the same thing to do all day: walk. But the walker who marvels while walking (the blue of the rocks in a July evening light, the silvery green of olive leaves at noon, the violet morning hills) has no past, no plans, no experience. He has within him the eternal child. While walking I am but a simple gaze.
— Frédéric Gros, A Philosophy of Walking
Tiny Thought
A great challenge of life: Knowing enough to think you are right, but not knowing enough to know you are wrong.
Before You Go…
Thanks so much for reading! Send me ideas, questions, reading recs. You can write to abhishek@coffeeandjunk.com, reply to this email, or use the comments.
Until next Sunday,
Abhishek 👋