EconTalk — Nassim Nicholas Taleb (3)

On: Rationality, Risk, and Skin in the Game.

Episode: N/A

Date: March 2018

Background: Author of “Skin in the Game”.

Key Subjects:

  • Third episode with Taleb related to the general topic of skin in the game.
  • Decision-making and policy in an uncertain world.
  • Rationality:
    • Ex-post rationality: what behavior or rule has allowed a unit to survive.
    • Filtering principle: not simply look at one-time risks and rewards, but what behavior over time allows you to survive and continue playing the game.
    • From this perspective, many biases are not irrational but rational behavior, as biases allow you to avoid individual or collective risk of ruin (to keep playing the game).
  • Religion:
    • Similarly, from this perspective, religion is not necessarily irrational.
    • Similar to John Gray: religion is not about the specifics of what is written down or believed, it’s about the actions actually taken.
    • To the extent that certain religious practices survive and are still here today, they probably have contributed to the survival of those that practiced them (and so, they can be viewed as rational).
    • The pope and atheist go to the same hospital – behavior is what counts.
    • [The criticism that some religious practices (rightly) get filtered out over time is not addressed in this podcast.]
  • Challenge of thinking about probability and risk correctly in a dynamic world.
    • Looking at risk from a dynamic perspective (bias literature often isolates behavior and reduces it to a one-time event).
    • Taking into consideration the amount of underlying risk (fat tail events, is there a risk of ruin).

Key Takeaways:

  • Biases may seem irrational when isolated, but can be rational if they allow you to avoid the risk of ruin in the long run.

Worth Listening:


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