Read, Rupert

Taleb, Nassim Nicholas

English

University of East Anglia digital repository

Religion, Heuristics,and IntergenerationalRisk ManagementRupert Read1 and Nassim Nicholas Taleb2LINK TO ABSTRACTThis article does not concern what might be termed ‘the religious side ofreligion’ (each of us has written about that elsewhere3). Both of us are very sym-pathetic to true religion; to what we call faith as practice; to a genuinely spiritualorientation toward life. One of us, Rupert Read, is a Quaker and a Buddhistmeditator. The other, Nassim Taleb, comes from a Levantine Greek Orthodoxfamily and, growing up in Lebanon, studied the Quran and other religious texts(Old Testament, Talmud) to practice Semitic languages; he has embraced GreekOrthodoxy as a repository of ancient Mediterranean lore and rites, focusing onthe practice aspect (which includes religious fasts and feasts and a focus on theceremonial), rather than the belief side. A victim of the Lebanese war, he is fullyaware of the destructive effects of religious intolerance.So to the question posed in the Prologue to this symposium (Klein 2014),“Does professional economics needs enrichment by religious or quasi-religiousthinking?,” our answer is squarely “yes,” as we believe that religion has traditionallyperformed a powerful risk-management function at the level of the individual andthe collectivity, particularly in preventing the accumulation of debt in systems andin preventing some kinds of experimentation with natural systems, ones thatproduce errors with irreversible effects. We argue that religion transmits heuristicsDiscuss this article at Journaltalk:http://journaltalk.net/articles/5836/ECON JOURNAL WATCH 11(2)May 2014: 219-2261. University of East Anglia, Norwich NR4 7TJ, UK.2. New York University, Brooklyn, NY 11201.3. See Taleb (2010b, 18-21) and Read (2007, ch. 3).VOLUME 11, NUMBER 2, MAY 2014 219of risk control across generations, and that religion does so in modes that only itcan.4Figure 1. Rare or ‘tail’ events tend to not show in (recent) past samples. Yet they are terriblyconsequential. Religion helps with intergenerational memory by carrying a certain class ofinterdicts.Let us start by presenting the problem of silent risk, as seen in Figure 1, a classof severe exposures—‘Black Swans’—that are so infrequent as to not necessarilyshow in past samples. Yet these are terribly consequential and determine a largeshare of the statistical properties. Perhaps one cannot explain their ‘causes’ exceptafter the fact, and perhaps not even then. If we look at asset prices, we find a largeshare of rare events without predecessors. Black Swans are often brushed asidewith assurances to the effect of ‘it never happened before’ or ‘times are different.’Evidentiary or statistical methods fail us there. Such methods consist inlooking at the properties of past data and reacting based on recent ‘evidence.’ But4. These heuristics belong to the class called “convex heuristics,” mathematically defined in Taleb (2014).Their aim is not to be ‘right’ and avoid errors, but to ensure that errors remain small. A convex heuristichas the following properties: (1) Compactness: It is easy to remember, implement, use, and transmit. (2)Consequences, not truth: It is about what it helps you do, not whether it is true or false. It should bejudged not in ‘truth space’ but in ‘consequence space.’ (3) Antifragility: It is required to have a benefitwhen it is helpful larger than the loss when it is harmful. Thus it will eventually deliver gains from disorder.(4) Robustness: It satisfies the fragility-based precautionary principle. (5) Opacity: You do not need tounderstand how it works. (6) Survivability of populations: Such a heuristic should not be judged solely onits intelligibility (how understandable it is), but on its survivability, or on a combination of intelligibilityand survivability. Thus a long-surviving heuristic is less fragile than a newly emerging one. But ultimatelyit should never be assessed in its survival against other ideas, rather on the survival advantage it gave thepopulations who used it.READ AND TALEB220 VOLUME 11, NUMBER 2, MAY 2014risk is not really in the visible past but rather in the future: the past is just a proxy.The ‘recent past’ may not show these events and yet, typically, has higher weightingin conventional time series analysis. Further, these silent risks, when they hit, areproduced most likely by some largely unknown class of distributions.Using, for risk-management purposes, ‘fat tailed’ probability distributions(those, such as power laws, that extrapolate beyond the sample set in which theyhave been calibrated), also fails us because such distributions are extremely sen-sitive to small changes in parameters.In addition, consider the class of tail exposures that lead to ruin of a system,whether the economy or the environment. Like a resource that gets depleted inthe long term, the risk of ruin makes the system unsustainable. If one incurs a tinyprobability of ruin as a ‘one-off’ risk, and survives it, and then continues to repeatthe exposure (simply because one has survived), one will eventually go bust. Soover time, and under repetition, a tiny risk ends up blowing up the system (Bar-Yam, Read, and Taleb 2014).Consider the recent crisis that started in 2008, resulting from the wildaccumulation of silent risk via a high ratio of debt and leverage in the system.A good knowledge of history might have given people pause, as a similar rise ofthe debt-to-GDP ratio occurred before the crisis of 1929, leading subsequently toanti-debt sentiment. But the 1929 experience did not effectively cross generations.Economic theories that Taleb has called “risk-blind” or “Black Swan-blind”displaced the heuristic knowledge of grandmothers (2007; 2010b). The argumentmade in Taleb (2007) is that debt accumulation reflects overconfidence. Under-estimation of one’s error rate in forecasting the future leads to more debt, as itmakes the payoff under high leverage appear more attractive. In addition, suchoverconfidence causes fragility in the system.In the matter of debt, religions have been potent in the prevention of debtaccumulation: from the Ecclesiast, to Islam, to Aquinas (Summa, II-II, 78). Exceptfor Protestantism, every Abrahamic branch has had some interdict against ‘lendingwith interest.’ The interdict’s justification invoked issues of moral symmetry be-tween lender and borrower, but we believe that the actual causes for the survival ofsuch interdicts go beyond such a rationalization.Compare the near-universal religious caution, even exhortation, against debtto the Modigliani-Miller (1958) result establishing that a firm’s debt-equity ratiodoes not matter for valuation, which invited an entire generation of economists toendorse debt, or at least not caution against it. A careful reading of the literatureshows that the highly rationalistic approach of Modigliani and Miller ignores theeffect of debt on error in the representation of the future. And economists callingthis result a “theorem” when it is fragile to change of assumptions caused it to betaken more seriously than was warranted.INTERGENERATIONAL RISK MANAGEMENTVOLUME 11, NUMBER 2, MAY 2014 221Religion counters the modern post-Enlightenment attitude as it allows usto hold that what we don’t see or understand isn’t necessarily stupid or irrational.In his technical book Silent Risk, Taleb (2014) argues that social science hastraditionally operated under the modus that what is not explainable is “irrational.”Psychologists and behavioral economists often find that people do not appearto follow a normative model, and then suggest that such behavior is “irrational”or “biased.” But in talking that way, the analysts are usually missing layers ofuncertainty beyond that of a tinky-toy first-order model; it is the researcher whois making a mistake, not the real-world person. Taleb (2014) shows that many“biases” can be made to go away by building a richer mathematical model, one withstochastic parameters. He also suggests that much of the decision-science literatureon ‘dread risk’ (whereby humans overestimate particular small-probability risksand overreact to them) and ‘long-shot bias’ (overestimation by humans of theodds of large-but-infrequent payoffs) turns out not to be robust to changes inassumptions or environment, as the researchers have derived their conclusionsusing thin-tailed models and experiments in thin-tailed domains. The role of small-probability events is larger in fat-tailed domains, and once we take that into accountmuch of the so-called bias goes away. It looks instead like we humansunderestimate risks of unimagined rare events and overestimate our knowledgeabout the future.We believe that religion supplies potent tricks to mitigate people’s naturalepistemic arrogance and overconfidence about the future. “I don’t know” issomething hard for humans to accept and say; this is made easier in the Arabiclanguage, as the typical traditional expression is “God knows.” Saying “Godknows” is easier on one’s ego than “I don’t know.”Wittgenstein (1961/1921, 6.372) remarked: “…the view of the ancients isclearer in so far as they have a clear and acknowledged terminus, while the modernsystem tries to make it look as if everything were explained.”Religion and beliefsLet us now enlarge on an idea captured by an aphorism by Taleb (2010, 21):“Restaurants get you in with food to sell you liquor; religions get you in with beliefto sell you rules (e.g., avoid debt). People can understand the notion of God, notunexplained rules, interdicts, and categorical heuristics.”When someone discusses religious beliefs, he does not necessarily mean beliefin the epistemic sense, and the relevance of the epistemic sense of the term de-creases as we go back in the history of the fixation of the creed. For ancient FertileCrescent and Mediterranean pagan systems and what we commonly callREAD AND TALEB222 VOLUME 11, NUMBER 2, MAY 2014Abrahamic religions (Judaism, Islam, and the various pre-Protestant Christianbranches), the notions of piste, πίστη in Greek, credere in Latin, or “Amen”/“Amin”(ןומא and نيمآ) in Semitic languages do not map exactly to what we call “belief” intoday’s language. Rather, such notions are rather closer to the root of “belief”: be-loved, a sense of commitment, something related to the notion of trust. It is notcoincidental that credere is related to letter of credit or financial transactions thatentail trust (see Armstrong 1994; Boyer 2001).Accordingly it is an extremely naive interpretation to think that religious‘beliefs’ map to the ‘justified true belief’ standards of modern epistemology (seeIchikawa and Steup 2014); it is naive to examine the supernatural aspect of religionas anything but epiphenomenal. One needs to think of religious ‘belief’ as closerto a form of trusting, as a form of action, or a willingness to take action, and,most crucially of all, as a set of interdicts upon action.5 Further, religion establishesa categorical demarcation between sacred and profane, and one that cannot beviolated (see Eliade 1959). The sacred is not open to ‘rationalization’—what wedon’t understand is not necessarily irrational, and it might have reasons that can beprobed only across generations of experience and experimentation.What we call religion itself conflates many ‘religions,’ as if they were variationsaround the same system providing the same functions. To a Protestant in thetwenty-first century, religion has a large element of spirituality. But ancientMediterranean religion, including the three Abrahamic and other creeds, are aboutheuristics, laws, and regulatory frameworks. In Arabic, “din” (نيد), which nowmeans “religion,” corresponds to “din” (ןיִד), “law” in Hebrew and ancient Arabic.Medina, which means state in Hebrew and city in Arabic, means literally a placewhere the law prevails. In addition, Islamic law was explicitly marketed as a sort ofrisk management, counter to the great legal confusion towards the end of the sixthcentury about the various commercial rules in the Arabic peninsula, with recoursesto makeshift arbiters (hakam) (see Schacht 1964).Religion enforces interdicts.6 Interdicts appear to be historically the mostpotent form of regulation, considerably better than moderation. Jon Elster (2007,ch. 13) writes about how abstinence is more effective than rationing or “moder-ation.”Consider the evolution of ideas: ‘bad ideas’ (in the epistemic sense) cansurvive if they have some side benefits—an idea that seems to be absent in theliterature about “evolutionary epistemology” (Popper 1999). It is misguided to5. Such an understanding of belief is encountered in the philosophy of religion, e.g., by R. W. Hepburn(1958). It is present in the works of Kierkegaard and William James, and especially subtly in Wittgenstein'swritings. Wittgenstein offers a reading of what religion in its true sense is. He offers a way of understandinghow religion can be possible and necessary without its descending into outright superstition.6. See Fourest and Venner (2010) for a list of interdicts across various creeds.INTERGENERATIONAL RISK MANAGEMENTVOLUME 11, NUMBER 2, MAY 2014 223focus on the competition between ideas—and their survival—as an end product.What matters is the survival of the populations that have such ideas. Those withthe right risk-management heuristics make it, even if their system of belief does notappear ‘rational.’ConclusionIt is not just that religion is a helpful source of sound heuristics for resistinggambler’s ruin and similar hazards. More strongly, we should say that we humansactually don’t know whether human beings can live sustainably without somethinglike religion. Modernity is in this sense a dangerous uncontrolled experiment. Theamount of historical time that any significant number of humans have lived withoutreligion is infinitesimal compared to the sweep of history. Given that, the amountof time that we have sought as societies, as a species, to live without religion isalmost nil. It is a symptom of chronic short-termism and over-optimism thatpeople now assume that living in such a way is sustainable.Just as nature is ‘wiser’ than us (in a statistical, risk-management sense) withregard to a vast swathe of threats, illnesses, etc., just as our knowledge only sur-passes nature’s in unusual and rare circumstances, so religious man is wiser thanirreligious and non-religious man with regard to a vast swathe of threats, moral andspiritual illnesses and problems, etc. The knowledge of irreligious and non-religiousman surpasses that of religious man only in rare and unusual circumstances. Untilwe have had a lot longer to develop non-religious heuristics that work, we shouldnot throw the precautionary, religion-as-risk-management baby out with thesuperstitious, theological-claptrap bathwater.The idea advanced here, about the role of religion for system-risk manage-ment, has been aired in a manner to provoke attention and interest; we advocatemore research about interdicts that are helpful in risk management and about theviable modes, religious or otherwise, of carrying those interdicts.ReferencesAquinas, Thomas. 1964–1973. Summa Theologiæ, trans. Thomas Gilby, et al.London: Eyre and Spottiswoode.Armstrong, Karen. 1993. A History of God: The 4000-Year Quest of Judaism,Christianity, and Islam. New York: Knopf.Bar-Yam, Yaneer, Rupert Read, and Nassim Nicholas Taleb. 2014. ThePrecautionary Principle. Working paper. LinkREAD AND TALEB224 VOLUME 11, NUMBER 2, MAY 2014Boyer, Pascal. 2001. Religion Explained: The Evolutionary Origins of Religious Thought.New York: Basic Books.Eliade, Mircea. 1959. The Sacred and the Profane: The Nature of Religion, trans. WillardR. Trask. New York: Harcourt, Brace.Elster, Jon. 2007. Explaining Social Behavior: More Nuts and Bolts for the Social Sciences.Cambridge, UK: Cambridge University Press.Fourest, Caroline, and Fiammetta Venner. 2010. Les Interdits Religieux. Paris:Éditions Dalloz.Hepburn, Ronald W. 1958. Christianity and Paradox: Critical Studies in Twentieth-Century Theology. New York: Pegasus.Ichikawa, Jonathan Jenkins, and Matthias Steup. 2014. The Analysis ofKnowledge. In The Stanford Encyclopedia of Philosophy, Spring 2014 ed., ed.Edward N. Zalta. Center for the Study of Language and Information,Stanford University (Stanford, Calif.). LinkKlein, Daniel B. 2014. Does Economics Need an Infusion of Religious or Quasi-Religious Formulations? A Symposium Prologue. Econ Journal Watch 11(2):97-105. LinkModigliani, Franco, and Merton H. Miller. 1958. The Cost of Capital,Corporation Finance and the Theory of Investment. American EconomicReview 48(3): 261-297.Popper, Karl R. 1999. All Life Is Problem Solving. London: Routledge.Read, Rupert. 2007. Philosophy for Life: Applying Philosophy in Politics and Culture. NewYork: Continuum.Schacht, Joseph. 1964. An Introduction to Islamic Law. Oxford: Clarendon Press.Taleb, Nassim Nicholas. 2010 [2007]. The Black Swan: The Impact of the HighlyImprobable, 2nd ed. New York: Random House.Taleb, Nassim Nicholas. 2010b. The Bed of Procrustes: Philosophical and PracticalAphorisms. New York: Random House.Taleb, Nassim Nicholas. 2014. Silent Risk: Lectures on Fat Tails, (Anti)Fragility,Precaution, and Asymmetric Exposures. Manuscript. LinkWittgenstein, Ludwig. 1961 [1921]. Tractatus Logico-Philosophicus, trans. D. F.Pears and B. F. McGuinness. London: Routledge & Kegan Paul.INTERGENERATIONAL RISK MANAGEMENTVOLUME 11, NUMBER 2, MAY 2014 225Rupert Read is Reader in Philosophy at the University of EastAnglia and was until recently a Green Party Councillor inNorwich. His books include Kuhn (Polity, 2002), Philosophy forLife (Continuum, 2007), There Is No Such Thing as a Social Science(Ashgate, 2008) and Wittgenstein Among the Sciences (Ashgate,2012). He is now working on a book criticizing the politicalphilosophy of liberalism. Read is also Chair of Green HouseThink Tank (link). His email address is R.Read@uea.ac.uk.Nassim Nicholas Taleb traded derivatives for 21 years be-fore starting a research career. His research focuses on practi-cal, mathematical, and philosophical problems with prob-ability, as well as the ability of systems to handle disorder. He isthe author of the Incerto, a tetralogy (Antifragile, The Black Swan,Fooled by Randomness, The Bed of Procrustes), and its mathematicalbackup Silent Risk. He is currently Distinguished Professor ofRisk Engineering at New York University’s School ofEngineering. His email address is NNT1@nyu.edu.About the AuthorsGo to Archive of Economics in Practice sectionGo to May 2014 issueDiscuss this article at Journaltalk:http://journaltalk.net/articles/5836/READ AND TALEB226 VOLUME 11, NUMBER 2, MAY 2014

Religion, heuristics and intergenerational risk-management

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