I want to elaborate on the idea of alternative histories as described in Nassim Nicholas Taleb’s Fooled by Randomness.
Recall, when we assess performance, it is important to consider not just what happened, but also what could have happened. All of these together are the alternative histories.
Note that these ideas of alternative histories have been covered by separate disciplines in intellectual history, worth presenting quickly because they all seem to converge on the same concept of risk and uncertainty (certainty is something that is likely to take place across the highest number of different alternative histories; uncertainty concerns events that should take place in the lowest number of them).
In philosophy, there has been considerable work on the subject starting with Leibniz’ idea of possible worlds. For Leibniz, God’s mind included an infinity of possible worlds, of which [He] selected just one. These nonselected worlds are worlds of possibilities, and the one in which I am breathing and writing these lines is just one of them that happened to have been executed. Philosophers also have a branch of logic that specializes in the matter: whether some property holds across all possible worlds or if it holds across a single world—with ramifications into the philosophy of language called possible worlds semantics with such authors as Saul Kripke.
In physics, there is the many-world interpretation in quantum mechanics (associated with the works of Hugh Everett in 1957) which considers that the universe branches out treelike at each juncture; what we are living now is only one of these many worlds. Taken at a more extreme level, whenever numerous viable possibilities exist, the world splits into many worlds, one world for each different possibility—causing the proliferation of parallel universes. I am an essayist-trader in one of the parallel universes, plain dust in another.
Finally, in economics: Economists studied (perhaps unwittingly) some of the Leibnizian ideas with the possible “states of nature” pioneered by Kenneth Arrow and Gerard Debreu. This analytical approach to the study of economic uncertainty is called the “state space” method—it happens to be the cornerstone of neoclassical economic theory and mathematical finance. A simplified version is called “scenario analysis,” the series of “what-ifs” used in, say, the forecasting of sales for a fertilizer plant under different world conditions and demands for the (smelly) product. 1
In order to reason through alternative histories, we need some way to what-if a decision. Taleb in his own work as a trader made extensive use of Monte Carlo machines. In his case, this was a piece of software he used to run a decision through many iterations, with various parameters set at random. Thus, he explored and even measured alternative histories. We could make similar efforts I our own lives, seeking to properly asses the probabilities in the judgment phase, before finally making a decision.
I think achieving the rigor Taleb found in his own work is unlikely for most of us, but that doesn’t destroy the lesson. If we remember to fully explore and consider all the outcomes of a decision, we can make better choices.
This post is one part in a series on Fooled by Randomness. Feel free to dip in anywhere or start at the beginning.
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto) by Nassim Nicholas Taleb, link. ↩︎