When we look at whether or not a decision was correct, how much does the outcome matter? Surely we are correct when events validate our decision, right?

Not really. Actual outcome is really just another datapoint when considering probability vs. certainty. The actual outcome certainly happened, but it was not a certainty before it happened. Get it? Even with this actual outcome assured, that doesn’t mean we made the right decision that brought it about. We may have just been lucky.

Our minds seek the comfort of narratives and a deterministic universe, but since we lack omniscience, narratives are best fitted post hoc, and we can’t possibly know enough to close the gap between probability and certainty. How then should we evaluate performance? By thinking in terms of what Taleb calls alternative histories.¹

One can illustrate the strange concept of alternative histories as follows. Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger. Each realization would count as one history, for a total of six possible histories of equal probabilities. Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death. The problem is that only one of the histories is observed in reality; and the winner of $10 million would elicit the admiration and praise of some fatuous journalist (the very same ones who unconditionally admire the Forbes 500 billionaires). Like almost every executive I have encountered during an eighteen-year career on Wall Street (the role of such executives in my view being no more than a judge of results delivered in a random manner), the public observes the external signs of wealth without even having a glimpse at the source (we call such source the generator). Consider the possibility that the Russian roulette winner would be used as a role model by his family, friends, and neighbors.

While the remaining five histories are not observable, the wise and thoughtful person could easily make a guess as to their attributes. It requires some thoughtfulness and personal courage. In addition, in time, if the roulette-betting fool keeps playing the game, the bad histories will tend to catch up with him. Thus, if a twenty-five-year-old played Russian roulette, say, once a year, there would be a very slim possibility of his surviving until his fiftieth birthday—but, if there are enough players, say thousands of twenty-five-year-old players, we can expect to see a handful of (extremely rich) survivors (and a very large cemetery).²

The question remains, what is a value of the $10 million earned playing Russian roulette, compared to $10 million earned practicing dentistry³? The money spends the same way, but did the player choose correctly by deciding to play in the first place? I think this example, by being absurd⁴, is useful in highlighting the flaw in the usual way we evaluate success.

Just because you did not die playing Russian roulette does not mean you were correct putting the gun to your head. Just because you did not break your neck diving into unfamiliar, shallow water does not mean you were correct jumping in head-first. Just because you won the lottery does not mean you were correct spending all your money buying Powerball tickets.

Use good judgment, make sound decisions, and rest secure in the knowledge that you chose well, no matter the outcome. If fortune does not favor you, remember, “it ain’t over until it’s over,” and should success later arrive, as a result of good judgment and decision making, consider the positive reading of Solon’s warning: what arrives irrespective of luck is more resistant to randomness in the future.

This post is one part in a series on Fooled by Randomness. Feel free to dip in anywhere or start at the beginning.