It means that there is no such thing as a long run for such systems, called “nonergodic” systems—as opposed to the “ergodic” ones. In an ergodic system, the probabilities of what may happen in the long run are not impacted by events that may take place, say, next year. Someone playing roulette in the casino can become very rich, but, if he keeps playing, given that the house has an advantage, he will eventually go bust. Someone rather unskilled will eventually fail. So ergodic systems are invariant, on average, to paths, taken in the intermediate term—what researchers call absence of path dependency. A nonergodic system has no real long-term properties—it is prone to path dependency.
I believe that the distinction between epistemic and ontic uncertainty is important philosophically, but entirely irrelevant in the real world. Epistemic uncertainty is so hard to disentangle from the more fundamental one. This is the case of a “distinction without a difference” that (unlike the ones mentioned earlier) can mislead because it distracts from the real problems: practitioners make a big deal out of it instead of focusing on epistemic constraints. Recall that skepticism is costly, and should be available when needed.
There is no such thing as a “long run” in practice; what matters is what happens before the long run. The problem of using the notion of “long run,” or what mathematicians call the asymptotic property (what happens when you extend something to infinity), is that it usually makes us blind to what happens before the long run, which I will discuss later as preasymptotics . Different functions have different preasymptotics, according to speed of convergence to that asymptote. But, unfortunately, as I keep repeating to students, life takes place in the preasymptote , not in some Platonic long run, and some properties that hold in the preasymptote (or the short run) can be markedly divergent from those that take place in the long run. So theory, even if it works, meets a short-term reality that has more texture. Few understand that there is generally no such thing as a reachable long run except as a mathematical construct to solve equations; to assume a long run in a complex system, you need to also assume that nothing new will emerge. In addition, you may have a perfect model of the world, stripped of any uncertainty concerning the analytics of the representation, but have a small imprecision in one of the parameters to input in it. Recall Lorenz’s butterfly effect of Chapter 11. Such minutely small uncertainty, at the level of the slightest parameter, might, because of nonlinearities, percolate to a huge uncertainty at the level of the output of the model. Climate models, for instance, suffer from such nonlinearities, and even if we had the right model (which we, of course, don’t), a small change in one of the parameters, called calibration, can entirely reverse the conclusions.
We will discuss preasymptotics further when we look at the distinctions between different classes of probability distributions. I will say for now that many of these mathematical and philosophical distinctions are entirely overblown, Soviet-Harvard-style, top-down, as people start with a model and then impose it on reality and start categorizing, rather than start with reality and look at what fits it, in a bottom-up way.
Probability on a Thermometer
This distinction, misused in practice, resembles another deficient separation discussed earlier, between what economists call Knightian risk (computable) and Knightian uncertainty (uncomputable). This assumes that something is computable, when really everything is more or less incomputable (and rare events more so). One has to have a mental problem to think that probabilities of future events are “measurable” in the same sense that the temperature is measurable by a thermometer. We will see in the following section that small probabilities are less computable, and that this matters when the associated payoffs are consequential.
Another deficiency I need to point out concerns a strangely unrealistic and unrigorous research tradition in social science, “rational expectations,” in which observers are shown to rationally converge on the same inference when supplied with the same data, even if their initial hypotheses were markedly different (by a mechanism of updating called Bayesian inference). Why unrigorous? Because one needs a very quick check to see that people do not converge to the same opinions in reality. This is partly, as we saw in Chapter 6, because of psychological distortions such as the confirmation bias, which cause divergent interpretation of the data. But there is a mathematical reason why people do not converge to the same opinion: if you are using a probability distribution from Extremistan, and I am using a distribution from Mediocristan (or a different one from Extremistan), then we will never converge, simply because if you suppose Extremistan you do not update (or change your mind) that quickly. For instance, if you assume Mediocristan and do not witness Black Swans, you may eventually rule them out. Not if you assume we are in Extremistan.
To conclude, assuming that “randomness” is not epistemic and subjective, or making a big deal about the distinction between “ontological randomness” and “epistemic randomness,” implies some scientific autism, that desire to systematize, and a fundamental lack of understanding of randomness itself. It assumes that an observer can reach omniscience and can compute odds with perfect realism and without violating consistency rules. What is left becomes “randomness,” or something by another name that arises from aleatory forces that cannot be reduced by knowledge and analysis.
There is an angle worth exploring: why on earth do adults accept these Soviet-Harvard-style top-down methods without laughing, and actually go to build policies in Washington based on them, against the record, except perhaps to make readers of history laugh at them and diagnose new psychiatric conditions? And, likewise, why do we default to the assumption that events are experienced by people in the same manner? Why did we ever take notions of “objective” probability seriously?
After this foray into the psychology of the perception of the dynamics of time and events, let us move to our central point, the very core of our program, into what I have aggressively called the most useful problem in philosophy. The most useful, sadly.
* Robert Merton, the villain of Chapter 17, a person said to be of a highly mechanistic mind (down to his interest in machinery and his use of mechanical metaphors to represent uncertainty), seems to have been created for the sole purpose of providing an illustration of dangerous Black Swan foolishness. After the crisis of 2008, he defended the risk taking caused by economists, giving the argument that “it was a Black Swan” simply because he did not see it coming, therefore, he said, the theories were fine. He did not make the leap that, since we do not see these events coming, we need to be robust to them. Normally, such people exit the gene pool; academic tenure holds them a bit longer.
* The argument can actually be used to satisfy moral hazard and dishonest (probabilistically disguised) profiteering. Rubin had pocketed more than $100 million from Citigroup’s earning of profits from hidden risks that blow up only occasionally. After he blew up, he had an excuse—“It never happened before.” He kept his money; we, the taxpayers, who include schoolteachers and hairdressers, had to bail the company out and pay for the losses. This I call the moral hazard element in paying bonuses to people who are not robust to Black Swans, and who we knew beforehand were not robust to the Black Swan. This beforehand is what makes me angry.
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