Epistemic arrogance, running through traffic lights & Black Swans

November 25th, 2010

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Today, we received an email from one of our readers. After reading Failure to understand Black Swan leads to fallacious thinking, this is what he thought:

I liked your use of the term “Epistemic arrogance”. Recently I was driving and almost ran straight through a red light at a pedestrian crossing and I was trying to think how I could have been so reckless. I mean I am a great driver (?) and I had been down that road numerous times, yet I still almost managed to run down an almost-unfortunate couple. Sure the red light is in a seemingly random position, and the green light at the intersection 50m down the road can cause very slight confusion, but a red light is a red light.

Its then I theorised the issue. If it was my first time driving, or my first time driving down this road, there would be no way that I would have missed this red light. I would watch out for all hazards because I know that I don’t know. An arrogant driver on the other hand, as I was, thinking they know the lay of the land, can get into strife when the unexpected (in their mind) pops up.

Its this “epistemic arrogance” which leads the learned to cause crashes and accidents… I’m sure there are many top minds in the world who fail to look beyond their view… Learning from one’s mistakes is a great way to improve your management of risk!

This is a very great point. And by the way, it is Nassim Nicholas Taleb that came up with the term “”epistemic arrogance.”

We also have an example that is relevant to investing. Marc Faber once mentioned that the financial valuation of asset prices severely underestimate the possibility of geo-political Black Swans. The recent North Korean artillery pot-shots at their southern neighbour is a case in point. The US and South Koreans are planning to hold military exercises this coming Sunday in response to North Korea’s provocation. The North Korean had already warned repeatedly that they will be provoked with such actions, especially when they are happening so closely to the border. With a juvenile rookie dictator-in-waiting probably calling the shots in Pyongyang, we wonder at the wisdom of the American and South Koreans.

The Korean peninsular is just one example of geo-political Black Swans. We can also include Afghanistan, Lebanon, Iran, Pakistan as well.

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  • Pete

    Good points.

    It reminds me of what I was taught in Psychology 101 about ‘vision’, or rather, the brain’s processing of what your eyes see.

    Basically, we receive so much stimulus through our eyes that for the brain to consciously process it all would drive us completely mad. So what the brain does instead is to subconsciously scan the image for significant changes and alert us to anything ‘unusual’. For example, we can focus on tying up our shoelaces, but react quickly when we see a frisbee in the corner of our eye.

    So your reader would probably have had this ‘epistemic arrogance’ and only stopped because his subconscious mind felt a dissonance (discomfort) in the situation which alerted him to something being wrong. I find this aspect of our minds quite fascinating. I think many people refer to this dissonance as a type of ‘instinct’ or ‘intuition’. It’s pretty amazing if you can use it to your advantage.

    (any psychologists out there please correct me if I mucked that up)

    On another note, I perceive North Korea as China’s play thing. A bit like Israel is to the US, or as Iran is to Russia. I think of them as the ‘crazy uncle’ that causes lots of problems. However, they are allied and used as a proxy for exercising more hostile international relations (if that makes sense).

    Perhaps I am the crazy uncle here, but I think of it as China ‘allowing’ North Korea to cause problems as it is to China’s advantage. US pursues hostilities towards Iran through Israel, etc. Russia combats the US through Iran. As I was saying, proxies.

    Yet, when the parent countries (US, China, Russia) are implicated, they distance themselves from the proxy (that’s the point) by saying a few harsh words. Then they’re back to being friends again. It’s interesting, because it means that the proxy countries are also under the pseudo protection of the parent country and it makes international relations all the trickier.

    Then again I could be completely wrong, that’s just my perception.

  • Pete

    Not that most of what I just said had anything to do with epistemic arrogance…

    What I was trying to illustrate was that, from my understanding, these hostilities are less likely to eventuate as war with North Korea would also seem to imply war with China. Which is a big step to take, and one that would not be taken in haste.

    So whilst it is in fact a black swan, and epistemic arrogance is a great way to describe it, I think the likelihood of it eventuating is slightly less, however may have a much higher impact.

  • as war with North Korea would also seem to imply war with China

    The latest WikiLeaks revealed that China is ready to ‘abandon’ North Korea because they are not reliable and useful ally.