Nassim Taleb’s best-seller - The Black Swan: The Impact of the Highly Improbable – proposes the Ludic Fallacy as a significant contributor to financial crises that have plagued the modern world.
The Ludic Fallacy states that games are used too often to help people model, learn about and think about real life situations. Taleb hypothesises that this causes problems because the defined rule sets of games do not take account of the full range of uncertainties that exist in the real world.
However, having read through the relevant section of the book I disagree with many of Taleb’s points, and have found other parts of the book that contradict the Ludic Fallacy.
As you can imagine I have a vested interest in disproving (or exposing the fallacies of) some or all of the Ludic Fallacy since Texas Holdem Investing is based on using the game of Texas Holdem Poker to train people to invest. However, it is not just a vested interest – it is a passionate belief of mine that games can provide a great environment to learn about the real world. Clearly there is no substitute for the real world, but using games appropriately and ensuring that they are realistic enough can certainly help.
This article argues about why (Texas Holdem) Poker goes against many of the elements of the Ludic Fallacy, and also explains why we shouldn’t be harsh on games as a way of learning all the time.
Texas Holdem Poker has uncertainty based on the cards that are dealt but also based on the unpredictability of the actions of the players. This makes the set of potential outcomes infinite even in the context of a 52-card universe, unlike games against the house e.g. roulette, which Taleb often refers to in his discussions of the Ludic Fallacy. Therefore, Texas Holdem Investing will help the learning investor to become familiar with the infinite randomness of the financial markets.
The training regime of the military is totally based around the ludic concept – they even go so far as to name many training exercises “wargames”! And Taleb actually uses the Black Swan book to praise the military thinkers who he encounters at one point as being far more capable than some of the other strategic and financial planners he meets. Clearly the military don’t believe in the Ludic Fallacy – otherwise they never would have set up the Top Gun school in Fightertown, California.
Another example of the military using a “gaming” environment for training is the US Special Forces camp at Fort Bragg which uses extreme methods to help soldiers gain some insight to the terrifying experience of being captured. I have written about this in more detail on the post entitled “Investing and Poker Lessons in Survival – Can we all be like Jack Bauer, James Bond, Phil Hellmuth, or Warren Buffett?“. In this “game” special forces trainees are subjected to extreme stress as part of a live battle and kidnap simulation. Clearly it is not the real thing, but I’m pretty sure that going through this kind of “game” helps prepare the soldiers in some way for the stress of the battlefield.
And what about one of the most well known “game training” systems of them all – the flight simulator. Thousands of pilots are trained how to fly a huge jet with hundreds of passengers through the medium of a computer simulator that (as per Taleb) only has a finite number of possible outcomes. Yet they end up graduating just fine to fly the real thing with amazing safety records.
And perhaps the most important proof of all that poker doesn’t suffer from the Ludic Fallacy comes from Taleb himself! Yes in Aaron Brown’s fantastic book – The Poker Face of Wall Street – Taleb provides the foreword and he highly praises poker as benefiting from the Ludic Virtue. Poker offers true randomness according to Taleb due to the infinite levels of “social probability” caused by the actions of other players (see above). And he finishes off the foreword with the phrase “Economic life is gambling”. My own derivative would be “Investing is gambling, just like Texas Holdem Poker”.
So, after all that, Taleb admits that poker doesn’t suffer from the Ludic Fallacy, and I think that I’ve given some good reasons as to why “games” can provide good training even for extreme situations in other walks of life. And let’s face it, investing can be pretty extreme at times.
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