Flawed Intuition, Over-Reliance on Statistical Date, and the Repression of our Darwinian Instincts
Posted: 14 January 2012 07:58 AM   [ Ignore ]  
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Daniel Kahneman, Nobel Laureate cognitive psychologist, has empirically demonstrated that relying on our own intuition leads to a flawed understanding of the objective world. Kahneman recommends consulting with statistical evidence before making decisions that may be intuitively flawed. Nassim Taleb, cognitive philosopher, illustrates, in “The Black Swan” that an over-reliance on these self-same statistics impairs one’s view of reality. Specifically, he critiques the financial sector’s reliance on past data, neatly placed under a Gaussian Curve, to extrapolate future events.

Hence it may boil down to a psychological appreciation of what influences the mind to retreat from reality; whether it is a retreat into our flawed intuitions (Kahneman) or statistical data (Taleb). Lewis Mumford articulated Taleb’s idea in the following summation:

“[t]hose who use machinery because they are incapable of facing the stream of life and directing it, those who seek order in automatons because they lack the discipline and courage to achieve order in themselves, become the victims of their instruments and end by becoming mere attachments to a mechanical contrivance.” LEWIS MUMFORD, CITY DEVELOPMENT: STUDIES IN DISINTEGRATION AND RENEWAL 46 (Harcourt, Brace and Company 1945).

In my opinion, Freud, offers the most compelling psychological explanation of the retreat from reality. The repression of our Darwinian impulses ultimately leads to their perverse manifestations, the most salient and omnipresent of which is a flawed understanding of objective reality.

In summary, individuals make the rational choice to retreat from reality rather than facing it (note, I employ “retreat” and “face” to provide a clear juxtaposition though they do suggest a certain bravado, it is unintended and please disregard it). However, retreating from reality is detrimental in two significant ways: 1) it forces one to repress our Darwinian instincts which lead to their perverse manifestation and; 2) it does not offer the cathartic effects of facing reality.

I do want to avoid categorization as an ill-tempered Nietzschean; perhaps the following example will help to distill these inferences.

Steve’s boss yells at him for breaking the copying machine; a defunct, antiquated machine that broke through no fault of anyone. Steve’s primordial impulse maybe to strike his boss; and while social constraints dictate that he not do so –he is in no sense prohibited from doing fifty push ups in the bathroom or taking a run on his lunch break. Steve will receive a catharsis from the expurgation of the stress hormones that were released when his boss berated him. Steve, in this sense, has faced reality.

Steve could have chosen to do nothing and stew in his cubicle; and in his own hormones, most notably Adrenocorticotropic hormone (ACTH) which stimulates the release of cortisone, a hormone released in response to the sympathetic nervous system’s (popularly known as fight or flight) response to perceived environmental threats. Cortisone has the beneficial effects of increasing blood pressure and providing short term pain relief; however, excess levels thereof, hypercorticalism has been associated with depression. Symptoms of depression vary, but one of the most common is mental lethargy. Thus, a retreat from reality creates an impediment to comprehension of the objective world.

I agree with Hume’s dictum, “that reason must always be slave to the passions.” However, we are able to cognize this fact and rationally circumvent it –to an extent at least, as the example of Steve demonstrates.

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Posted: 15 January 2012 04:22 PM   [ Ignore ]   [ # 1 ]  
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Nassim Taleb, cognitive philosopher, illustrates, in “The Black Swan” that an over-reliance on these self-same statistics impairs one’s view of reality. Specifically, he critiques the financial sector’s reliance on past data, neatly placed under a Gaussian Curve, to extrapolate future events.

 

You have misunderstood Taleb although it’s nice to see him quoted anyway because he is a great and important thinker. .

 

Taleb is not saying that the overuse of   statistics - specifically the famous Gaussian curve - is the problem.

 

What he says is the MISAPPLICATION of bell curve statistics - ones that assume a normal distribution of events - is the problem.

 

But to your point, Naseem would be the first to tell yo to apply statistics *if the situation is amenable to statistical analysis and if you apply the *right* kind of statistical methods and you have enough data to begin with.

In The Black Swan, Taleb takes after, especially, the use of stats in finance. The problems with the use of stats in finance are numerous. To begin with, the stats used assume a Gaussian Distribution or Bell Curve distribution t outcomes.

But a phenomena only produce a Gaussian distribution under some circumstances. To wit, the phenomena, in order to show a Gaussian distribution of values over time <i>has to be itself the merely the end product of a large number of independent variables which 1) determine the value of the phenomena of interest at any given time and 2)  are known to be causally unrelated to each other.

 

Failing those criteria, then any seeming Gaussian distribution of the phenomena’s value is either just a passing lark or , in the case of high finance, a fiction imposed on it by analysts who have no reason whatsoever to assume that its values will distribute in a Gaussian way.

 

The reason these morons- and that’s what these 8 figure analysts are and why the market just crashed and has crashed in the past (for instance the Black / Shaoles equation crashing Long Term Capital Management ) the reason these morons ASSUME a Gaussian distribution of values for the phenomena they study is because if they don’t, they can’t use the stat. analysis tools they want to.

 

If the old joke about looking for your keys in the dark under the light despite the fact that they clearly didn’t fall anywhere under the light flashed in your mind , then you get what’s going on.


For any given real world event, Taleb points out, the micro events which CAUSED that event are effectively unknowable.

That means that you cannot apply Gaussian statistical methods to predict whether something will happen or how it will unfold.

Why? Because Gaussian stats can only be applied to phenomena which are caused by many, unrelated random variables. 
That’s how you GET your phenomena assuming a Gaussian distribution of values over time.


How do you know what variables produce real world phenomena X and of those variables, how would you know if they are independent - that is the value of one has no effect on the value of any other. How do you propose to establish that for say, the price of tea in China?  You can’t. And if you can’t, you can’t ASSUME that the phenomena will produce a bell shaped curve of possible values, with extreme values at either end of a occurring only infrequently.


So to your point again. Taleb is against the sad misapplication , in fact, imposition by force, of Bell curve math where it does not belong.


But that’s not the same thing at all as saying stats cannot and should not be used to understand the world because some parts of the world are amenable to stat. analysis.


To say otherwise is to be unscientific.


In general, you’re always better off consulting at least an objective record of what has in fact happened even if you can’t apply stat to it. And in lots of situations, you can apply stat and sometimes just raw logic to counter faulty intuitions


Periodically, writers counsel everyone to just go with their gut in some best seller.  Meh. Don’t be too sure this is good advice.

 

 

 

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