What’s the Ludic Fallacy?

Nassim Nicholas Taleb created the term Ludic Fallacy to describe how people mistake the kind of uncertainty found in games to the kind of uncertainty found in real life.

And the consequences are disastrous.

Here’s the formal definition, from Taleb’s book, Antifragile: Things That Gain from Disorder:

Ludic Fallacy: Mistaking the well-posed problems of mathematics and laboratory experiments for the ecologically complex real world. Includes mistaking the randomness in casinos for that in real life.

Taleb derived the term from the Latin word “Ludes,” which means “related to games.”

So a direct translation would be “games fallacy.”

How you think about risk

When people think about risk and uncertainty, their ideas are often confined to a particular domain.

Take stock picking, for example. Say you are trying to understand whether a stock will go up or down in the future.

You could start by looking at the company’s financial statements. Or read its history. You could examine the options market and look for insider buying or selling. You could do a quick discounted cash flow analysis. All to make a better decision under uncertainty.

But what you don’t understand is that the real risk to your investment has nothing to do with your spreadsheets and your gamification of the odds.

The real risk exists outside the domain (in the real world).

You are falling for the Ludic Fallacy.

Ludic Vs. Ecological

According to Taleb, there are two domains in which we can think about risk:

1) The Ludic, which is set-up like a game with clearly defined rules (like a casino), and

2) The Ecological (real-life) where no one knows the rules and you can’t determine what variables contribute to what result.

The Ludic is clean and crisp, while the ecological is messy.

Gambling is in the domain of the ludic. There are clear rules and you can figure out the odds with math. It feels like you are operating in a world of great uncertainty, but it’s sterile.

Real-life is ecological. You can’t calculate the odds when you set out into the world - you learn them as you go. There is unknowable uncertainty that can’t be defined.

The ludic fallacy occurs when you try to apply ludic risk to the real world.

Examples of the Ludic Fallacy

1) A Casino’s Hidden Risks

Here’s an example Taleb gives for the Ludic Fallacy from Antifragile: Things That Gain from Disorder:

Imagine you run a casino in Las Vegas. What would you expect some of the risks to be to your business?

Many casino owners spend hundreds of millions of dollars on high-tech surveillance to stop cheaters, card counters, and high-rollers from cleaning out the coffers.

They see the gamblers who are inside the casino’s domain as their risk of ruin.

But, these owners are falling for the Ludic Fallacy.

You’re smarter than that.

You know that the real risks your casino faces are outside the domain of the casino itself. They are out in the real world.

You know this because you’ve heard stories.

Stories about a casino owner losing $100 million when their star performer got attacked by his tiger and could no longer perform.

Stories about a disgruntled contractor at a casino across the street who tried to plant dynamite in the basement to blow it all to hell.

Stories about one casino owner who had to dip into the coffers to pay the ransom for his kidnapped daughter.

Those are the real risks to your business. Those ecological risks with no rules and no boundaries. Uncertainties that can’t be known or calculated for.

2) A Sword Fight in the Metaverse

Imagine you are a professional swordsman. You consider yourself the greatest in the world.

An adversary challenges you to a duel to win your swords.

This foe has studied the Kendo sword-fighting style for many years. It’s a highly organized form of sword fighting where you can strike an opponent only in certain parts of the body. You know that you are no match for this combatant in a Kendo fight.

But you beat him easily by kicking him in the kneecap, smashing a beer bottle over his head, and then cutting him in half with your sword.

See, you learned to fight in the streets. Surrounded by chaos and violence and conflict. You didn’t mistake the domain-specific, Kendo sword-fighting game of risk for that of the real world.

Your foe fell for the Ludic Fallacy. You did not.

*Note: This example is built from a passage in Neal Stephenson’s book, Snow Crash (1992) - an absolute must-read.

3) A Fool’s Coin Flip

Below is a thought experiment from Taleb’s book, The Black Swan: The Impact of the Highly Improbable.

It involves Taleb and two characters from his book - the street-smart “Fat Tony” and the intellectual (yet idiot), Dr. John:

NNT (Taleb): Assume that a coin is fair, i.e., has an equal probability of coming up heads or tails when flipped. I flip it ninety-nine times and get heads each time. What are the odds of my getting tails on my next throw? 

Dr. John: Trivial question. One half, of course, since you are assuming 50 percent odds for each and independence between draws. 

NNT: What do you say, Tony? 

Fat Tony: I’d say no more than 1 percent, of course. 

NNT: Why so? I gave you the initial assumption of a fair coin, meaning that it was 50 percent either way. 

Fat Tony: You are either full of crap or a pure sucker to buy that “50 pehcent” business. The coin gotta be loaded. It can’t be a fair game. (Translation: It is far more likely that your assumptions about the fairness are wrong than the coin delivering ninety-nine heads in ninety-nine throws.) 

NNT: But Dr. John said 50 percent. 

Fat Tony (whispering in my ear): I know these guys with the nerd examples from the bank days. They think way too slow. And they are too commoditized. You can take them for a ride.

Which one of these guys fell for the Ludic Fallacy?

Dr. John, of course.

Why the ludic fallacy is important

Because understanding it can stop you from making the mistake John did! He’s a sucker, and unless you know the difference between domain-specific risk and ecological (real) world risk, you are too.

Taleb tells us that these domain-specific games don’t actually train you for real life!

Just look at the Kendo sword-fighting master who is so easily sliced up in the real world. Or maybe you know a weight-lifter or body-builder who is very weak when it comes to functional, real-world strength.

Life does not resemble games, and games don’t resemble life.

The entrepreneur Vs. The Strategy Consultant

I recently read an article by Auren Hoffman on the differences between an entrepreneur and a strategy consultant.

Hoffman writes:

Entrepreneurs tend to be street-smarter than strategy consultants. Entrepreneurs are more practical, more focused on the bottom line, and more attuned to real-world contingencies.

He then asks the following interview question: should you play a game where you win $10,000 if the coin flips heads and lose $6,000 if it flips tails?

A strategy consultant would likely calculate the net value of the game and determine if it’s positive (play the game) or negative (don’t play the game).

An entrepreneur though, Hoffman suggests, would ask a few more questions… like whether or not the coin is far, how taxes will impact the payout, where the money is going to be kept in the interim, etc.

These are the questions that matter! These are the questions of the ecological world - of risk outside the domain of the game itself.

Of course, you can’t come up with all of the ecological questions one could ask about the risk (remember, there are unknowable uncertainties), but you can ask the ones that come to mind. That’s what an entrepreneur would do.

As Taleb reminds us in The Black Swan:

The attributes of the uncertainty we face in real life have little connection to the sterilized ones we encounter in exams and games.

The strategy consultant in Hoffman’s article plays games and falls for the Ludic Fallacy.

The entrepreneur attempts to define uncertainty in the real world because that’s what matters.

Don’t be a strategy consultant.

Be an entrepreneur.

Start now.

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Stephenson, Neal. Snow Crash. Random House Publishing Group. Kindle Edition.

Taleb, Nassim Nicholas. Antifragile: Things That Gain From Disorder (Incerto). Random House Publishing Group. Kindle Edition.

Taleb, Nassim Nicholas. The Black Swan: Second Edition: The Impact of the Highly Improbable (Incerto) . Random House Publishing Group. Kindle Edition.

You can read Auren Hoffman’s article here.