The Coin Toss
A coin is tossed 99 times with heads coming up each time. Two men are asked to predict the next toss: a mathematician and a gangster. The mathematician predicts that the next toss has approximately a 50% chance of being tails by pointing out that each toss in an independent random event. The gangster points out there is a 100% chance of heads coming up because the coin is obviously loaded.The Unlikely Interview
A new graduate is offered a job interview for a job that she doubts she will get. She performs a risk-benefit analysis to see if her investment in studying and preparing for the interview is likely to pay a reasonable return. She considers factors such as the probability of getting the job, the salary of the job and the hours spend preparing and decides not to attend. She fails to consider the thousands of possibilities that exist in real life situations. For example, she may not get the job but the interview may be challenging enough to tune her interviewing skills resulting in greater future successes.Algorithmic Trading
Algorithms that trade stocks based on historical patterns and derived attempts to predict future outcomes may neglect the true complexity of markets. For example, novel patterns can suddenly emerge and render the algorithm extremely risky or the algorithm may be vulnerable to manipulation by other algorithms.A/B Testing
Over-optimization based on a simplistic factor such as Click Through Rate on a link by techniques such as A/B testing may not reflect the complex realities of a business. For example, a respected news organization begins A/B testing the titles of its articles. The result is a race to the bottom whereby titles become more and more sensational and less and less accurate. Click through rates improve but the organization suffers reputation declines that damage the business in greater ways.| Overview: Ludic Fallacy | ||
Type | ||
Definition | Misuse of games to model real life situations. | |
Origin | The Black Swan, Nassim Nicholas Taleb, 2007 | |
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