Conflation
Taleb uses conflation to describe confusing an idea or theory with the practical result or payoff associated with it. Asymmetries can make a theory’s properties a poor guide to the consequences of acting on it.
THE IDEA
Conflation
A theory and its practical payoff are not the same “ting”, as Taleb puts it.
This lesson “not the same thing” is quite general. When you have optionality, or some antifragility, and can identify betting opportunities with big upside and small downside, what you do is only remotely connected to what Aristotle thinks you do.
There is something (here, perception, ideas, theories) and a function of something (here, a price or reality, or something real). The conflation problem is to mistake one for the other, forgetting that there is a “function” and that such function has different properties.
Now, the more asymmetries there are between the something and the function of something, then the more difference there is between the two. They may end up having nothing to do with each other.
This seems trivial, but there are big-time implications. As usual science—not “social” science, but smart science—gets it. Someone who escaped the conflation problem is Jim Simons, the great mathematician who made a fortune building a huge machine to transact across markets. It replicates the buying and selling methods of these sub–blue collar people and has more statistical significance than anyone on planet Earth. He claims to never hire economists and finance people, just physicists and mathematicians, those involved in pattern recognition accessing the internal logic of things, without theorizing. Nor does he ever listen to economists or read their reports.
The great economist Ariel Rubinstein gets the green lumber fallacy—it requires a great deal of intellect and honesty to see things that way. Rubinstein is one of the leaders in the field of game theory, which consists in thought experiments; he is also the greatest expert in cafés for thinking and writing across the planet. Rubinstein refuses to claim that his knowledge of theoretical matters can be translated—by him—into anything directly practical. To him, economics is like a fable—a fable writer is there to stimulate ideas, indirectly inspire practice perhaps, but certainly not to direct or determine practice. Theory should stay independent from practice and vice versa—and we should not extract academic economists from their campuses and put them in positions of decision making. Economics is not a science and should not be there to advise policy.
In his intellectual memoirs, Rubinstein recounts how he tried to get a Levantine vendor in the souk to apply ideas from game theory to his bargaining in place of ancestral mechanisms. The suggested method failed to produce a price acceptable to both parties. Then the fellow told him: “For generations, we have bargained in our way and you come and try to change it?” Rubinstein concluded: “I parted from him shamefaced.” All we need is another two people like Rubinstein in that profession and things will be better on planet Earth.
Sometimes, even when an economic theory makes sense, its application cannot be imposed from a model, in a top-down manner, so one needs the organic self-driven trial and error to get us to it. For instance, the concept of specialization that has obsessed economists since Ricardo (and before) blows up countries when imposed by policy makers, as it makes the economies error-prone; but it works well when reached progressively by evolutionary means, with the right buffers and layers of redundancies. Another case where economists may inspire us but should never tell us what to do.
The difference between a narrative and practice—the important things that cannot be easily narrated—lies mainly in optionality, the missed optionality of things. The “right thing” here is typically an antifragile payoff. And my argument is that you don’t go to school to learn optionality, but the reverse: to become blind to it.
When to use it
When making investment decisions, focus on empirical patterns and risk management rather than relying solely on economic theories.
In policy design, test small-scale interventions before imposing top-down models, as theories may not translate directly into practice.
In personal productivity, avoid conflating planning (the idea) with execution (the function); treat plans as flexible guides, not rigid commands.
When learning a new skill, beware of confusing theoretical knowledge (e.g., reading about swimming) with actual practice (getting in the water).
FROM THEORY TO EVERYDAY LIFE
In practice
Jim Simons and the Conflation of Economic Theory with Market Reality
Taleb presents Simons’s systematic trading as an example of finding useful patterns without relying on economists’ explanations. He describes a preference for physicists and mathematicians. This is Taleb’s account of the approach, rather than a demonstration that ignoring economic theory caused its success.
Ariel Rubinstein's Souk Bargaining Lesson
Economist Ariel Rubinstein, a game theorist, tried to apply a bargaining model to a Levantine vendor in a souk. The vendor rejected the theory-based approach, stating that generations of traditional bargaining worked fine. Rubinstein realized the conflation of theoretical models with real-world practice and left ashamed, emphasizing that theory should not be directly imposed on practice.
A MOMENT TO REFLECT
Put it to work.
Think of a time when you or someone you know confused a theory or model with its real-world application. What were the consequences?
In your field of work, how can you avoid conflating abstract ideas with their practical function?
What evidence would distinguish a useful theory from one that merely offers a persuasive explanation after the fact?
CONTINUE THE CONVERSATION
Source texts
- Antifragile (Nassim Nicholas Taleb)