Possible Worlds
Taleb connects philosophical possible worlds, quantum many-worlds, and economic states of nature through the idea of alternatives to the observed outcome. The uses differ, but each provides a way to consider more than the single history we experienced.
THE IDEA
Possible Worlds
Several disciplines consider alternatives to the history we observe. Their possible worlds serve different purposes: logical possibility, a physical interpretation, or a model of uncertain outcomes. Simply counting imagined alternatives does not assign them probabilities.
In philosophy, there has been considerable work on the subject starting with Leibniz’ idea of possible worlds. For Leibniz, God’s mind included an infinity of possible worlds, of which he selected just one. These nonselected worlds are worlds of possibilities, and the one in which I am breathing and writing these lines is just one of them that happened to have been executed. Philosophers also have a branch of logic that specializes in the matter: whether some property holds across all possible worlds or if it holds across a single world—with ramifications into the philosophy of language called possible worlds semantics with such authors as Saul Kripke.
In physics, there is the many-world interpretation in quantum mechanics (associated with the works of Hugh Everett in 1957) which considers that the universe branches out treelike at each juncture; what we are living now is only one of these many worlds. Taken at a more extreme level, whenever numerous viable possibilities exist, the world splits into many worlds, one world for each different possibility—causing the proliferation of parallel universes. I am an essayist-trader in one of the parallel universes, plain dust in another.
Finally, in economics: Economists studied (perhaps unwittingly) some of the Leibnizian ideas with the possible “states of nature” pioneered by Kenneth Arrow and Gerard Debreu. This analytical approach to the study of economic uncertainty is called the “state space” method—it happens to be the cornerstone of neoclassical economic theory and mathematical finance. A simplified version is called “scenario analysis,” the series of “what-ifs” used in, say, the forecasting of sales for a fertilizer plant under different world conditions and demands for the (smelly) product.
When to use it
In business strategy, use scenario analysis to evaluate potential outcomes under different market conditions.
In personal finance, consider possible worlds to assess the risk of investment decisions.
In scientific research, think about alternative hypotheses as possible worlds that could explain data.
In policy making, use counterfactual thinking to evaluate the impact of different policies.
FROM THEORY TO EVERYDAY LIFE
In practice
Leibniz's Possible Worlds
Leibniz proposed that God's mind contained an infinity of possible worlds, of which only one was selected. This concept is used to analyze necessity and possibility across all worlds.
Many-Worlds Interpretation
In quantum mechanics, the many-worlds interpretation suggests that the universe branches at each quantum event, creating parallel universes for each possibility.
State Space in Economics
Economists use 'states of nature' to model uncertainty, as pioneered by Arrow and Debreu. Scenario analysis is a simplified version used in forecasting.
A MOMENT TO REFLECT
Put it to work.
How does the concept of possible worlds change the way you think about decision-making under uncertainty?
Consider a recent decision you made. What alternative worlds could have resulted from different choices?
How does using scenarios for a decision differ from claiming that alternative physical worlds exist?
References
- Many-Worlds Interpretation — Hugh Everett (1957)
CONTINUE THE CONVERSATION
Source texts
- Fooled by Randomness The Hidden Role of Chance in the Markets and in Life (Nassim Nicholas Taleb)