What we all really want are not wants (or needs), but simply a payoff. This may sound crass, but hear me out. I am reading Nassem Nicholas Taleb’s book Antifragile at the moment, which is about how to think about and deal with risk and uncertainties.

To understand the options available to us, we need to understand our exposure to the risks and uncertainties we think we may face. The exposure is often most usefully expressed as the difference between costs and benefits, a measure of the expected net gain or loss or simply the ‘payoff’.

Payoff implies monetary outcomes, but that is just a mental convention or even delusion, take your pick. Just think of it as a measure of an outcome that can me good, bad or indifferent. We may find it useful to think of this in monetary terms, but as I said, that is a choice for a particular situation. Other situations may not lend themselves to specific monetary metrics.

What struck me as I was reading Taleb was that the payoff concept seems more practical than most other terms I’ve seen for expected outcomes (a term in point; see what I mean).

We the human race are generally terrible when it comes to understanding risk, complexity and uncertainty. We may get close to appreciating things like averages, but mostly fail to grasp the importance of variability (read: probability of occurrence, volatility, variance).

It gets really bad when it gets to uncertainties because by definition, we cannot predict most of them. We have nothing to base our analysis on. Just because something has not happened in the past does not mean it can’t or won’t.

What we can know is the extent of damage or exposure we face if an uncertain event might occur. (Oh, and uncertain events are typically events we can imagine, but cannot assign meaningful probabilities to.) What this means is that we may have a perfectly workable understanding of volatility or variance even if we’re missing the rest.

For example. we may not know when the next volcano eruption will occur in, say Mexico or Nicaragua, but we can say a lot with a high degree of accuracy of what the damage might be for various severities.

The point of all this is that we can manage rare events, especially the unpleasant ones, not by predicting them, because that really doesn’t do anything, but by taking specific actions to avoid harm from their occurrence.

In the long run, is it cheaper not to locate anyone too close to a volcano than to relocate and rebuild after a disaster? Due to the screwed up way to count costs and benefits, the ‘total cost of ownership’ usually ends up misstated because we fail to take into account what economists call externalities. E.g., real estate developers don’t want to take on the higher cost of volcano eruption earth quake protection. The result is that the costs of most disasters are transferred to the tax payers.

I’m expecting that at some point in the future the voters will become sufficiently versed in these matters to finally put and end to this by forcing some much needed policy changes. I’m not going to offer a prediction, though, for when.