It is unbelievable how many people today still think they can make money out of a roulette game by using the old “double-up” method, also called “martingale“. It works like this: you bet on a 50% event, red/black or odd/even, and you double the wager every time you lose. Eventually, when you win, you recoup your losses and make a small profit. Or, at least, this is the theory.
In practice, the martingale method is a recipe for disaster. At best, with it you will not be better off than with playing numbers at random. But it is worse than that: the martingale gives you a good chance to go broke by seeking to double “one last time.” Fortunately for gamers, most casinos have betting limits; casino managers want their customers to lose money but not so much that they will go broke and kill themselves.
The martingale strategy is related to what Nassim Taleb has termed “Black Swan”, an improbable but catastrophic event. A black swan event is not just a stroke of bad luck. It is something that you create by a series of wrong choices made with the best of intentions. It is the idea of the martingale: a sort of game of chicken played against the laws of probability. In a sense, you try to scare reality by raising the stakes – such as when you double the wager at the roulette game. But whatever small success you obtain in this way, reality is not easily scared and it comes back with a vengeance in the form of black swan: the bigger and the more catastrophic the more you had tried to avoid it.
Martingale-like schemes are typical, for instance, of the financial world. The subprime mortgage crash that started in 2007 is a good example of this strategy as noted by Nassim Taleb. Many financial schemes may be based on similar ideas. And, in these cases, there are no casino managers who stop people from falling into the martingale trap and go broke.
The Fukushima nuclear disaster may be telling us that there is a similar mechanism at play with technology in general. When we design machinery that is dangerous and prone to failure we try to reduce risks by tight regulations, specifics, and centralised control. Of course, these strategies are expensive and therefore are best implemented over large scales. So, we are raising the stakes by building bigger and more expensive systems in order to hedge the risk of failure. In the case of nuclear energy, the result is the concentration of power production in large plants. That strategy seems to work, within limits: on the average, the safety record of the nuclear industry is not bad. But when something goes wrong with a nuclear plant, it tends to go wrong in a big way, such as with Chernobyl and Fukushima.
So, are we protecting ourselves against small failures at the cost of risking large ones? In such case, we would be playing the martingale on a truly gigantic scale. The problem is not specific with nuclear technology. We tend to hedge risks with all kinds of technologies at the cost of risking catastrophes.
Think of coal as an example. We know that burning coal in power plants carries risks. In addition to local pollution, coal may be a major factor in overheating the whole planet because of the greenhouse effect associated with carbon dioxide (CO2) generated by combustion. Against this risk, we are presently planning a major effort in terms of “carbon capture and sequestration” (CCS) – a technology usually referred to as “Clean Coal.” The idea of clean coal is that CO2 can be stored underground in geological reservoirs and therefore prevented from reaching the atmosphere.
We may well be playing the martingale with this idea. Suppose that the carbon capture technology will be used on a large scale and that we end up relying on “clean coal” for a major fraction of the worldwide power production. Then, we will have hedged the risk of climate change by raising the stakes: invested money and resources on a specific technology. Likely, we will have reduced local pollution and the amount of CO2 emitted in the atmosphere. But do we know enough about the physics of the sequestration process to guarantee that the stored CO2 will stay there? ? How can we rule out that we’ll get that CO2 back in the atmosphere all together and much sooner than expected?
As a black swan, this one borders the unimaginable. Maybe it is an improbable event; sure, but it would be much more improbable if we were just to stop burning coal.
But we just don’t seem to be able to reason that way. We tend to go always for the bigger and the more sophisticated technological solution and that carries enormous risks – maybe in terms of unlikely events, but not impossible ones. We are addicted to technology (as noted by George Mobus) and we don’t seem to be able to realise that at some point technology starts showing diminishing returns (as Joseph Tainter has noted).
Maybe this is exactly what we are doing with civilisation: playing the martingale. We are hedging small risks by developing technologies, regulations, laws, and controls, all in order to keep society together. But the risk is the improbable, but eventually unavoidable, total collapse. The biggest black swan of all.
(*) The origin of the word “Martingale” is obscure, but a discussion on the meaning of the term can be found here.