Herodotus and the Economists

Artabanus, you define these matters reasonably. But do not fear everything, nor take account of all alike; If you wanted to take everything equally into account on every occasion that happens, you would never do anything; it is better to do everything boldly and suffer half of what you dread than to fear all chances and so never suffer anything. But if you quarrel with whatever is said yet cannot put forth a secure position, you must be proved as wrong on your part as he who holds the contrary opinion. In this both are alike: how can someone who is only human know where there is security? I think it is impossible. You see what power Persia has attained. Now if those kings who came before me had held such opinions as yours, or if they had not held them but had had advisers like you, you would never have seen our fortunes at their present height; but as it is those kings ran the risks and advanced them to this height. Great successes are not won except by great risks. So we will do as they did; (Herodotus, The Histories, Book 7, 50.2-4)

Modern economics teaches that great returns are the reward for taking greater risks. So, at first glance it seems that the Persian King, Xerxes, speaks like a modern economist. Given that he has an appetite for glory, he is willing to place bold bets and forgo the relative security of diversification (as suggested by modern portfolio theory). 

Xerxes anticipates the now standard criticism of standard decision theory; in real life, information is costly and we don't have time to gather it all. More important, in human affairs perfect information is an illusion. In context, Xerxes does not explain why he embraces fundamental uncertainty. Rather than seeing such uncertainty as undermining the very possibility of a decision, it is the grounds for a kind of bold decisionism. 

It's important to distinguish Xerxes's decisionism in conditions of uncertainty with what I call acting under "ersatz risk." In a passage in which Keynes diagnoses genuine uncertainty, he adds that "the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed." (Keynes, 1937, 213-214) That is, for practical purposes, we treat uncertain events as instances of (some) probable knowledge (or another), even though from a theoretical perspective we have no justification for doing so. This ersatz risk strategy has dominated decision theory since its formal revolution in the 1940s (and displaced interest in genuine or Knightian uncertainty). It has brought its practitioners within the halls of power and lucrative areas of finance. Despite the fact that this ersatz risk approach is directly implicated in the disastrous experience(s) of 2007-8, all schools of formal decision theory continue betting the farm on it.

 

Of course, as the reader of Herodotus learns, and Xerxes experienced, continuing the policies of one's successful predecessors is not always the right strategy.*

 

 

Happy birthday Chuck McCann!