The Scrambling of Messages
Uncertainty can provide informational benefits by scrambling potentially damaging or self-fulfilling messages, preventing overreaction to fluctuations and serving as a deterrent in conflicts.
THE IDEA
The Scrambling of Messages
Besides its effect on well-being, uncertainty presents tangible informational benefits, particularly with the scrambling of potentially damaging, and self-fulfilling, messages. Consider a currency pegged by a central bank to a fixed rate. The bank's official policy is to use its reserves to support it by buying and selling its currency in the open market, a procedure called intervention. But should the currency rate drop a tiny bit, people will immediately get the message that the intervention failed to support the currency and that the devaluation is coming. A pegged currency is not supposed to fluctuate; the slightest downward fluctuation is meant to be a harbinger of bad news! The rush to sell would cause a self-feeding frenzy leading to certain devaluation.
Now consider an environment where the central bank allows some noise around the official band. It does not promise a fixed rate, but one that can fluctuate a bit before the bank starts intervening. A small drop would not be considered to bear much information. The existence of noise leads us to avoid reading too much into variations. Fluctuat nec mergitur (it fluctuates but does not sink).
This point has applications in evolutionary biology, evolutionary game theory, and conflict situations. A mild degree of unpredictability in your behavior can help you to protect yourself in situations of conflict. Say you always have the same threshold of reactions. You take a set level of abuse, say seventeen insulting remarks per week, before getting into a rage and punching the eighteenth offender in the nose. Such predictability will allow people to take advantage of you up to that well-known trigger point and stop there. But if you randomize your trigger point, sometimes overreacting at the slightest joke, people will not know in advance how far they can push you. The same applies to governments in conflicts: They need to convince their adversaries that they are crazy enough to sometimes overreact to a small peccadillo. Even the magnitude of their reaction should be hard to foretell. Unpredictability is a strong deterrent.
When to use it
Central bank managing currency expectations by allowing controlled fluctuation bands.
Negotiation tactics where you randomize your responses to avoid being predictable.
Military strategy to deter attacks by making your reaction threshold uncertain.
Business strategy to avoid competitors exploiting your predictable behavior patterns.
FROM THEORY TO EVERYDAY LIFE
In practice
Currency Peg and Intervention
Taleb argues that a small deviation from a promised fixed exchange rate can be interpreted as evidence that the peg is failing, prompting further selling. A permitted fluctuation band makes a small move less informative and may reduce that reaction.
Randomized Trigger Point in Conflicts
A person who always reacts after exactly seventeen insults is predictable and can be exploited. Randomizing the trigger point (sometimes overreacting to small jokes) deters adversaries because they cannot gauge how far they can push.
A MOMENT TO REFLECT
Put it to work.
How can introducing noise into a system prevent self-fulfilling prophecies?
In what situations might unpredictability be a useful strategy for deterring conflict?
How does the concept of scrambling messages apply to your personal or professional decision-making?
CONTINUE THE CONVERSATION
Source texts
- Fooled by Randomness The Hidden Role of Chance in the Markets and in Life (Nassim Nicholas Taleb)