VI. Uncertainty

0:00Chapter 6. Uncertainty 1. Uncertainty and Acting The uncertainty of the future is already implied in the very notion of action. That man acts and that the future is uncertain are by no means two independent matters. They are only two different modes of establishing one thing. We may assume that the outcome of all events and changes is uniquely determined by eternal, unchangeable laws governing becoming and development in the whole universe. We may consider the necessary connection and interdependence of all phenomena, that is, their causal concatenation, as the fundamental and ultimate fact.

0:51We may entirely discard the notion of undetermined chance. But however that may be, or appear to the mind of a perfect intelligence, the fact remains that to acting man, the future is hidden. If man knew the future, he would not have to choose, and would not act. He would be like an automaton, reacting to stimuli without any will of his own. Some philosophers are prepared to explode the notion of man's will as an illusion and self-deception because man must unwittingly behave according to the inevitable laws of causality. They may be right or wrong from the point of view of the prime mover or the cause of itself.

1:37However, from the human point of view, action is the ultimate thing. We do not assert that man is free in choosing and acting. We merely establish the fact that he chooses and acts, and that we are at a loss to use the methods of the natural sciences for answering the question why he acts this way and not otherwise. Natural science does not render the future predictable. It makes it possible to foretell the results to be obtained by definite actions. But it leaves unpredictable two spheres, that of insufficiently known natural phenomena and that of human acts of choice. Our ignorance with regard to these two spheres taints all human actions with uncertainty.

2:28Apodictic certainty is only within the orbit of the deductive system of a prioristic theory. The most that can be attained with regard to reality is probability. It is not the task of praxeology to investigate whether or not it is permissible to consider as certain some of the theorems of the empirical natural sciences. This problem is without practical importance for praxeological considerations. At any rate, the theorems of physics and chemistry have such a high degree of probability that And we are entitled to call them certain for all practical purposes. We can practically forecast the working of a machine constructed according to the rules of scientific technology.

3:17But the construction of a machine is only a part in a broader program that aims at supplying the consumers with the machine's products. Whether this was or was not the most appropriate plan depends on the development of future Future Conditions, which, at the time of the plan's execution, cannot be forecast with certainty. Thus, the degree of certainty with regard to the technological outcome of the machine's construction, whatever it may be, does not remove the uncertainty inherent in the whole action. Future needs and valuations, the reaction of men to changes in conditions, future scientific Ludwig and technological knowledge, future ideologies and policies can never be foretold with more than a greater or smaller degree of probability. Every action refers to an unknown future. It is, in this sense, always a risky speculation.

4:19The problems of truth and certainty concern the general theory of human knowledge. The The problem of probability, on the other hand, is a primary concern of praxeology. 2. The Meaning of Probability The treatment of probability has been confused by the mathematicians. From the beginning, there was an ambiguity in dealing with the calculus of probability. When the Chevalier de Maire consulted Pascal on the problems involved in the games of dice, The great mathematician should have frankly told his friend the truth, namely that mathematics cannot be of any use to the gambler in a game of pure chance. Instead, he wrapped his answer in the symbolic language of mathematics. What could easily be explained in a few sentences of mundane speech was expressed in a terminology which is unfamiliar to the immense majority and therefore regarded with reverential awe. People suspected that the puzzling formulas contained some important revelations, hidden to the uninitiated. They got the impression that a scientific method of gambling exists, and that the esoteric teachings of mathematics

5:38provide a key for winning. The heavenly mystic Pascal unintentionally became the patron saint of Gambling. The textbooks of the Calculus of Probability gratuitously propagandize for the gambling casinos precisely because they are sealed books to the layman. No less havoc was spread by the equivocations of the Calculus of Probability in the field of scientific research. The history of every branch of knowledge records instances of the misapplication of the Calculus Methods of Probability, which, as John Stuart Mill observed, made it the real opprobrium of mathematics. Some of the worst errors have arisen in our day in the interpretation of the methods of physics. The problem of probable inference is much bigger than those problems which constitute the field of the calculus of probability. Only preoccupation with the A mathematical treatment could result in the prejudice that probability always means frequency.

6:45A further error confused the problem of probability with the problem of inductive reasoning as applied by the natural sciences. The attempt to substitute a universal theory of probability for the category of causality characterizes an abortive mode of philosophizing, very fashionable only a few years ago. A statement is probable if our knowledge concerning its content is deficient. We do not know everything which would be required for a definite decision between true and not true. But, on the other hand, we do know something about it. We are in a position to say more than simply non liquid or ignoramus.

7:32There are two entirely different instances of probability. We may call them class probability, or frequency probability, and case probability, or the specific understanding of the sciences of human action. The field for the application of the former is the field of the natural sciences, entirely Class probability means, we know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena, but about the actual For all singular events or phenomena, we know nothing but that they are elements of this class.

8:30We know, for instance, that there are ninety tickets in a lottery and that five of them will be drawn. Thus, we know all about the behavior of the whole class of tickets. But with regard to the singular tickets, we do not know anything but that they are elements of this class of tickets. We have a complete table of mortality for a definite period of the past in a definite area. If we assume that with regard to mortality, no changes will occur, we may say that we know everything about the mortality of the whole population in question. But with regard to the life expectancy of the individuals, we do not know anything but that they are members of this class of people.

9:17For this defective knowledge, the calculus of probability provides a presentation in symbols of the mathematical terminology. It neither expands nor deepens nor complements our knowledge. It translates it into mathematical language. Its calculations repeat in algebraic formulas what we knew beforehand. They do not lead to results that would tell us anything about the actual singular events. And of course, they do not add anything to our knowledge concerning the behavior of the whole class, as this knowledge was already perfect, or was considered perfect, at the very outset of our consideration of the matter. It is a serious mistake to believe that the calculus of probability provides the gambler with any information which could remove or lessen the risk of gambling.

10:13It is, contrary to popular fallacies, quite useless for the gambler, as is any other mode of logical or mathematical reasoning. It is the characteristic mark of gambling that it deals with the unknown, with pure chance. The gambler's hopes for success are not based on substantial considerations. The non-superstitious gambler thinks, there is a slight chance, Cool reasoning must show the gambler that he does not improve his chances by buying two tickets instead of one of a lottery in which the total amount of the winnings is is smaller than the proceeds from the sale of all tickets. If he were to buy all the tickets, he would certainly lose a part of his outlay. Yet every lottery customer is firmly convinced that it is better to buy more tickets than less. The habitués of the casinos and slot machines never stop. They do not give a thought to the fact that because Because the ruling odds favor the banker over the player, the outcome will the more certainly

11:37result in a loss for them the longer they continue to play. The lure of gambling consists precisely in its unpredictability and its adventurous vicissitudes. Let us assume that ten tickets, each bearing the name of a different man, are put into a box. One ticket will be drawn, and the man whose name it bears will be liable to pay $100. Then an insurer can promise to the loser full indemnification if he is in a position to insure each of the ten for a premium of $10. He will collect $100 and will have to pay the same amount to one of the ten. But if he were to insure only one of them at a rate fixed by the calculus, he would would embark not upon an insurance business but upon gambling.

12:31He would substitute himself for the insured. He would collect ten dollars and would get the chance either of keeping it or of losing that ten dollars and ninety dollars more. If a man promises to pay at the death of another man a definite sum and charges for this promise the amount adequate to the life expectancy as determined by the calculus of probability, He is not an insurer, but a gambler. Insurance, whether conducted according to business principles or according to the principle of mutuality, requires the insurance of a whole class or what can reasonably be considered as such. Its basic idea is pooling and distribution of risks, not the calculus of probability. The mathematical operations that it requires are the four elementary operations of arithmetic. The calculus of probability is mere by-play.

13:32This is clearly evidenced by the fact that the elimination of hazardous risk by pooling can also be effected without any recourse to actuarial methods. Everybody practices it in his daily life. Every businessman includes in his normal cost accounting the compensation and for losses which regularly occur in the conduct of affairs. Regularly means, in this context, the amount of these losses is known as far as the whole class of the various items is concerned. The fruit dealer may know, for instance, that one of every 50 apples will rot in this stock. But he does not know to which individual apple this will happen.

14:17He deals with such losses as with any other item in the bill of costs. The definition of the essence of class probability as given above is the only logically satisfactory one. It avoids the crude circularity implied in all definitions referring to the equiprobability of possible events. In stating that we know nothing about actual singular events, except that they are elements The characteristic mark of insurance is that it deals with the whole class of events.

15:09As we pretend to know everything about the behavior of the whole class, there seems to There may be no specific risk involved in the conduct of the business. Neither is there any specific risk in the business of the keeper of a gambling bank or in the enterprise of a lottery. From the point of view of the lottery enterprise, the outcome is predictable, provided that all tickets have been sold. If some tickets remain unsold, the enterprise is in the same position with regard to them as every buyer of a ticket is with regard to the tickets he bought. 4. Case Probability Case probability means we know with regard to a particular event some of the factors which determine its outcome, but there are other determining factors about which we know nothing.

16:04Case probability has nothing in common with class probability but the incompleteness of our knowledge. In every other regard, the two are entirely different. There are, of course, many instances in which men try to forecast a particular future event on the basis of their knowledge about the behavior of the class. A doctor may determine the chances for the full recovery of his patient if he knows that 70% of those afflicted with the same disease recover. If he expresses his judgment correctly, he will not say more than that the probability of recovery is 0.7, that is, that out of 10 patients, not more than 3 on the average die.

16:52All such predictions about external events, that is, events in the field of the natural sciences, are of this character. They are, in fact, not forecasts about the issue of the case in question, but statements about the frequency of the various possible outcomes. They are based either on statistical information, or simply on the rough estimate of the frequency derived from non-statistical experience. So far as such types of probable statements are concerned, we are not faced with case probability. In fact, we do not know anything about the case in question except that it is an instance of a class, the behavior of which we know or think we know.

17:40A surgeon tells a patient who considers submitting himself to an operation that 30 out of every 300 undergoing such an operation die. If the patient asks whether this number of deaths is already full, he has misunderstood the sense of the doctor's statement. He has fallen prey to the error known as the gambler's fallacy. Like the roulette player who concludes from a run of ten red in succession that the probability of the next turn being black is now greater than it was before the run, he confuses His Case Probability with Class Probability All medical prognoses, when based only on physiological knowledge, deal with class probability.

18:29A doctor who hears that a man he does not know has been seized by a definite illness will, on the basis of his general medical experience, say, his chances for recovery are 7 to 3. If the doctor himself treats the patient, he may have a different opinion. The patient is a young, vigorous man. He was in good health before he was taken with the illness. In such cases, the doctor may think the mortality figures are lower. The chances for this patient are not 7 to 3, but 9 to 1. The logical approach remains the same, although it may be based not on a collection of statistical Data, but simply on a more or less exact resume of the doctor's own experience with previous cases.

19:19What the doctor knows is always only the behavior of classes. In our instance, the class is the class of young, vigorous men seized by the illness in question. Case probability is a particular feature of our dealing with problems of human action. Here, any reference to frequency is inappropriate, as our statements always deal with unique events which, as such, that is, with regard to the problem in question, are not members of any class. We can form a class, American presidential elections. This class concept may prove useful or even necessary for various kinds of reasoning, as, for instance, for a treatment of the matter from the viewpoint of constitutional law.

20:10But if we are dealing with the election of 1944, either before the election, with its future outcome, or after the election, with an analysis of the factors which determined the outcome, we are grappling with an individual, unique and non-repeatable case. The case is characterized by its unique merits. It is a class by itself. All the marks which make it permissible to subsume it under any class are irrelevant for the problem in question. Two football teams, the Blues and the Yellows, will play tomorrow. In the past, the Blues have always defeated the Yellows. This knowledge is not knowledge about a class of events.

20:58If we were to consider it as such, we would have to conclude that the blues are always victorious and that the yellows are always defeated. We would not be uncertain with regard to the outcome of the game. We would know for certain that the blues will win again. The mere fact that we consider our forecast about tomorrow's game as only probable shows that we do not argue this way. On the other hand, we believe that the fact that the blues were victorious in the past is not immaterial with regard to the outcome of tomorrow's game. We consider it as a favorable prognosis for the repeated success of the blues. If we were to argue correctly according to the reasoning appropriate to class probability, we would not attach any importance to this fact.

21:52If we were not to resist the erroneous conclusion of the gambler's fallacy, we would, on the contrary, argue that tomorrow's game will result in the success of the yellows. If we risk some money on the chance of one team's victory, the lawyers would qualify our action as a bet. They would call it gambling if class probability were involved. Understanding that outside the field of class probability is commonly implied in the term probability, refers to the peculiar mode of reasoning involved in dealing with historical uniqueness or individuality, the specific understanding of the historical sciences. Understanding is always based on incomplete knowledge.

22:40We may know the motives of the acting men, the ends they are aiming at, and the means as they plan to apply for the attainment of these ends. We have a definite opinion with regard to the effects to be expected from the operation of these factors, but this knowledge is defective. We cannot exclude beforehand the possibility that we have erred in the appraisal of their influence or have failed to take into consideration some factors whose interference we did not don't foresee at all, or not in a correct way. Gambling, engineering and speculating are three different modes of dealing with the future. The gambler knows nothing about the event on which the outcome of his gambling depends.

23:29All that he knows is the frequency of a favorable outcome of a series of such events, knowledge which is useless for his undertaking. He trusts to good luck. That is his only plan. Life itself is exposed to many risks. At any moment it is endangered by disastrous accidents which cannot be controlled, or at least not sufficiently. Every man banks on good luck. He counts upon not being struck by lightning and not being bitten by a viper. There is Man is an element of gambling in human life. Man can remove some of the crematistic consequences of such disasters and accidents by taking out insurance policies.

24:16In doing so, he banks upon the opposite chances. On the part of the insured, the insurance is gambling. His premiums were spent in vain if the disaster does not occur. In life insurance, the insured's stake spent in vain consists only in the difference between the amount collected and the amount he could have accumulated by saving. With regard to non-controllable natural events, man is always in the position of a gambler. The engineer, on the other hand, knows everything that is needed for a technologically satisfactory solution of his problem, the construction of a machine. As far as some fringes of uncertainty are left in his power to control, he tries to eliminate them by taking safety margins.

25:08The engineer knows only soluble problems, and problems which cannot be solved under the present state of knowledge. He may sometimes discover from adverse experience that his knowledge was less complete than he had assumed, and that he failed to recognize the indeterminateness of some issues which which he thought he was able to control. Then he will try to render his knowledge more complete. Of course, he can never eliminate altogether the element of gambling present in human life. But it is his principle to operate only within an orbit of certainty. He aims at full control of the elements of his action. It is customary nowadays to speak of social and Engineering.

25:57Like planning, this term is a synonym for dictatorship and totalitarian tyranny. The idea is to treat human beings in the same way in which the engineer treats the stuff out of which he builds his bridges, roads and machines. The social engineer's will is to be substituted for the will of the various people he plans to use for the construction of his utopia. is to be divided into two classes, the almighty dictator on the one hand, and the underlings who are to be reduced to the status of mere pawns in his plans, and cogs in his machinery on the other. If this were feasible, then of course the social engineer would not have to bother about understanding other people's actions.

26:46He would be free to deal with them as technology deals with lumber and iron. In the real world, acting man is faced with the fact that there are fellow men acting on their own behalf as he himself acts. The necessity to adjust his actions to other people's actions makes him a speculator for whom success and failure depend on his greater or lesser ability to understand the future. Every investment is a form of speculation. There is, in the course of human events, no stability and, consequently, no safety. 5. Numerical Evaluation of Case Probability Case probability is not open to any kind of numerical evaluation.

27:39What is commonly considered as such exhibits, when more closely scrutinized, a different character. On the eve of the 1944 presidential election, people could have said, A. I am ready to bet $3 against one that Roosevelt will be elected. B. I guess that out of the total amount of electors, 45 millions will exercise their franchise, 25 millions of whom will vote for Roosevelt. C. I estimate Roosevelt's chances as 9 to 1. D. I am certain that Roosevelt will be elected. Statement D is obviously inexact.

28:25If asked under oath on the witness stand whether he is as certain about Roosevelt's future victory as about the fact that a block of ice will melt when exposed to a temperature of 150 degrees, our man would have answered no. He would have rectified his statement and would have declared, I am personally fully The case of statement A is similar. This man believed that he risked very little when laying such a wager. The relation 3 to 1 does not assert anything about the chances of the candidates.

29:11It is the outcome of the interplay of two factors, the opinion that Roosevelt will be elected and the man's propensity for betting. Statement B is an evaluation of the outcome of the impending event. Its figures refer not to a greater or smaller degree of probability but to the expected result of the voting. Such a statement may be based on a systematic investigation like the Gallup poll or simply on Estimates. It is different with Statement C. This is a proposition about the expected outcome couched in arithmetical terms. It certainly does not mean that out of ten cases of the same type, nine are favorable for Roosevelt and one unfavorable.

30:01It cannot have any reference to class probability. But what else can it mean? It is a metaphorical expression. Most of the metaphors used in daily speech imaginatively identify an abstract object with another object that can be apprehended directly by the senses. Yet this is not a necessary feature of metaphorical language, but merely a consequence of the fact that the concrete is, as a rule, more familiar to us than the abstract. As metaphors aim at an explanation of something which is less well known by comparing it with something better known, they consist for the most part in identifying something abstract with a better known concrete.

30:49The specific mark of our case is that it is an attempt to elucidate a complicated state of affairs by resorting to an analogy borrowed from a branch of higher mathematics, the calculus of probability. As it happens, this mathematical discipline is more popular than the analysis of the epistemological nature of understanding. There is no use in applying the yardstick of logic to a critique of metaphorical language. Analogies and metaphors are always defective and logically unsatisfactory. It is usual to search for the underlying tertium comparationis. And even this is not permissible with regard to the metaphor we are dealing with.

31:36For the comparison is based on a conception which is in itself faulty in the very frame of the calculus of probability, namely, the gambler's fallacy. In asserting that Roosevelt's chances are nine to one, the idea is that Roosevelt is in regard to the impending election in the position of a man who owns 90% of all tickets of a Lottery in regard to the first prize. It is implied that this ratio 9 to 1 tells us something substantial about the outcome of the unique case in which we are interested. There is no need to repeat that this is a mistaken idea. No less impermissible is the recourse to the calculus of probability in dealing with hypotheses Hypotheses in the field of the Natural Sciences Hypotheses are tentative explanations consciously based on logically insufficient arguments.

32:34With regard to them, all that can be asserted is, the hypothesis does or does not contradict either logical principles or the facts as experimentally established and considered as true. In the first case, it is untenable. In the second case it is, under the present state of our experimental knowledge, not untenable. The intensity of personal conviction is purely subjective. Neither frequency probability nor historical understanding enters into the matter. The term hypothesis applied to definite modes of understanding historical events is a misnomer. If a historian asserts that in the fall of the Romanov dynasty, the fact that this house was of German background played a relevant role, he does not advance a hypothesis.

33:30The facts on which his understanding is founded are beyond question. There was a widespread animosity against Germans in Russia, and the ruling line of the Romanovs, having for 200 years intermarried exclusively with scions of families of German descent, was viewed by many Russians as a Germanized family, even by those who assumed that Tsar Paul was not the son of Peter III. But the question remains what the relevance of these facts was in the chain of events which brought about the dethronement of this dynasty. Such problems are not open to any elucidation other than that provided by understanding. 6. Betting, gambling and playing games A bet is the engagement to risk money or other things against another man on the result of an event about the outcome of which we know only so much as can be known on the ground of understanding. Thus people may bet on the result of an impending election or a tennis match, or they may bet on whose opinion concerning

34:42Gambling the content of a factual assertion is right and whose is wrong. Gambling is the engagement to risk money or other things against another man on the results of an event about which we do not know anything more than is known on the ground of knowledge concerning the behavior of the whole class. Sometimes betting and gambling are combined. The outcome The outcome of horse racing depends both on human action, on the part of the owner of the horse, the trainer and the jockey, and on non-human factors, the qualities of the horse. Most of those risking money on the turf are simply gamblers, but the experts believe they know something by understanding the people involved.

35:29As far as this factor influences their decision, they are betters. Furthermore, they pretend to know the horses. They make a prognosis on the ground of their knowledge about the behavior of the classes of horses to which they assign the various competing horses. So far, they are gamblers. Later chapters of this book deal with the methods business applies in handling the problem of the uncertainty of the future. On this point of our reasoning, only one more observation must be made. Embarking upon games can be either an end or a means. It is an end for people who yearn for the stimulation and excitement with which the vicissitudes of a game provide them, or whose vanity is flattered by the display of their skill and superiority in playing a game which requires cunning and expertness.

36:26It is a means for professionals who want to make money by winning. Playing a game can therefore be called an action. But it is not permissible to reverse this statement and to call every action a game, or to deal with all actions as if they were games. The immediate aim in playing a game is to defeat the partner according to the rules of the game. This is a peculiar and special case of acting. Most actions do not aim at anybody's defeat or loss. They aim at an improvement in conditions. It can happen that this improvement is attained at some other men's expense. But this is certainly not always the case.

37:13It is, to put it mildly, certainly not the case within the regular operation of a social system based on the division of labor. There is not the slightest analogy between playing games and the conduct of business within a market society. The card player wins money by outsmarting his antagonist. The businessman makes money by supplying customers with goods they want to acquire. There may exist an analogy between the strategy of a card player and that of a bluffer. There is no need to investigate this problem. He who interprets the conduct of business as trickery is on the wrong path. The characteristic feature of games is the antagonism of two or more players or groups of players.

38:04Patience or solitaire is not a one-person game, but a pastime, a means of escaping boredom. It certainly does not represent a pattern for what is going on in a communistic society, as John von Neumann and Oscar Morgenstern assert. The characteristic feature of business within a society, that is, within an order based on the division of labor, is concord in the endeavors of its members. As soon as they begin to antagonize one another, a tendency toward social disintegration emerges. Within the frame of a market economy, competition does not involve antagonism in the sense in in which this term is applied to the hostile clash of incompatible interests.

38:51Competition, it is true, may sometimes, or even very often, evoke in the competitors those passions of hatred and malice which usually accompany the intention of inflicting evil on other people. Psychologists are therefore prone to confuse combat and competition. But praxeology must beware of such artificial and misleading equivocations. From its point of view, there exists a fundamental difference between catalactic competition and combat. Competitors aim at excellence and preeminence in accomplishments within a system of mutual cooperation. The function of competition is to assign to every member of a social system that position in which he can best serve the whole of society and all its members.

39:45It is a method of selecting the most able man for each performance. Where there is social cooperation, there some variety of selection must be applied. Only where the assignment of various individuals to various tasks is affected by the dictator's decisions alone, and the individuals concerned do not aid the dictator by endeavors to represent We will have to deal at a later stage of our investigations with the function of competition. At this point we must only emphasize that it is misleading to apply the terminology of mutual extermination to the problems of mutual cooperation as it works within a society.

40:37Praxeology terms are inappropriate for the description of business operations. It is, for example, a bad metaphor to speak of the conquest of a market. There is no conquest in the fact that one firm offers better or cheaper products than its competitors. There is strategy in business, only in a metaphorical sense. 7. Praxeological Prediction Practical knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But of course, such prediction can never imply anything regarding quantitative matters. Quantitative problems are in the field of human action, open to no other elucidation than that by understanding.

41:29We can predict, as will be shown later, that, other things being equal, a fall in the demand for A will result in a drop in the price of A. But we cannot predict the extent of this drop. This question can be answered only by understanding. The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding by trying to grasp what is going on in the minds of the men concerned can approach the problem of forecasting future conditions.

42:29We may call its method unsatisfactory, and the positivists may arrogantly scorn it. But