HomeAbout UsCover Art GalleryContact UsSubscribe

Pascal’s Wager on the Economy

AddThis Social Bookmark Button

There’s hardly a matter subject to more speculation today than the state of the world economy. In the marketplace, naysayers, yeasayers, and economic agnostics are equally plentiful. Is the economy on an upward swing? Well, this Ivy League-trained economist says yes. That one however says no, and there are a few in between who say (using different words) that it’s too early to tell. Mind you these aren’t mere opinion. They’ve got complex spreadsheets and lengthy PowerPoint presentations to prove their points!

Unfortunately for us, effective business decision making does not permit economic agnosticism. So, if you were made to wager, would you be bullish or bearish about the economy? With the world’s sharpest intellectual compasses pointing north, south, and several other directions in between, where else can we turn for guidance? The short answer: God.

Learning From a Related Problem
God—besides being the omnipotent, omnipresent, and omniscient Being—was (and I reckon still is) a serious philosophical problem. Like our economic dilemma, the problem of God’s existence was quite the tough nut to crack. So much so that they even coined a term to collectively refer to problems of a similar irational and contradictory nature and antimony (noun), which refers to a problem or question for which opposing answers are equally logically defensible.

Several of the smartest minds in human history were put to work to offer solutions for the quintessential antinomy of God’s existence. One solution in particular may be useful to us as we try to understand our own philosophical and, more importantly, economic predicament. This solution to the problem of God’s existence is known, fondly among scholars, as Pascal’s Wager.

The First Wager
PascalBlaise Pascal (14th century mathematician, physicist, philosopher, and seminal writer on, what is today known as, the decision sciences) began his solution by defining (in probabilistic terms) the problem.

With this dilemma, we have two options: to wager that God exists or to wager that He does not. Independent of our choice is two realities, that is, that God exists or that He does not.

Based on these choices and realities, there are then four possibilities: (a) that we wager God exists and He does, (b) that we wager God exists but He does not, (c) that we wager God does not exist but He does, or (d) that we wager God does not exist and He does not.

With this, Pascal writes that, in wagering on God, we put two things at stake: our knowledge (i.e., whether we are right or wrong on our wager) and our happiness (i.e., whether we are content with the resulting reality).

However, note that if God does not exist, there is no happiness for anyone. Thus, if we wager that He does not exist, even if we win the wager, we do not win happiness. On the other hand, if we wager that He exists, then, if we win, we win everything (both happiness and correctness)! And, even if we lose, we lose nothing since happiness was anyway already forfeit.

Our Wager on the Economy
Similarly, when made to wager on the state of the economy, we have two options: to say that it is recovering or to say that it is not. Independent of our choice is two realities: that the economy is indeed recovering or that it is not.

Based on these choices and realities, there are then four possibilities: (a) that we wager the economy is recovering and it is, (b) that we wager the economy is recovering but it is not, (c) that we wager the economy is not recovering but it is, or (d) that we wager the economy is not recovering and it is indeed not.

With this, we likewise put two things at stake: our knowledge (i.e., that we are right about where the economy is going) and our happiness (i.e., that we benefit from the actual state of the economy.)

However, note also that if the economy is not recovering, there is no happiness for anyone! After all, no one is independent of the world economy, not even China. Thus, if we wager that the economy is not recovering, even if we win the wager, we do not profit. Credit will still be hard to come by, our markets will continue contracting, consumers will still trade down, our investments will still swim deeply in red ink.

On the other hand, if we wager that it is recovering, then, if we win, we are not only correct in our wager but we profit too. And, even if we lose, we lose nothing since no one cares about a silly wager when the economy is in the dumps. There are many more important things to talk about.

So, the next time the Wall Street Journal polls you about your economic outlook for 2009, what will you say? I know what I’ll say: The economy is on its way up, up, up!

Print ed: 06/09

 

On Newsstands Now

DECEMBER 2014:
The Asian Consumer Goldmine

14-12