Phil Fernbach
Appearances
Hidden Brain
How Much Do We Really Know?
So the big banks who were developing these instruments and selling them they would have a mathematical model that would determine exactly how these things would behave. The problem is that those mathematical models work really well most of the time, like an airplane that's highly automated, but they actually break down in very unusual situations, a black swan event, so to speak.
Hidden Brain
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And that's exactly what happened. So the models failed. And so the super experts on derivatives even they completely misunderstood the amount of risk that was present in these products. So it was across the entire financial system that there was these sort of miscalibrations in understanding.
Hidden Brain
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And there was this cascade effect that started with, you know, some slight decreases in the price of housing and then just cascaded into this massive crash and devastation that not only affected the United States, but affected... countries all over the world because the entire global system is so connected nowadays.
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That is a paradox, and that is the paradox at the heart of humankind, I think. On the one hand, we have visited the moon and created incredible artificial intelligence and all these other sort of almost magical abilities. On the other hand, everybody knows that people can engage in behavior that's incredibly ignorant and extreme and foolish.
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And we've all done it ourselves and we've all seen it in others.
Hidden Brain
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The illusion of knowledge is the idea that we think that we understand the world in much greater detail than we actually do. In cognitive science, this is sometimes called the illusion of explanatory depth. There was great research done by a psychologist at Yale named Frank Kyle and his colleagues in the 1990s. And that's precisely what they were interested in.
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How well do people understand how everyday objects work, things like toilets or ballpoint pens or zippers? And in these studies, what they asked people to do was to first just give a sort of impression of how well they understand things. And what's fun about this experiment is that your listeners can actually do this experiment on themselves right now. So think about it.
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How well do you understand how a toilet works? And if you're like most people, you're kind of nodding your head right now and saying, well, I have a decent understanding of how a toilet works. You think that somewhere in your mind is something like an annotated plumbing diagram that you could tell us about. But here's the trick.
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In the next part of the experiment, what I'm going to do is I'm going to ask you to explain to me in detail exactly how it works. And when I do that, something really remarkable happens. People reach inside and they realize they have just about nothing to say. It turns out that we tend to know remarkably little about the way that the world works.
Hidden Brain
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And yet, that initial impression we have is that we do understand in a lot of depth. And that's what Kyle called the illusion of explanatory depth and is sometimes referred to more simply as an illusion of knowledge or an illusion of understanding.
Hidden Brain
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So that's actually most of the time pretty much all you need to know about how a toilet works until the toilet breaks and you have to fix it. And then you realize, actually, there's a lot more going on.
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So the most popular flush toilet in North America is the siphoning toilet. And by the way, this is a really ingenious mechanism that was created. Its most important components are a tank, a bowl, and a trapway. The trapway is usually S or U-shaped, and it curves up higher than the outlet of the bowl before descending into the drain pipe that eventually feeds the sewer.
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The tank is initially full of water, and when the toilet is flushed, the water flows from the tank quickly into the bowl, raising the water level above the highest curve of the trapway. This purges the trapway of air, filling it with water. As soon as the trapway fills, the magic occurs.
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A siphon effect is created that sucks the water out of the bowl and sends it through the trapway down the drain. It's the same siphon action that you can use to steal gasoline out of a car by placing one end in the tank and sucking on the other end.
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Well, I think we should test that with a plumber, not with me. But I think you did a pretty good job.
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I think we both should. But what this highlights is just how complicated the world is. Whoever thought, you know, there's this ingenious mechanism in this object that we use every single day and we never think about.
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I think this reflects a really deep fact about the nature of the mind and what thinking is actually for. Thinking evolved to make us more effective at acting in the world. The world is extremely complex. And to be able to choose effective actions in the world really requires acting in environments that are very different from one another. We almost never see the same exact situation arise twice.
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And so our minds have to be really effective at generalization. They have to understand that this situation is similar to this situation in some way to be able to act effectively. So storing a huge amount of detail about the world and the way that it works is actually counterproductive.
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What we really want to do is throw away all of the irrelevant detail and just retain the deeper principles, the deeper generalizable structures that are going to allow us to choose effective actions.
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That's exactly right. The world is so complex. When you start digging into the details of almost anything, you realize how complicated it is and that you don't necessarily appreciate that complexity off the bat. I remember hearing a story about a rock, paper, scissors tournament. Do you know the game rock, paper, scissors? Yes, yeah. Very simple game, right?
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It seems like there's nothing to learn and nothing to understand about that game. How could you have a tournament? You just throw randomly. Right. Well, actually, it turns out that there's a group of people who have gotten really good at rock, paper, scissors. And what do they do? They master the details of how the human mind chooses—
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what to throw and how it engages in pattern matching and other kinds of things. And they can identify certain kinds of patterns in what a more novice rock, paper, scissors player will do and take advantage of that.
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That's exactly right. It's a funny kind of dumb example, but something where when I first looked at it, I said, there is no way that somebody could develop any level of expertise in that area. But it turns out, no, there is actually something to be learned there.
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Yeah, this is a super fascinating example. So hyperthymesia is also called highly superior autobiographical memory. And these are people who literally remember everything that's ever happened to them. And so you could talk to a person with hyperthymesia and say, what happened to you at 10.30 in the morning on August 15th, 1985. And they can relate to exactly what occurred.
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They basically have perfect recall. So before I described how our minds are very good at throwing away irrelevant detail. If you have hyperthymesia, it's the opposite. You retain everything that's ever happened to you. It sounds like a superpower, but it actually makes life really difficult. And there's an amazing short story by the Argentinian writer Borges, which is called Funes de Memorias.
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And it describes exactly this, a man who falls off a horse and develops perfect autobiographical memory so that he remembers every little detail of his life, and it drives him crazy. And that's because the purpose of thinking, the purpose of cognition is really not to store detail. It's to throw the detail away to be able to generalize. And that's such an important function of cognition.
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If you have this hyperthymesia, it actually makes life really difficult.
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In fact, it would be futile to try to know everything. The world is just way too complex. We've already talked about that. There's just no way that an individual can know enough about the world that it would be effective to store all the details about everything. That's just part and parcel of what it means to be a human being.
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It is a problem that we don't appreciate the extent to which we don't understand.
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This is a crazy story. So this guy... was under the impression that he would be invisible to the cameras if he put lemon juice on his face. You remember when you were a kid, you could create invisible ink by putting lemon juice on the paper. So he thought for some reason that this would apply to making him invisible to the camera.
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So he actually went in to try to rob a bank with no mask, no subterfuge whatsoever, just lemon juice on his face. So his image is broadcast on the news. Within minutes, the police arrive at his door to arrest him, and he is completely incredulous. How could they have possibly known it was him because he had the lemon juice on his face?
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And in fact, it turned out that he had tested the method by taking a Polaroid of himself and And making sure that his face was indeed invisible to the Polaroid camera. It's never been discovered why the Polaroid didn't show his face. But one possibility is that he missed because his eyes were filled with lemon juice.
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it's been well documented that people tend to be very overconfident in their capabilities in terms of beating the market. Um, and that can lead to really disastrous outcomes. Like people take on too much risk. Um, and it actually turns out that the more people actively trade, the worse they do.
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And active trading is sort of a, an indicator of being overconfident in your ability to, to beat the market. Um, this is a paper that I wrote with, um, Dan Walters and, um, What we found in this paper is that one reason for the overconfidence, the reason that people feel that they can beat the market, is because they tend to remember the good outcomes and forget the bad outcomes.
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So if I make a trade and I do great on it, that one's gonna stick in my memory more so than when I make a trade and it does poorly. That's not to say that if you have a really disastrous trade that you're not gonna remember that. You certainly would. But on average, you're going to tend to inflate the good over the bad.
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And one reason for that is because we tend to remember the things that help us maintain a positive self-image. We want to believe that we're smart and good at investing. That's a very natural human tendency to want to remember the good and kind of forget the bad. And so this doesn't just occur in the domain of investing, but can occur in other domains as well.
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Yes, and that is what made me so passionate about these ideas. Because it turns out that the reason that we should care about this illusion is not because people don't understand how a ballpoint pen or a toilet works. But I realized at some point that the illusion applies to just about everything that we grapple with as a society and as individuals. I was doing this work
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in the midst of a political environment in the United States that was becoming more and more polarized. And as I was doing this work, I had this big insight that, wow, we are arguing with incredible vitriol across the aisle about issues that are extremely complex and that nobody understands in a lot of depth and detail.
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And yet we have these passionate, strong views and are unable to compromise across the political divide. And that was a core issue that really got me interested in this stuff.
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I think in many cases they are wrong. And actually we've demonstrated that in experiments. So what we've done is something very akin to the toilet experiment that I described earlier. We bring people into the lab and we ask them about their position on the issues of the day, the things that we're arguing about as a society. And then we ask them how well they understand those issues.
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People tend to say, oh yeah, I understand it pretty well. And then we ask them to explain the mechanism, explain in detail how it works. And we find this large decrease in the sense of understanding. So people are humbled by that because they try to explain and they realize, wow, I just have a talking point or two. I actually don't understand this thing in detail.
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So I've studied this in the context of controversial scientific issues. So things like the safety of genetically modified foods or the reality of climate change. In those cases, there's a substantial minority of the population who expresses really extreme, strong counter-consensus views. views that are counter to the scientific consensus.
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And what we find in that case is that the people who have the strongest
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Counter consensus views have the highest levels of subjective understanding They feel like they understand these issues the best which makes sense because if I feel like I understand it really well I'm gonna have a strong opinion But when we measure their actual understanding of the issue in a variety of ways They actually have the lowest levels of objective knowledge so when you put those things together
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the people who have the most extreme counter consensus views have this huge gap between what they think they know and what they actually know.
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I think that that's right. So if I feel like I understand something and I feel like I know it well, I'm gonna be less likely to listen to counter evidence and counter explanations or to do more research into the issue to learn more about it. If I already feel like I understand it, it's really hard to reach me with counter evidence.
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And so the people whose views seem to be the most out of line with what the scientific community says are the ones who are hardest to reach because they already feel like they understand the issue.
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So we're not in the habit of engaging in a lot of explanation. most of the time. We just take things for granted, as we've been discussing. And so when we get in the habit of doing that, it's sort of hard to hide from ourselves that we don't understand things as well as we thought we did. A great example of this comes from work by Rebecca Lawson on people's understanding of bicycles.
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So if you ask somebody, do you know how a bicycle works? A lot of people would say, oh yeah, I kind of know how that works. But then in the study, what she did was she asked people to draw bicycles. And if you sit down and try to do it, I encourage the listeners to try to do it. It's much more difficult than you might have anticipated.
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And that's just a great example of, in that case, it's impossible to hide from yourself the gaps in your knowledge. They've just become revealed on the page as you try to draw.
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That's right. A test that is designed to actually gauge knowledge. understanding of the way things work as opposed to a test that is merely regurgitating facts. So a test that's well designed to actually evaluate whether somebody understands the details or mechanisms of the way that something works would indeed reveal those gaps.
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I have a colleague who was recently telling me a story about one of his classes where he was just imploring students, if you are using artificial intelligence to try to help you with the class. Make sure that you understand this and not just are using the artificial intelligence. And yet, when the test came around and they'd all been using ChatGPT, they learned that they
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did not understand the material as well as they thought that they did because they had been relying on the artificial intelligence. And they got very upset with him. And he sort of explained to them, look, I tried to tell you, but this is such a natural human thing to overestimate our understanding. that it's very hard to actually appreciate the gaps in our knowledge.
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It's so natural for us to go through life just not really questioning and assuming we know more than we do that we don't really see it. And that's why getting into this habit of questioning yourself and questioning your understanding is a very powerful tool for dispelling the illusion.
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So in our studies, we've often compared two different types of explanations. One is this mechanistic explanation. How does it work? And the other is more about why you believe what you do. So reasons. And you can think about those two modes of thinking as being more explanatory or mechanistic on the one hand, and then more argumentative on Or advocacy-based, on the other hand.
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I think we are much more commonly engaged in this argumentation or advocacy when we're talking about things like political issues. We very rarely engage in this kind of mechanistic or explanatory kind of discussion. But it turns out that the mechanistic or explanatory mode leads to a little more open-mindedness.
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It gets people to be a little less certain about their positions because it reveals the complexity of issues. And this has been demonstrated to some extent in our work where we simply ask people, how do you feel about these issues afterwards? But I think even more interestingly and meaningfully, there's a great paper by El-Nakori Hun and Grossman a few years ago
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And they asked people on different sides of the political divide to have political discussions. And then they measured different things about the discussion, like how well it went and how open-minded people seemed to be and how much they were listening to the other side and those kinds of things.
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And what they found is that the discussions were more productive when people engaged in this more explanatory kind of discussion.
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It does. They move to the middle a little bit. The challenge with that is that people get defensive as well. So if you challenge people with their understanding, they might actually double down and say, no, I know what I'm talking about. Because people naturally tend to be a little bit defensive. So the way to actually implement such an intervention can be
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a little bit challenging in its details because, again, human beings are not simple. They're complex. So if you reveal people's lack of understanding to them, it may have the effect of making them a little bit more humble or more moderate, but it could also make them double down on their position a little bit.
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The key is to be curious. about the other side's position. So if you start from a perspective of the other side is not as smart as me, is not as ethical or moral as me, they're bad, they're stupid, then you're not going to be likely to have a very productive discussion. If you start instead with the perspective of the person that I'm talking to is as smart as me,
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and as moral as me, then you become curious. Why is it that they maintain a strong position that's so different from yours when it seems like the right answer is just so obvious to you? And then when you become curious, and if both sides are mutually curious, and they want to understand what is behind the other side's position, then you can have a more productive discussion.
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And I think what you will find is that when you engage jointly in this explanatory kind of discussion, it's more of a collaboration than it is an argument. And that collaboration is going to reveal, likely, that both sides don't know as much as they thought they did at the beginning. That's going to be the most common outcome.
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I agree with that 100% because we all have beliefs that are incorrect, and we all have beliefs that we have much more strength and conviction in than we should. And conspiracies are a bizarre sort of extreme example of this, but they're part and parcel of the same kind of mechanisms that lead to all of our beliefs.
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Yes. So there's been a lot of research in the psychology literature on overconfidence. People tend to be overconfident in a lot of different ways. The reason for overconfidence is what's called confirmation bias. That is, we're preferentially disposed to find evidence for the position that we start with, the one that we want.
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Some of the work that I've done is looking at another reason that we're overconfident. It's not just because we tend to preferentially weight the evidence for our positions, but also that we tend to neglect all of the unknown information. And that's part and parcel of all of the themes that we've been talking about today, that the world just seems simpler than it is.
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If the world seems simpler and we're confronted with an issue, then we're going to tend not to think about all of the stuff that we don't know. we're going to tend to think about the stuff that we do know. And if we thought about all the stuff that we don't know, it would make us more moderate in our positions because, wow, there's a lot more to know about this.
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What we find is that when people search the internet for financial information, they become overconfident in their knowledge. And not only do they become overconfident in their knowledge, but that leads to downstream behaviors like taking on more risk.
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This has been a really fun conversation, Shankar. Thank you so much.
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I was sitting on an aisle and I will never forget the way that it felt to try to sit still. It was impossible. I couldn't stop moving. The strength of the emotions was so intense. I really stood out and I felt like people were avoiding eye contact with me. They weren't really sure what to do with me. And partway through the flight,
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this man came up to me I was sitting on the aisle on the right side of the plane so he came up to me and he crouched down next to me on my left side and he was so gentle he made direct eye contact with me and he spoke softly and slowly and he was really sincere and
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And he said, I know you don't know me and I don't know what's going on for you, but I want you to know that if you need anything, I'm here. And I said, thank you. I never ended up going to him during that flight, but knowing he saw me. You know, I felt like I was in this cavern of just like untenable emotion and that I was deeply, deeply alone.
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This was one of the most fascinating periods in American history. It was the development of the nuclear bomb at Los Alamos in New Mexico. And these were very eminent physicists who were testing the reaction of the fissile material in the bomb, the plutonium.
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And, you know, having lost a brother, we were so close in age. We grew up just one year in school apart. And knowing that I was on a plane with somebody that could see me and that knew that I needed something even if I didn't know what it was, even if they didn't know what it was, was an incredibly powerful experience. I will forever be grateful for him. It was a really powerful moment for me.
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And this particular experiment, which the physicist Richard Feynman, as you said, called Tickling the Dragon's Dale, it was a very delicate experiment that involved taking two hemispheres of beryllium that were surrounding the plutonium core and moving them closer and closer together to test the reactivity of the plutonium. So the plutonium is radioactive and gives off neutrons.
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Those neutrons rebound off of the beryllium and create the reaction.
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As the hemispheres get closer together, you get more of that reaction. What's so delicate and dangerous about this experiment is that if the hemispheres get too close together, it can create a chain reaction that releases a burst of radioactivity that can be very dangerous.
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He was. He was one of the developers of the bomb and was an extremely eminent and experienced physicist. He was... the most important member of this experimental team because he was the one who was actually engaged in the process of bringing those hemispheres of beryllium closer together. How was he doing it? What was he doing? Well, this is the crazy part of the story.
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He was actually using a common flathead screwdriver to keep the two sections of beryllium apart. Unfortunately, at the critical moment, The screwdriver slipped. The two hemispheres of beryllium crashed together and they released this intense burst of radioactive radiation. Slotin, who was right next to the apparatus, took the worst of it.
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And he actually died in the infirmary eight days later of radiation poisoning. The rest of the physicists in the room, all eminent scientists, all survived the initial burst. Some of them unfortunately died before their time, potentially due to the radiation dose that they received.
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There certainly was. For instance, an obvious way to do it would have been to suspend one of the hemispheres of beryllium, and then the other hemisphere could be raised from the bottom. In that case, if anything slipped or there was any problem, gravity would have just pulled the two hemispheres apart, and that would have been much less of a dangerous way to conduct the experiment.
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I think Slotin, like any other person, by virtue of his experience, did not foresee this potential problem. He became overconfident in his ability to conduct this experiment because he had done it so many times before and he had so much experience in this domain.
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A stall is a very scary thing. So that's when an airplane loses airspeed and literally starts falling out of the sky. Every pilot, when they learn how to fly an airplane, this is one of the most important things that they train for. So they actually will purposely put the airplane into a stall and then learn how to take it out of the stall. How do you take a plane out of a stall?
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Well, actually, what you need to do is point the nose of the plane down counterintuitively. You want to go up, but you actually have to point the plane down. You have to increase your acceleration. You have to regain airspeed, and then you can actually achieve an altitude correction.
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When they recovered the black box from this airplane, surprisingly, what they found was that this very experienced pilot had done was exactly the opposite of what you're supposed to do in a stall situation. He was actually trying to pull the plane up, but without any airspeed, that's just impossible. There's no way that the plane could recover.
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And so, unfortunately, this led to this devastating outcome.
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Yeah, they did very extensive analyses to try to figure out what went wrong. And one of their overall conclusions was that pilots in general have become too reliant on automation and have lost some of their basic flying skills. Modern airplanes, especially modern jetliners, are so technologically sophisticated that a lot of the time the software and the airplane are doing most of the work.
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The pilot is almost like an observer watching the airplane do the job. The pilot, of course, has to be there to intervene in unusual situations when something goes wrong. The problem is that those situations are becoming more and more rare because the software is becoming more and more capable.
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So in cases where an intervention is necessary, the pilot might not be as prepared as they should be because they become too reliant on the automation.
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I've had the exact same experience. In fact, I've heard stories of people driving into lakes because that's what the GPS tells them to do. Yeah. My own personal experience with this is I use self-driving software all the time when I'm driving now. It works remarkably well. But one thing I've noticed over the last few years is that I've actually become a worse driver.
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No one wants to admit to themselves that they've become a worse driver. But for me, the evidence is kind of incontrovertible at this point because I've gotten into a few fender benders recently. Over the last few years, which I've never done before. And so I've asked myself, what is going on here?
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And I really think it's because I've become so reliant on the car doing the work that I've lost my situational awareness. And then when something unusual happens and I need to take over, I'm not ready to do it. Just like a pilot on an automated airline.
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The financial crash in 2008 was in a great part due to a massive decline in the value of these financial products, a certain kind of financial product called a derivative. Derivatives are really complicated financial instruments, and it's really hard to predict exactly how they're going to behave.
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Traders like derivatives because they can often generate really good returns in Financial markets return is always correlated with risk.
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So if something has a high return, it's also gonna have a high risk The problem with derivatives is because they're so complicated It's often impossible to see the risk or it's very hard to see the risk the risk only emerges in sort of unusual situations so it's like
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that the product is, you know, it seems to be behaving just very safely, but then something changes and all of a sudden, instead of losing 10% of its value, it loses 90% of its value or something like that.
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Now, what ended up happening in the financial crisis was that these derivative products were ending up in places where they didn't belong, in places that should not have been taking on this amount of risk. Things like pension funds that should be relatively safe investments. Why did they end up there? Because the people buying them just did not appreciate or realize how complicated they were.
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And so what happened was when the price of real estate in the United States started going down, these products, which were tied to the value of real estate and like the default probabilities on mortgages, they crashed in value.
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And there was this huge amount of risk in our financial system because these products had entered into all these different areas and they were highly represented in all these different areas.
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And all of a sudden, kind of everybody was caught by surprise that the pension fund was losing a huge amount of its value because it had exposure to these very risky things because people didn't realize that the risk was there.
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That's absolutely right. And I think it happens at more than one level. So if you think about a pension fund manager who knows what a derivative is, but isn't a super expert in a derivative, he's relying on the people who do the analysis of the derivatives to kind of think, oh, this is potentially like a good investment vehicle for my portfolio. He's not thinking in terms
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super careful detail about what the risk profile is of that instrument. And maybe he or she should be, but they obviously didn't. But it also occurs at another level, which is the person who actually is the super expert on the derivative, even that person, it turned out, didn't understand completely how these things were going to behave.