The Ludic Fallacy refers to the misuse of games or simplified models to represent real-life situations, especially when these models ignore the complexity, unpredictability, and unknowns of reality. The term was introduced by Nassim Nicholas Taleb in his book The Black Swan.

The fallacy occurs when people assume that the structured, rule-based nature of games or mathematical models can accurately capture the messiness of real-world events.

In games, all variables, risks, and outcomes are known and quantifiable. In real life, many risks are unknown or unknowable (“unknown unknowns”).

This fallacy can lead to overconfidence in predictions, risk assessments, and decision-making, especially in fields like finance, economics, and policy.

Example

Using casino odds to model financial markets ignores the fact that markets are influenced by unpredictable events, irrational behavior, and incomplete information.