Fooled by Randomness
Rating: 8.5/10Author: Nassim Nicholas Taleb Read The Original
The Book in 3 Sentences
- Monkey on the typewriter problem -> with a sample size big enough someone is bound to succeed in a very big way.
- Nonlinearity explains why there are routes to success that are nonrandom, but few, very few, people have the mental stamina to follow them.
- We are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.
I think this one example from the book sums it up nicely. You have a fact: automobiles happen closer to home. A naive reader of the result would tell you that you are more likely to have an accident if you drive in your neighborhood than if you did so in remote places, which is a typical example of naive empiricism. Why? Because accidents may happen closer to home simply because people spend their time driving close to home. Too many people just read explanations. We cannot instinctively understand the nonlinear aspect of probability, which is why having a basic understanding and grasp of statistics is so important. Although very finance sector-heavy, Taleb gives numerous other unique examples where we are fooled by randomness from stoic beliefs to our understanding of evolution, this book is a must-read!
Fooled By Randomness Summary
- Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.
- I am not saying that Warren Buffett is not skilled; only that a large population of random investors will almost necessarily produce someone with his track records just by luck.
- “people think that there is a story when there is none”
- Symbolism is the child of our inability and unwillingness to accept randomness;
- bad information is worse than no information at all.
Part I • SOLON’S WARNING Skewness, Asymmetry, Induction
One • IF YOU’RE SO RICH, WHY AREN’T YOU SO SMART?
- one cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e., if history played out in a different way). Such substitute courses of events are called alternative histories.
- "He was about to thank me when he abruptly stopped and said that he paid for half of it probabilistically." - > when you make a bet.
- it is also a scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the “thinking” part of the brain but largely in the emotional one
Three • A MATHEMATICAL MEDITATION ON HISTORY
- Mathematics is principally a tool to meditate, rather than to compute.
- Stochastic processes refer to the dynamics of events unfolding with the course of time. Stochastic is a fancy Greek name for random.
- The only way I developed a respect for history is by making myself aware of the fact that I was not programmed to learn from it in a textbook format.
- A mistake is not something to be determined after the fact, but in the light of the information until that point.
- The janitor in Chapter 1 who won the lottery, if he lived one thousand years, cannot be expected to win more lotteries. Those who were unlucky in life in spite of their skills would eventually rise.
- Over a short time increment, one observes the variability of the portfolio, not the returns. In other words, one sees the variance, little else.
- chronic stress leads to memory loss, lessening of brain plasticity, and brain damage.
Five • SURVIVAL OF THE LEAST FIT—CAN EVOLUTION BE FOOLED BY RANDOMNESS?
- He had observed that firemen with much downtime who talk to each other for too long come to agree on many things that an outside, impartial observer would find ludicrous
- Both Carlos and John belong to the class of people who benefited from a market cycle.
- Negative mutations are traits that survive in spite of being worse, from the reproductive fitness standpoint, than the ones they replaced.
- on average, animals will be fit, but not every single one of them, and not at all times.
Six • SKEWNESS AND ASYMMETRY
- Median means roughly that 50% of the people die before eight months and 50% survive longer than eight months.
- Someone did a study for the SEC and discovered that 90 percent of all options expire as losses.
- history teaches us that things that never happened before do happen.
- Psychologists recently found out that people tend to be sensitive to the presence or absence of a given stimulus rather than its magnitude. This implies that a loss is first perceived as just a loss, with further implications later. The same with profits. The agent would prefer the number of losses to be low and the number of gains to be high, rather than optimizing the total performance.
- Where statistics becomes complicated, and fails us, is when we have distributions that are not symmetric, like the urn above. If there is a very small probability of finding a red ball in an urn dominated by black ones, then our knowledge about the absence of red balls will increase very slowly—more slowly than at the expected square root of n rate. On the other hand, our knowledge of the presence of red balls will dramatically improve once one of them is found. This asymmetry in knowledge is not trivial; it is central in this book—it is a central philosophical problem for such people as the ancient skeptics David Hume and Karl Popper
- There is no point searching for patterns that are available to everyone with a brokerage account; once detected, they would be self-canceling.
Seven • THE PROBLEM OF INDUCTION
- automobile accidents happen closer to home can be tested by taking the average distance between the accident and the domicile of the driver (if, say, about 20% of accidents happen within a twelve-mile radius). However, one needs to be careful in the interpretation; a naive reader of the result would tell you that you are more likely to have an accident if you drive in your neighborhood than if you did so in remote places, which is a typical example of naive empiricism. Why? Because accidents may happen closer to home simply because people spend their time driving close to home (if people spend 20% of their time driving in a twelve-mile radius).*
- To conclude, extreme empiricism, competitiveness, and an absence of logical structure to one’s inference can be a quite explosive combination.
- was at the age when one felt like one needed to read everything, which prevented one from making contemplative stops.
- There are only two types of theories: 1. Theories that are known to be wrong, as they were tested and adequately rejected (he calls them falsified). 2. Theories that have not yet been known to be wrong, not falsified yet, but are exposed to be proved wrong.
- Newtonian physics is scientific because it allowed us to falsify it, as we know that it is wrong, while astrology is not because it does not offer conditions under which we could reject it.
- Memory in humans is a large machine to make inductive inferences.
- induction is going from plenty of particulars to the general. It is very handy, as the general takes much less room in one’s memory than a collection of particulars.
Part II • MONKEYS ON TYPEWRITERS
- A small knowledge of probability can lead to worse results than no knowledge at all.
Eight • TOO MANY MILLIONAIRES NEXT DOOR
- we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.
Nine • IT IS EASIER TO BUY AND SELL THAN FRY AN EGG
- ergodicity, namely, that time will eliminate the annoying effects of randomness.
- Many college graduates are trading as a first career, failing, then going to dental school.
- television to be bombarded by advertisements for funds that did (until that minute) outperform others by some percentage over some period. But, again, why would anybody advertise if he didn’t happen to outperform the market? There is a high probability of the investment coming to you if its success is caused entirely by randomness. This phenomenon is what economists and insurance people call adverse selection.
- real randomness does not look random!
Ten • LOSER TAKES ALL—ON THE NONLINEARITIES OF LIFE
- Brian Arthur, an economist concerned with nonlinearities at the Santa Fe Institute, wrote that chance events coupled with positive feedback rather than technological superiority will determine economic superiority
- mathematics is merely a way of thinking and meditating, little more, in our world of randomness.
- My partner Mark Spitznagel summarizes it as follows: Imagine yourself practicing the piano every day for a long time, barely being able to perform “Chopsticks,” then suddenly finding yourself capable of playing Rachmaninov. Owing to this nonlinearity, people cannot comprehend the nature of the rare event. This summarizes why there are routes to success that are nonrandom, but few, very few, people have the mental stamina to follow them.
Eleven • RANDOMNESS AND OUR MIND: WE ARE PROBABILITY BLIND
- (1) We do not think when making choices but use heuristics; (2) We make serious probabilistic mistakes in today’s world—whatever the true reason.
- Damasio reported that the purely unemotional man was incapable of making the simplest decision. He could not get out of bed in the morning, and frittered away his days fruitlessly weighing decisions. Shock!
- we feel emotions (limbic brain) then find an explanation (neocortex).
- Worse, one Harvard lawyer used the specious argument that only 10% of men who brutalize their wives go on to murder them, which is a probability unconditional on the murder (whether the statement was made out of a warped notion of advocacy, pure malice, or ignorance is immaterial). Isn’t the law devoted to the truth? The correct way to look at it is to determine the percentage of murder cases where women were killed by their husbands and had previously been battered by them (that is, 50%)—for we are dealing with what is called conditional probabilities; the probability that O. J. killed his wife conditional on the information of her having been killed, rather than the unconditional probability of O. J. killing his wife. How can we expect the untrained person to understand randomness when a Harvard professor who deals and teaches the concept of probabilistic evidence can make such an incorrect statement?
- Why do I want everybody to learn some statistics? The answer is that too many people read explanations. We cannot instinctively understand the nonlinear aspect of probability.
Part III • WAX IN MY EARS
- Wittgenstein’s ruler: Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.
Thirteen • CARNEADES COMES TO ROME: ON PROBABILITY AND SKEPTICISM
- probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive.
- attribution bias. You attribute your successes to skills, but your failures to randomness.
Fourteen • BACCHUS ABANDONS ANTONY
- Start stressing personal elegance at your next misfortune.
- By some argument, the boss of the company may be unskilled labor but one who presents the necessary attributes of charisma and the package that makes for good MBA talk. In other words, he may be subjected to the monkey-on-the-typewriter problem. There are so many companies doing all kinds of things that some of them are bound to make “the right decision.”
- research on happiness shows that those who live under a self-imposed pressure to be optimal in their enjoyment of things suffer a measure of distress.