• Alex Vikner

Fooled by Randomness by Taleb

Fooled by Randomness by Nassim Nicholas Taleb investigates the hidden role of chance in life. We tend to mistake luck for skills because randomness does not look random. The core message is that life is not all random but it's more random than we think. These are my reading notes.

We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract.

Dentists and speculators

One cannot judge the performance in any given field by the results, but by the cost of the alternative. $10 million earned through Russian roulette does not have the same value as

$10 million earned through the practice of dentistry. One’s dependence on randomness is greater than the other.

Reality is even more vicious than Russian roulette:

  1. It delivers the fatal bullet rather infrequently. After a few dozen tries, one forgets about the existence of a bullet, under a numbing sense of security.

  2. One does not observe the barrel of reality.

  3. There is an ingratitude factor in warning people about something abstract.

We dislike the abstract

People do not like to insure against something abstract; the risk that merits their attention is always something vivid.

Somehow all respect we may have for history does not translate well into our treatment of the present. Why? Because people learn only from their own mistakes. Self-discoveries last.

Things are always obvious after the fact. A vicious effect of hindsight bias is that those who are very good at predicting the past will think of themselves as good at predicting the future.

A mistake is not something to be determined after the fact, but in the light of the information until that point.

Signals amid the noise

As the world becomes increasingly complicated, we are surrounded by more and more noise.

The wise man listens to meaning; the fool only gets the noise.

To not drown, it is crucial to reduce the noise and focus on the signals.

Over a short time increment, one observes the variability of the portfolio, not the returns. Our emotions are not designed to understand this point. Hence, people who look too closely at randomness burn out emotionally.

Wealth does not count so much into one’s well-being as the route one uses to get to it.

The implications of asymmetry

It does not matter how frequently something succeeds if failure is too costly to bear.

Coming back to Russian roulette, whenever there is asymmetry in outcomes, the average survival has nothing to do with the median survival.

People confuse probability and expectation because much of their schooling comes from examples in symmetric environments, like a coin toss. Reality does not have the same closed and symmetric laws as games.

Rare events are always unexpected, otherwise they would not occur.

Our brain is not cut out for nonlinearities. Our emotional apparatus is designed for linear causality.

The fact that losses hurt more than gains, and *differently*, makes your total wealth less relevant than the last change in it.

Because of anchoring, wealth itself does not really make one happy (above, of course, some subsistence level); but positive changes in wealth may, especially if they come as “steady” increases.

This anchoring to a number is the reason people don't react to their total accumulated wealth, but to differences of wealth from whatever number they are currently anchored to.

Our natural habitat doesn't include much information. An efficient computation of the odds was never necessary until very recently. Many of our problems come from the fact that we've evolved out of such a habitat much faster than our genes. In fact, our genes have not changed at all.

Monkey’s on Typewriters

If one puts an infinite number of monkeys in front of typewriters, and lets them clap away, there is a certainty that one of them would come up with an exact version of the Iliad. Now, would you invest your life’s savings on a bet that this monkey would write the Odyssey next?

If someone performed better than the crowd in the past, there is a presumption of his ability to do better in the future. However, this presumption may be very weak as it depends on 2 factors:

1. The profession’s randomness content

2. The number of monkeys in operation

If there are five monkeys in the game, it would be extremely impressive if one of them wrote the Iliad. If there are 10 billion, it would be surprising if none of them got it, just by luck.

Unfortunately, in real life the other monkeys are uncountable and we only see the winners which gives us a mistaken perception of the odds (i.e. survivorship bias).

It is not that Warren Buffett is unskilled; only that a large population of random investors will almost necessarily produce someone with his track record just by luck.

Mild success can be explainable by skills and labor. Wild success is attributable to variance.

Repetitiveness is key for the revelation of skills because of ergodicity.

The mistake of ignoring survivorship bias is chronic because 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.

Even a broken clock is right twice a day.

Pasteur famously said that chance favors the prepared. It is true that hard work, showing up on time, etc is necessary but this may be insufficient as these actions do not cause success.

That all millionaires were persistent, hardworking people does not make persistent hard workers become millionaires.

By definition, lucky fools do not bear the slightest suspicion that they may be lucky fools.

Consequently, nobody accepts randomness in his own success, only in his failure.