Fooled by Randomness
Author: Nassim Taleb
Summary: Fooled by Randomness explores how we tend to mistake luck for skills, how randomness does not look random, why there is no point in talking about performance when it is easier to buy and sell than fry an egg, and the profound difference between dentists and speculators.
The kind of luck in finance is of the kind that nobody understands but most operators think they understand, which provides us a magnification of the biases.
"It is more random than we think" rather than "it is all random"
Chance favors the prepared. Hard work, showing up on time, wearing a clean shirt etc are necessary but may be insufficient as they do not cause success.
That all millionaires were persistent, hardworking people does not make persistent hard workers become millionaires.
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.
This business of journalism is about pure entertainment, not search for truth.
Solon's warning: the uncertain future has yet to come.
It does not matter how frequently something succeeds if failure is too costly to bear.
Mild success is attributable to chance. Wild success is attributable to variance.
By definition, lucky fools do not bear the slightest suspicion that they may be lucky fools.
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 miilion earned through the practice of dentistry. On'es dependence on randomness is greater than the other.
Reality is even more vicious than Russian roulette:
It delivers the fatal bullet rather infrequently. After a few dozen tries, one forgets about the existence of a bullet, uner a numbing sense of security.
One does not observe the barrel of reality.
There is an ingratitude factor in warning people about something abstract.
Heroes are heroes because they are heroic in behavior, not because they won or lost.
People do not like to insure against something abstract; the risk that merits their attention is always something vivid.
As the world becomes more and more complicated, our minds are trained for more and more simplification. That is one of the many reasons that journalism is one of the greatest plagues today.
What sounds intelligent in a conversation or a metting, or, particularly, in the media, is suspicious.
Almost all the smart things that have been proven by science appeared like lunacies at the time they were first discovered.
The generator of reality is not observable.
Mathematics is not just a "numbers game", it is a way of thinking. Mathematics is principally a tool to meditate, rather than to compute. Probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive.
People learn only from their own mistakes.
Reading history books is not enough to learn from history.
Every man believes himself to be quite different, a matter that amplifies the "why me?" shock upon a diagnosis.
Somehow all respect we may have for history does not translate well nto our treatment of the present.
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.
Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny.
A mistake is not something to be determined after the fact, but in the light of the information until that point.
Bad trades catch up with you (ergodicity).
For an idea to have survived so long across so many cycles is indicative of its relative fitness.
The problem with information is not that it is diverting and generally useless, but that it is toxic.
People do not realize that media is paid to get your attention.
People often think that it will surely be the next batch of news that will really make a difference to their understanding of things.
Reduce the noise, focus on the signal.
"The wise man listens to meaning; the fool only gets the noise" — Cavafy
Over a short time increment, one observes the variability of the portfolio, not the returns. Our emotions are not designed to understand this point.
I am not immune to such emotional defect. But I deal with it by having no access to information, except in rare circumstances. Again, I prefer to read poetry. If an event is important enough, it will find its way to my ears.
People who look too closely at randomness burn out, their emotions drained by the series of pangs they experience.
Wealth does not count so much into one's well-being as the route one uses to get to it.
My sole advantage in life is that I know some of my weaknesses, mostly that I am incapable of taming my emotions faciing news and incapable of seeing a performance with a clear mind. Silence is far better.
To a scientist, science lies in the rigor of the inference. Science is method and rigor; it can be identified in the simplest of prose writing.
We do not need to be rational and scientific when it comes to the details of our daily life—only in those that can harm us or threathen our surviival. Modern life invites us to do the opposite.
If I'm going to be fooled by randomness, it better be of the beautiful (and harmless) kind.
At any point in time, the richest traders are often the worst traders.
Overestimate the accuracy of their beliefs in some measure.
Tend to get married to their positions.
Tend to change their story.
Have no precise game plan ahead of time as to what to do in the event of losses.
Absence of critical thinking expressed in absence of revision of their stance with stop losses.
We tend to think that traders were successful because they are good. Perhaps we have turned the causality on its head; we consiider them good just because they make money: one can make money in the financial markets totally out of randomness.
Owing to abrupt rare events, we do not live in a world where things "converge" continuously toward betterment. Nor do things in life move continuously at all.
Whenever there is asummetry 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 envrionments, like a coin toss.
Bullish or bearish are often hollow words with no application in a world of randomness—particularly if such a world, like ours, presents asymmetric outcomes.
An event, although rare, that brings large consequences cannot just be ignored.
Rare events are always unexpected, otherwise they would not occur.
We are designed by mother nature to have an extremely skewed physical workout: hunter-gatherers had idle moments followed by burts of intense energy expenditure.
There is no point searching for patterns that are available to everyone with a brokerage account; once detected, they would be self-canceling.
Reality does not have the same closed and symmetric laws and regulations as games.
A theory is never right because we will never know if all the swans are white.
To Popper, verification is not possible. Verificationism is more dangerious than anything else.
If the science of statistics can benefit me in anything, I will use it. If it poses a threat, then I will not. I want to take the best of what the past can give me without its dangers. Accordingly I will use statistics and inductive methods to make aggressive bets, but I will not use them to manage my risks and exposure.
If someone has performed better than the crowd in the past, there is a presumption of his ability to do better in the future. But this presumption may be very weak because it all depends on the profession’s randomness content and the number of monkeys in operation.
The more data we have, the more likely we are to drown in it.
There is no solace to be found from reasoning.
I have no large desire to sacrifice much of my personal habits, intellectual pleasures, and personal standards in order to become a billionaire like Warren Buffett, and I certainly do not see the point of becoming one if I were to adapt Spartna (even miserly) habits and live in my starter house.
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.
A population entirely composed of bad managers will produce a small amount of great track records.
Nobody accepts randomness in his own success, only in his failure.
Survivorship bias depends on the size of the initial population. The information that a person derived some profits in the past, just by itself, is neither meaningful nor relevant. We need to know the size of the population from which he came.
Randomness would be expected to allow a few investment classes to fare extremely well. Are "experts" who make foolish statements like "markets will always go up in any 20-year period" aware of this problem?
I prefer to remian skeptic. I never said that every rich man is an idiot and every unsuccessful person unlucky, only that in absence of much additional information it is preferable to reserve one's judgement. It is safer.
Life is unfair in a nonlinear way (i.e. the drop that caused the water to spill).
The information age, by homogenizing our tastes, is causing the unfairness to be even more acute—those who win capture almost all the customers.
Our brain is not cut out for nonlinearities. Our emotional apparatus is designed for linear causality. This is why there are routes to success that are nonrandom, but very few people have the mental stamina to follow them.
Buridan's donkey: sometimes randomness is useful for us to make decisions.
It is better to have a handful of enthusiastic advocates than hordes of people who appreciate your work—better to be loved by a dozen than liked by the hundreds. This applies to the sale of books, the spread of ideas, and success in general and runs counter to conventional logic.
Too much stress is the enemy; too much failure is demoralizing. I would like the option of having neither.
The problem with thinking is that it causes you to develop illusions.
Satisficing is the idea of stopping when you get a near-satisfactory solution.
Normative economics is like religion without the aesthetics.
One central aspect of a heuristic is that it is blind to reasoning.
The fact that the losses hurt more than the 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 do not react to their total accumulated wealth, but to differences of wealth from whatever number they are currently anchored to.
We reason in 2 ways: System 1 (heuristics) and System 2 (rationality). System 1 can be impacted by experience and integrate elements from System 2.
Our natural habitat does not include much information. An efficient computation of the oddswas never necessary until very recently.
Much of our problem comes from the fcat that we have evolved out of such as habitat much faster than our genes. Even worse, our genes have not changed at all.
One does not learn how birds fly by studying feathers but rather studying aerodynamics.
One cannot make a decision without emotion.
An option is simply the weighted average of the possible states the asset can take.
Many journalists claim to provide an explanation for something that amounts to perfect noise.
A trick to know if something real in the world is taking place is to only look at the large percentage changes. Unless something moves by more than its usual daily percentage change, the event is deemed to be noise.
It is not the estimate that matters so much as the degree of confidence.
The small daily emotions are not rational but we need them to function properly.
Wittgenstein's ruler: unless the source of the statement has extremely high qualifications, the statement will be more revealing of the author than the information intended by him.
A compliment is always pleasant, regardless of its authorship—something manipulators know rather well.
Most of us know pretty well how we should behave. It is the execution that is the problem, not the absence of knowledge.
Science evolves from funeral to funeral.
Epic heroes were judged by their actions, not by the results.
Self-help books are largely ineffectual. Good, enlightened advice and eloquent sermons do not register for more than a few moments when they go against our wiring.
Exhibit sapere vivere in all circumstances. The only article Lady Fortuna has no control over is your behavior.
The higher up the corporate ladder, the higher the compensation. However, and in general (provided we exclude risk-bearing entrepreneurs), the higher up the corporate ladder, the lower the evidence of contribution.
Repetitiveness is key for the revelation of skills because of ergodicity.
CEOs are not entrepreneurs, they are often empty suits.
Causality is not clear. The quesion remains whether optimizers are unhappy because they are constantly seeking a better deal or if unhappy people tend to optimize out of their misery.
We are not made for clear-cut, well-delineated schedules. We are made to live like firemen, with downtime for lounging and meditating between calls, under the protection of protective uncertainty.
Don't do to others what you don't want them to do to you.
We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract.