Fooled by Randomness

The Hidden Role of Chance in Life and in the Markets, by Nassim Nicholas Taleb

Prologue

• Randomness disguised and perceived as non-randomness. The "lucky fool" benefits from this.
• The literary mind is prone to confusion between noise (randomly constructed arrangement) and meaning (precisely intended message).
• We underestimate the share of randomness in anything.
• The greatest fools of randomness will be found among snake-oil salesmen dressed in the garb of scientists.

PART II: Survivorship and Other Biases

• The more data we have the more we are likely to drown in it.
• It is common wisdom that it is unlikely for someone to perform well consistently without his doing something right. However, this presumption is weak because it depends on the initial sample size and dependence on randomness.
• We only see the survivors.

8: Too Many Millionaires Next Door

• By living on Park Avenue in New York, one will have no exposure to losers, only winners, so it's hard to assess the situation outside of the narrowly defined geographic confines of one's habitat. This led to emotional distress that comes from comparative failure (despite being wealthy overall).
• The book The Millionaire Next Door claims that the wealthiest are to be found among those less suspected to be wealthy; those who act and look wealthy subject their net worth to such a drain that they inflict damage to their brokerage account.
  • There is no heroism in accumulating money if they don't try to derive any tangible benefit from wealth. Being rich is a selfish act, and we should no praise the wealth for living in austerity (or they should go be a social worker). There is no point in accumulating wealth if you were to live in misery in a starter house.
  • Becoming rich is not a moral achievement
• People only see winners
• We are trained to take advantage of the information that is lying in front of our eyes, ignoring information we do not see.
• Survivorship bias implies that the highest performing realization will be most visible because losers do not show up.

9: It's Easier to Buy and Sell than Fry and Egg

• Even if the successful people represent 2% of the population, they will get the attention.
• Number of successful managers depends on how many started in the investment business rather than their ability to produce profits. (expectation of the maximum track records depends on size of initial sample
• ergodicity has a property that describes that time will eliminate annoying effects of randomness. In the long term, managers that were profitable for five years in a row, will not fare any better than the initial cohort who failed.
• Noby accepts randomness in his own success, only his failure.
• Adverse selection: judging an investment that comes to you requires more stringent standards than judging an investment you seek.
• 1/365.25 chance of meeting someone with your same birthday. 50% chance for two people to have the same birthday in a room of 23 birthday. Not specifying which person changes things.
• The results of testing a given relationship can be serious, but the looking for any relationships is easy.
• Book jackets are examples of survivorship bias, only the top reviews make it on the jacket.
• For medicine, people can give testimonies that it cured them, but it could be one of a million people who tried it, or an expert in a different field's claim.
• Reference case problem explain that there is no attainable randomness in practice, only theory.
• There are scientific results that are left out of publications because they are not statistically significant, but nevertheless provide information

10: Losers Takes All - On the Nonlinearities of Life

• Life is unfair in a nonlinear way. A small advantage in life can translate into a highly disproportionate payoff and vice versa.

  • Nonlinear effect is like a small additional input causing a disproportionate result. "The straw that broke the camel's back," "Chaos theory"

• Fame is a feedback loop

• If people don't want to change, then your company/method succeeds for a long time. (QWERTY)

• when it rains, it pours.