Fooled By Randomness | The Hidden Role Of Chance In Life And In The Markets by Nassim Nicholas Taleb

I. Brief Summary

An investigation of luck, uncertainty, probability, decision-making, and randomness in a data driven (statistics) and narrative world. Nassim Taleb is a great thinker and shares his personal and philosophical views to help us understand the world we live in which many don't understand. He is a quantitative trader by profession and learned about practical problems with decision-making, human biases and probabilistic thinking from his professional journey of taking bets (risks). Taleb is a true multidisciplinary thinker. I also enjoyed Taleb's writing style. He has a way to explain complex topics in colorful ways. On the downside, I can see why some may see this book as a personal rant. Taleb does not hide his emotions or shy away from being too opinionated. Nonetheless, this book is a must-read.

II. Big Ideas

• We look back and see less randomness.
• History played out the way it did because it was observed with one perspective amongst all possible alternatives. Hence, history proves to be a terrible teacher.
• Use Monte Carlo simulation to generates thousands, perhaps millions, of random sample paths, and look at the prevalent characteristics of some of their features.
• History is a better teacher than today’s media journalism.
• Time scale is important in judging a historical event.
• Life is nonlinear. Small acts can have disproportionate consequences (good or bad).
• We are probability blind. We cannot make decisions without emotions. We are dominated by our emotions.
• We make choices with emotions and not rationality.
• We tend to generalize which lowers awareness of the randomness at play.
• We often get the causality arrow wrong. Correlation does not equal causation. We leverage stories and oversimplifications to falsely show why behind something.
• We experience attribution bias by assigning success to a precise reason but in reality it is randomness at play.
• It takes courage to introspect and bravery to be skeptical.
• Probability is the acceptance of the lack of certainty in our knowledge and a way to deal with our ignorance. Probability almost never presents itself as a mathematical problem or a brain teaser outside of textbooks.
• Not all is at randomness. Chance favors the prepared! Hard work and showing up on time contributes to success but might be insufficient and do not cause success.
• Bad information is worse than no information at all.
• We need to take into account the costs of mistakes. A mistake is not something to be determined after the fact, but in the light of the information until that point.
• We are often unaware that we’re playing a dangerous game of roulette. We often call our paths by some lower-risk name, but the truth is that we often can’t see the barrel of reality.
• We look at our rich neighbors and assume they are skilled and deserved their winnings. But they may have been lucky and random.
• Heroes are heroes because they are heroic in behavior, not because they won or lost.
• People pay for insurance to protect themselves. When a bad event happens, we think of their decision as a smart one. When it doesn’t, it seems like they wasted money. Probabilistically, it may have been the right move to buy the insurance.
• How we feel about something depends on the path to getting to the end result. And there are many ways to get to the end result.
• In trading, you don’t need to maximize profits. You need to stay in the game. Don’t blow up your portfolio. Neither bulls nor bears survive long term because they are useless terms. Optimize for longevity.
• It’s not about how likely an event is that matters, it’s how much you make when it happens. How frequent you profit is irrelevant; it’s the magnitude of the outcome that counts.
• We miss rare events because we remove the outliers from their analysis. Instead, we focus on the average of what’s happening over time.
• Loyalty to ideas is not good.
• Absence of critical thinking expressed in absence of thinking.
• Avoid intellectual pollution and trap of falling prey to the nice-sounding words.
• The pain of losing $100 is greater than the satisfaction of earning $100. Psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one.
• Whenever there is asymmetry in outcomes, the average survival (expected outcome) has nothing to do with the median survival (50%).
• 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 and threaten our survival.
• 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. The effect of such compression is the reduction in the degree of detected randomness.
• Heuristics:
  • The availability heuristic corresponds to the practice of estimating the frequency of an event according to the ease with which instances of the event can be recalled.
  • The representativeness heuristic is when we gauge the probability that a person belongs to a particular social group by assessing how similar the person’s characteristics are to the “typical” group member’s.
  • The simulation heuristic: The ease of mentally undoing an event—playing the alternative scenario.
  • The affect heuristic: What emotions are elicited by events determine their probability in your mind.
• The higher up the corporate ladder, the higher the compensation to the individual. This might be justified, as it makes plenty of sense to pay individuals according to their contributions. However, and in general, the higher up the corporate ladder, the lower the evidence of such contribution.
• Repetitiveness is key for the revelation of skills.
• Repetitiveness requires a process.

III. Quotes

• Realism is punishing. Probabilistic skepticism is worse.
• Reality does not have the same closed and symmetric laws and regulations as games.
• When you look at the past, the past will always be deterministic, since only one single observation took place.
• In other words, history teaches us to avoid the brand of naive empiricism that consists of learning from casual historical facts.
• Imagine taking a test knowing the answer. While we know that history flows forward, it is difficult to realize that we envision it backward.
• 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).
• Mathematics is principally a tool to meditate, rather than to compute.
• Self-contradiction is made culturally to be shameful, a matter that can prove disastrous in science.
• Heroes are heroes because they are heroic in behavior, not because they won or lost.
• We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract.
• 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.
• Those who were unlucky in life in spite of their skills would eventually rise. The lucky fool might have benefited from some luck in life; over the longer run he would slowly converge to the state of a less-lucky idiot. Each one would revert to his long-term properties.
• No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word.
• A mistake is not something to be determined after the fact, but in light of the information available until that point.
• Mild success can be explainable by skills and labor. Wild success is attributable to variance.
• My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.
• When things go our way we reject the lack of certainty.
• The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions. Besides, I believe that I need my emotions to formulate my ideas and get the energy to execute them. I am just intelligent enough to understand that I have a predisposition to be fooled by randomness—and to accept the fact that I am rather emotional. I am dominated by my emotions—but as an aesthete, I am happy about that fact.
• The problem with information is not that it is diverting and generally useless, but that it is toxic.
• It certainly takes bravery to remain skeptical; it takes inordinate courage to introspect, to confront oneself, to accept one's limitations. Scientists are seeing more and more evidence that we are specifically designed by mother nature to fool ourselves.
• Bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no experience in handling risk. Alas, investors and businesses are not paid in probabilities; they are paid in dollars.
• People do not realize that the media is paid to get your attention. For a journalist, silence rarely surpasses any word.
• People often confuse complex ideas that cannot be simplified into a media-friendly statement as symptomatic of a confused mind.
• This is one of the many reasons that journalism may be the greatest plague we face today—as the world becomes more and more complicated and our minds are trained for more and more simplification.
• There is asymmetry. Those who die do so very early in the game, while those who live go on living very long. Whenever there is asymmetry in outcomes, the average survival has nothing to do with the median survival.
• People overvalue their knowledge and underestimate the probability of their being wrong.
• Clearly, an open mind is a necessity when dealing with randomness. Popper believed that any idea of Utopia is necessarily closed owing to the fact that it chokes its own refutations. The simple notion of a good model for society that cannot be left open for falsification is totalitarian. I learned from Popper, in addition to the difference between an open and a closed society, that between an open and a closed mind.
• 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 and threaten our survival.
• Too much success is the enemy, too much failure is demoralizing.
• Common sense is nothing but a collection of misconceptions acquired by age eighteen. Furthermore, What sounds intelligent in a conversation or a meeting, or, particularly, in the media, is suspicious.
• The quality of a decision cannot be solely judged based on its outcome.
• We are not made to view things as independent from each other. When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other. Our bias is immediately to establish a causal link.
• This high-yield market resembles a nap on a railway track.
• The virtue of capitalism is that society can take advantage of people’s greed rather than their benevolence, but there is no need to, in addition, extol such greed as a moral (or intellectual) accomplishment (the reader can easily see that, aside from very few exceptions like George Soros, I am not impressed by people with money).
• The difference between a trader and an investor lies in the duration of the bet, and the corresponding size.
• There is a saying that bad traders divorce their spouse sooner than abandon their positions. Loyalty to ideas is not a good thing for traders, scientists - or anyone.
• Wealth does not count so much into one’s well-being as the route one uses to get to it.
• My principle activity is to tease those who take themselves and the quality of their knowledge too seriously.
• Our emotional apparatus is designed for linear causality. For instance, you study every day and learn something in proportion to your studies.
• Finally, I reckon that I am not immune to such an 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.
• 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 point of becoming one if I were to adopt Spartan (even miserly) habits and live in my starter house.
• One of the most irritating conversations I’ve had is with people who lecture me on how I should behave. Most of us know pretty much how we should behave. It is the execution that is the problem, not the absence of knowledge. I am tired of the moralizing slow-thinkers who pound me with platitudes like I should floss daily, eat my regular apple, and visit the gym outside of the New Year’s resolution. In the markets the recommendation would be to ignore the noise component in the performance. We need tricks to get us there but before that we need to accept the fact that we are mere animals in need of lower forms of tricks, not lectures.
• Probability is principally a branch of applied skepticism.
• Beware the confusion between correctness and intelligibility. Part of conventional wisdom favors things that can be explained rather instantly and “in a nutshell”—in many circles it is considered law.
• Of course chance favors the prepared! Hard work, showing up on time, wearing a clean (preferably white) shirt, using deodorant, and some such conventional things contribute to success—they are certainly necessary but may be insufficient as they do not cause success.
• We are faulty and there is no need to bother trying to correct our flaws. We are so defective and so mismatched to our environment that we can just work around these flaws.
• Life would be unbearably bland if we had no enemies on whom to waste efforts and energy.
• If my brain can tell the difference between noise and signal, my heart cannot.
• Our brain is not cut out for nonlinearities.
• I have two ways of learning from history: from the past, by reading the elders; and from the future, thanks to my Monte Carlo toy.
• The only article Lady Fortuna has no control over is your behavior. Good luck.