Fooled by Randomness, by Nassim Nicholas Taleb

Praised by many authors and online personalities I respect and admire, I decided to read the first of the Incerto books. Summary: I love his ideas, I hate the writer.

For context, I shared many of Taleb's views before I have read this book. From lack of probability understanding among supposed experts, to probability as a way of thinking beyond math, to understanding life outcomes better using probability. Still...so much noise in this book.

I really liked Taleb's ability to narrate stories with probability theories behind them. Nero's, the monkeys with typewriters, the explanation of managers investing in the market over time, Marc and Janet's marriage...They were well narrated and had enough length to convey both the parable and the learnings.

He also shares examples of different aspects of probability applied to life, like how dentists are richer than NFL quarterbacks (on expectation), how comparing yourself to people outside of your sample distribution is a bad idea (e.g. made-rich vs born-rich) or how the scientific method is violated all over because people do not understand it (e.g. you cannot prove a statement, you can only disprove it).

However, the farther the book goes the less interesting it gets. I attribute this to Taleb's ego: he writes for the amusement of himself rather than for the reader. He is as egocentric as a person as he is as a writer. This has nothing to do with the tone, it's simply that content-wise it has a lot of noise that can be trimmed with no loss. The quality of the signal is great, but the signal to noise ratio is awful.

Most of his ideas seem like they didn't have the time to be structured and jumped from the author's head to the page without any filter. There are chapters (I guess in order for this to be called a book?) but the content is a mess - he is his own editor and it shows.

He has a dispute with the whole corpus of journalists, economists and MBAs for not understanding probability and having professional success based on luck. He criticizes them several times, in multiple chapters. After the fifth mention...it comes across as jealousy as he doesn't receive as much attention himself (?). In any case, it's just childish to have a personal vendetta against a profession and taking any opportunity to let the reader know.

The second part of the book is dedicated to psychology and behavioural economics. It's not clear to me that he seems to be the wisest about probability but the concept of sample size evades him. Most of his claims are based on the psychology papers with very limited population, so the law of large numbers cannot apply and therefore the claims cannot be held.

My guess is that since he doesn't like to write papers, he doesn't like to read them either. Foolish mistake. The behavioural and evolutionary concepts mentioned align with what he thinks so it fits his book narrative (confirmation bias).

At least he admits openly that he can be fooled by randomness and biases as anyone else.

Overall, an "okay" book for me. A bit disappointed because it could have been a great read with 100% less ego and the work of an editor.

Quotes

• This book has two purposes: to defend science (as a light beam across the noise of randomness), and to attack the scientist when he strays from his course (most disasters come from the fact that individual scientists do not have an innate undderstanding of standard error or a clue about critical thinking, and likewise have proved both incapable of dealing with probabilities in the social sciences and incapable of accepting such fact).

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

• Scientists found out that serotonin, a neurotransmitter, seems to command a large share of our human behavior. It sets a positive feedback, the virtuous cycle, but, owing to an external kick from randomness, can start a reverse motion and cause a vicious cycle.

• One cab driver in Chicago explained to me that he could tell if traders he picked up near the Chicago Board of Trade, a futures exchange, were doing well. “They get all puffed up,” he said. I found it interesting (and mysterious) that he could detect it so rapidly. I later got some plausible explanation from evolutionary psychology, which claims that such physical manifestations of one’s performance in life, just like an animal’s dominant condition, can be used for signaling: It makes the winners seem easily visible, which is efficient in mate selection.

• In expectation, a dentist is considerably richer than the rock musician who is driven in a pink Rolls Royce, the speculator who bids up the price of impressionist paintings, or the entrepreneur who collects private jets. For one cannot consider a profession without taking into account the average of the people who enter it, not the sample of those who have succeeded in it.

• The idea of taking into account both the observed and unobserved possible outcomes sounds like lunacy.

• In people’s minds lower prices are far more “volatile” than sharply higher moves. In addition, volatility seems to be determined not by the actual moves but by the tone of the media.

• When you look at the past, the past will always be deterministic, since only one single observation took place.

• A more vicious effect of such hindsight bias is that those who are very good at predicting the past will think of themselves as good at predicting the future, and feel confident about their ability to do so.

• Ergodicity means, roughly, that (under certain conditions) very long sample paths would end up resembling each other.

• People tend to infer that because some inventions have revolutionized our lives that inventions are good to endorse and we should favor the new over the old. I hold the opposite view. The opportunity cost of missing a “new new thing” like the airplane and the automobile is minuscule compared to the toxicity of all the garbage one has to go through to get to these jewels. Now the exact same argument applies to information. The problem with information is not that it is diverting and generally useless, but that it is toxic.

• I would suggest London’s Anatole Kaletsky and New York’s Jim Grant and Alan Abelson as the underrated representatives of such a class among financial journalists; Gary Stix among scientific journalists.

• Over a short time increment, one observes the variability of the portfolio, not the returns. In other words, one sees the variance, little else.

• My sole advantage in life is that I know some of my weaknesses, mostly that I am incapable of taming my emotions facing news and incapable of seeing a performance with a clear head. Silence is far better.

• Veteran trader Marty O’Connell calls this the firehouse effect. 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 (they develop political ideas that are very similar).

• the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. They never considered that the fact that trading on economic variables has worked in the past may have been merely coincidental, or, perhaps even worse, that economic analysis was fit to past events to mask the random element in it. Consider that of all the possible economic theories available, one can find a plausible one that explains the past, or a portion of it.

• We will ignore the basic misuse of Darwinian ideas in the fact that organizations do not reproduce like living members of nature—Darwinian ideas are about reproductive fitness, not about survival.

• No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.

• Empiricism cannot be inseparable from methodology. A testable statement is one that can be broken down into quantitative components and subjected to statistical examination.

• I can use data to disprove a proposition, never to prove one.

• I do not know if it applies to other people, but, in spite of my being a voracious reader, I have rarely been truly affected in my behavior (in any durable manner) by anything I have read. A book can make a strong impression, but such an impression tends to wane after some newer impression replaces it in my brain (a new book).

• Having never been impressed by people with money (and I have met plenty of those throughout my life), I did not look at any of them as remotely a role model for me. Perhaps the opposite effect holds, as I am generally repelled by the wealthy, generally because of the attitude of epic heroism that usually accompanies rapid enrichment.

• There are only two types of theories: i) Theories that are known to be wrong, as they were tested and adequately rejected (falsified). ii) Theories that have not yet been known to be wrong, not falsified.

• Why is a theory never right? Because we will never know if all the swans are white

• Indeed the difference between Newtonian physics, which was falsified by Einstein’s relativity, and astrology lies in the following irony. 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. Such point lies at the basis of the demarcation between science and nonsense.

• 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.

• For common wisdom among people with a budding knowledge of probability laws is to base their decision making on the following principle: It is very unlikely for someone to perform considerably well in a consistent fashion without his doing something right. [...] it all depends on two factors: The randomness content of his profession and the number of monkeys in operation.

• As we are cut to live in very small communities, it is difficult to assess our situation outside of the narrowly defined geographic confines of our habitat. In the case of Marc and Janet, this leads to considerable emotional distress; here we have a woman who married an extremely successful man but all she can see is comparative failure, for she cannot emotionally compare him to a sample that would do him justice.

• The mistake of ignoring the survivorship bias is chronic, even (or perhaps especially) among professionals. How? 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.

• There are some instances in which one can trust a track record, but, alas, there are not too many of these.

• The Monte Carlo generator will toss a coin; heads and the manager will make $10,000 over the year, tails and he will lose $10,000. We run it for the first year. At the end of the year, we expect 5,000 managers to be up $10,000 each, and 5,000 to be down $10,000. Now we run themngame a second year. Again, we can expect 2,500 managers to be up two years in a row; another year, 1,250; a fourth one, 625; a fifth, 313. We have now, simply in a fair game, 313 managers who made money for five years in a row. Out of pure luck. Meanwhile if we throw one of these successful traders into the real world we would get very interesting and helpful comments on his remarkable style, his incisive mind, and the influences that helped him achieve such success. Some analysts may attribute his achievement to precise elements among his childhood experiences. His biographer will dwell on the wonderful role models provided by his parents; we would be supplied with black-and-white pictures in the middle of the book of a great mind in the making. And the following year, should he stop outperforming (recall that his odds of having a good year have stayed at 50%) they would start laying blame, finding fault with the relaxation in his work ethics, or his dissipated lifestyle. They will find something he did before when he was successful that he has subsequently stopped doing, and attribute his failure to that. The truth will be, however, that he simply ran out of luck.

• Ergodicity: time will eliminate the annoying effects of randomness.

• Nobody accepts randomness in his own success, only his failure.

• Data snooping. The more I try, the more I am likely, by mere luck, to find a rule that worked on past data. A random series will always present some detectable pattern. I am convinced that there exists a tradable security in the Western world that would be 100% correlated with the changes in temperature in Ulan Bator, Mongolia.

• Medical researchers are rarely statisticians; statisticians are rarely medical researchers.

• Professionals forget the following reality. It is not the estimate or the forecast that matters so much as the degree of confidence with the opinion.

• The first lesson I took from the story is not to even attempt to be Odysseus. He is a mythological character and I am not. He can be tied to the mast; I can merely reach the rank of a sailor who needs to have his ears filled with wax. I am not so intelligent. 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.