Book: Fooled by Randomness

Fooled by Randomness - The Hidden Role of Chance in Life and in the Markets, 2nd edition, Nassim Nicholas Taleb, 2004, 316 pages

We tend to see reasons/patterns even when there are none. Some things simply happen by chance. This bias leads to many stupid decisions, especially in economic and social matters. We should be aware of our foolishness and think twice before we reach conclusions. It reminds me of the warning by Montaigne:

"I realize that if you ask people to account for 'facts', they usually spend more time finding reasons for them than finding out whether they are true... They skip over the facts but carefully deduce inferences. They normally begin thus: 'How does this come about?' But does it do so? That is what they ought to be asking."

[p.xviii] Most journalists do not take things too seriously: After all, this business of journalism is about pure entertainment, not a search for truth, particularly when it comes to radio and television.

[p.12] Mild success can be explainable by skills and labor. Wild success is attributable to variance.

[p.38] Much of what rational thinking seems to do is rationalize one's actions by fitting some logic to them... the mental probabilistic map in one's mind is so geared toward the sensational that one would realize informational gains by dispens­ing with the news.

[p.61] Prices swing more than the fundamentals they are supposed to reflect, they visibly overre­act by being too high at times (when their price overshoots the good news or when they go up without any marked reason) or too low at others. The volatility differential between prices and infor­mation meant that something about "rational expectation" did not work. (Prices did not rationally reflect the long-term value of se­curities and were overshooting in either direction.) Markets had to be wrong. Shiller then pronounced markets to be not as efficients as established by financial theory

[p.85] ...economists are evaluated on how intelligent they sound, not on a scientific measure of their knowledge of reality.

[p.102] As to the commentators, their success is linked to how often they are right or wrong. This category includes the chief strategists of major investment banks the public can see on TV, who are nothing better than entertainers.

[p.104] ...the statistic that 90% of all option positions lost money is meaningless, (i.e., the frequency) if we do not take into account how much money is made on average during the remaining 10%.

[p.128] These are men with bold ideas, but highly critical of their own ideas; they try to find whether their ideas are right by trying first to find whether they are not perhaps wrong.

[p.129] An open society is one in which no permanent truth is held to exist; this would allow counter-ideas to emerge... The simple notion of a good model for society that cannot be left open for falsification is totalitarian.

[p.144] 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

[p.156] ...nobody accepts randomness in his own success, only his failure.

[p.158] Judging an investment that comes to you requires more stringent standards than judging an investment you seek, owing to such selection bias.

[p.162] 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.

[p.168] The late astronomer Carl Sagan, a devoted promoter of scien­tific thinking and an obsessive enemy of nonscience, examined the cures from cancer that resulted from a visit to Lourdes in France, where people were healed by simple contact with the holy waters, and found out the interesting fact that, of the total cancer patients who visited the place, the cure rate was, if anything, lower than the statistical one for spontaneous remissions. It was lower than the average for those who did not go to Lourdes!

[p.186] ...rules have their value. We just follow them not be­cause they are the best but because they are useful and they save time and effort.

[p.231] Our bias is immediately to establish a causal link.

[p.232] Most of us know pretty much how we should behave. It is the execution that is the prob­lem, not the absence of knowledge.

[p.244] People confuse science and scientists. Science is great, but individual scientists are dangerous. They are human; they are marred by the biases humans have.

[p.255] CEOs take a small number of large decisions, more like the person walking into the casino with a single million-dollar bet... The link between the skill of the CEO and the results of the company are tenuous... CEOs are not entrepreneurs. As a matter a fact, they are often empty suits.

[p.256] ...we continue to worship those who won battles and despise those who lost, no matter the reason. I wonder how many historians use luck in their interpretation of success— or how many are conscious of the difference between process and result.

[p.257] ...economics is a narrative disci­pline, and explanations are easy to fit retrospectively.

[p.260] ...you can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave...