Fooled by Randomness, 33 Critical Points

Fooled by Randomness (2004) by Nassim Nicholas Taleb

Author's website |buy from Amazon

"We favour the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract"

I couldn't recommend this book highly enough, and so in an attempt to encourage you to read it, i'll point out a few points made. These total 33 difference observations, which I'll serialise over the coming days. Enjoy!

Firstly

the only success i've had is in going around my emotions rather than rationalizing them

I hate the way that opponents, (typically environmentalists), attempt to portray economists as lacking heart - as if the act of rational contemplation is a substitute for a desire to do well. The two are complements, to be used together but understood for what they are. I use my emotions to guide me to subjects of interest, but once there appreciate that they obstruct and hinder sensible analysis. Throughout the book Taleb appreciates the schizophrenic nature of man.

Secondly

one cannot consider a profession without taking into account the average of the people who enter it, not the sample of those who succeed
If we only see the winners, we get a distorted view of the odds

MTV propogates an incorrect assessment of "the american dream": hip hop artists and sports stars harp on about how anything's within reach if you dream, producing a biased sample that manipulates the aspirations of children. If I had a child who wanted a "superstar" career, I'd ask them to think about the liefstyles of those who didn't make it as well as those who did.

Taleb adds later the example of a dentist and (i'll add) a footballer. Footballers make more money than dentists, but only because we don't see the failures. Dentists is a more lucrative profession since it maximises your expected income across all alternative histories.

Thirdly

Heroes should be defined as being heroic, rather than being winners

Fox Soccer Channel is so frustrating, in that thay always give man of the match to the player who scored the winning goal. Heroism has nothing whatsover to do with achievement or celebrity, as Ernest Shackleton demonstrated so majestically. In many ways the process is more important than the outcome.

Fourthly

In experiments, people think that a deadly flood caused by a Californian earthquake, is more likely than a fatal flood caused by a North American earthquake. (Where "deadly" and "fatal" are defined as the same thing).

Obviously California is a subset of North America, but the framing effect makes the former scenario less abstract, and therefore more terrifying.

Fifthly

We're not programmed to learn from history: it's all just innate characterisitcs combined with natural selection

Sixthly

We can all know what the manager should have done on a Monday morning, hence we should make bold conjectures prior to the event occurring and bet on it. A blog is good in that it's a public record, but if someone won't put money on their beliefs, don't bother listening. It's easy for me to say that I expected the Redskins, Panthers, Patriots and Steelers to all win last weekend, but why should you believe me? In hindsight I should have publically predicted it, but since none of you care about the NFL I didn't think it'd be interesting.

Seventhly

Shiller's Redux: Prices of stocks swing more than the fundamentals - hence rational expectations can't be wholly correct.

Merton argued against this, but invested in accordance with Shiller. As the point above demonstrates, someones actions are more telling than their utterences.

Eighthly

Imagine a stock that offers a 15% return, with a 10% variance. If you checked progress every minute, then after one day you'd have had 241 pleasant moments and 239 unpleasant ones. If you only check how you're faring every month, then a year would deliver 8 good bits of news, and 4 bad. If you only look at how you're doing every year, then 20 years would give you 19 occurences of happiness, and just 1 of sadness

If you support a successful football team, and the pain of losing is stronger than the thrill of winning, only check your teams progress sporadically. Is this why struggling teams have more loyal fans?

In the short term you observe variability, not returns.

Ninethly

Wealth isn't as important to wellbeing as the route through which it's acquired

Touchet. Live richly. Money is a means to an end - don't confuse the two (and don't assume that economists do).

Tenthly

If a situation is expecially prone to randomness, at any one moment the "winning" traders are most likely to be the worst. This is the cross-sectional problem

Time matters

Eleventhly

Analysis tends to be fitted to past events, masking the random element

With hindsight we can explain an awful lot. Alertnative histories are crucial in that they demonstrate that things could have been different, and that's the first step to assessing the likelihood that a particular explanation is valid

Twelfthly(!!)

Time series can show no gain despite the probability of success rising

In other words it doesn't encapsulate the fact that failures can make a success more likely. In trial-and-error industries repeated failure doesn't necessarily mean you should sack someone.

Thirteenthly

Exercise like hunter-gatherers: remain idle for long periods but have short bursts of heavy activity

My current fitness regime is based on an assumption that this doesn't work. As undergrads Lee and I decided that if we put too much effort into training, our lack of general healthy living would be counterproductive. Maybe Duncan Ferguson's fitness regime isn't so bad - i'll investigate

Fourteenthly

The median is not the message: Expected values are more important than frequency.

Even if an event is unlikely, if it's going to Kill you best beware.

Fifteenthly

Economic institutions are constantly changing. New York today is vastly different to Shanghai 10 years ago. Since economic data isn't stationary, it's pretty worthless as predictors of future events.

This is the Lucas critique in one sentence. It's a nice exercise to sum up entire research programs in one sentence. Try it.

Sixteenthly

Ah, Perth - one of my favourite cities.

Seventeenthly

"These are men with bold idea, 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. they work with bold conjectures and severe attempts at refuting their own conjectures."

Taleb loves Karl Popper, and uses this famous quote. It's easier said than done, but I try to operate with a proclivity for being bold. Most of my refutations I do behind closed doors, but I try not to shirk from Popper's vorticismic challenge.

Taleb also points out that an open society requires an open mind, offering advice to those of us who make such arguments to keep open minds. Whilst I try to, Popper himself was very unPopperian.

Eighteenthly

Causality is easier to commit to memory than random facts, hence we compress information into inductive inferences and reduce detected randomness.

Remember when Cilla Black used to offer a family a trip to Disneyworld if one of them could remember the exact sequence of a random list of 50 London Tube stops. They did it by creatign "stories" and other mental shortcuts that took on the randomness.

Nineteenthly

Stop loss: a predetermined exit point.

What's good for stocks is good for the casino. My strategy was to arrive with my playing money in cash. NEVER use the ATM, and therefore commit to a maximum amount you're willing to lose. (And then watch "9", "10", or "24" come up just as you loose... Prize for anyone who can guess why I like those numbers...) If you're out, be a man and walkaway.

Twentiethly

Imagine 10,000 fund managers, and each has a 50/50 chance of either making a profit/loss over the year. After 4 years, we'd expect 313 to have made a profit every year, even if they're all equally competant.

After 4 years, we can imagine the press have got hold of all 313 hailing them as geniuses, and creating elaborate reasons as to why they outperformed their rivals. Remember that there's only a 50/50 chance than an individual will post profits in year 5, and we can imagine the response if they fail - he rested on his laurels etc. Remember this when a Premiership striker suddenly blows cold.

Twenty-firstly

Regression to the mean: The larger the sample size, the more likely we'll see a winning streak

It's no surprise that all these records get broken in Test cricket, now that there's more teams and more fixtures.

Twenty-secondly

We need to know the sample size to be able to judge the likelihood of an outcome

Twenty-thirdly

The Birthday Paradox: What are the odds that out of 23 random people, two of them share a birthdaty?
50%

Twenty-fourthly

The finding of absence vs the absence of findings

A la Sherlock Holmes in "Silver Blaze" - the fact that the dog didn't bark implies that the dog knew the horseknapper. The absence of a variable can be just as important as the presence.

Twenthy-fifthly

Small inputs can lead to disporportionately large effects

This can be known as chaos theory, embodied in "The Straw that Broke the Camel's Back", and shows that we're not wired to think non-linearly.

Imagine a fair bet (odds are 50/50) that you'll either win £0 or win £2000

Chances are you're imagining what you would do with either 0 or 2000, and not the expected value, which is £1000. We find it hard to deal with outcomes that can't occur.

Twenty-sixthly

Too much success is the enemy (think of the punishment meted out on the rich and famous); too much failure is demoralizing.

True, true. Although i'll occasionally wish for more comments on the Filter^, i'd rather be talking to myself than suffer the fate of Brad De Long who received hundreds of comments per post. I read and think about any feedback I recieve - i'd explode if I ever became too popular!!

Twenty-seventhly

"normative economics is like religion without the aesthetics"

Bah! And he claims to have read Hayek and Shackle...

Twenty-eighthly

Availability, representative, simulation and affect heuristics (which will be delt with later in a seperate post)

Twenty-ninethly

A test of a disease presents a rate of 5% false positives. The disease strikes 1/1,000 of the population. People are tested at random, regardless of whether they are suspected of having the disease. A patient's test is positive. What is the probability of the patient being striken with the disease?

If you said 95% don't worry, less than 1/5 of professionals got the right answer - 2%

Thirtiethly

If the average life expectancy is 73, how long left should a 68 year-old expect to live?

More than 5 years, since other people have died whilst they've been living. Otherwise a 78 year-old would already be dead! Don't confuse conditional and unconditional life expectancy.

Thirsty-flirtly

Wittgenstein's Ruler: Unless you have confidence in a ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler

If you meet a new person then ask them about a subject you know a lot about. You'll end up gleaning more informaiton about them than the subject. This applies to book reviews too - are you learning about the book or about the reviewer?

Thirty-secondly

Attribution bias: Occurs when people attribute their success to skills, and their failures to randomness.

This explains why 80-90% of people think that they're "above average" at what they do. Have a look back at your life, and decide what was down to skill, and what was down to luck.

Thisrty-thirdly

Stoics get even with probability

Comments

[dearieme]

"We favour the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract": but presumably he means "you" not "we". Judging by the complaints that feminists used to make about the teaching of some subjects in elite universities, they believed that his remarks applied more to women than to men.

[Bosa]

I look forward to this. The book was informative and a great jumping point for other issues/authors worth looking into. It's both disconcerting and empowering to realise the shaky basis of the judgements we made on an every day basis.