Learnings from Fooled by Randomness by Nassim Taleb 📚

As you may know, I try to read a book every week and have been enjoying this routine for more than a year now. Learnings is a series where I share excerpts from the books I read, along with the ideas that those excerpts invoked in me.

On Luck

1. Luck in finance is of the kind that nobody understands but most operators think they understand, which provides us a magnification of the biases.
2. Scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm
3. SOLON’S WARNING: Solon was wise enough to get the following point; that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that)
4. Here we take a far simpler situation where we know the structure of randomness; the first such exercise is a finessing of the old popular saying that even a broken clock is right twice a day.

On Uncertainty

1. to take place across the highest number of different alternative histories; uncertainty concerns events that should take place in the lowest number of them.
2. whenever numerous viable possibilities exist, the world splits into many worlds, one world for each different possibility — causing the proliferation of parallel universes. I am an essayist-trader in one of the parallel universes, plain dust in another.
3. Yet real randomness does not look random!
4. probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive.

On Humans

1. Human warmth: Something in our nature may help us grow ideas while dealing and socializing with other people).
2. that both risk detection and risk avoidance are not mediated in the “thinking” part of the brain but largely in the emotional one (the “risk as feelings” theory). The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance.
3. In people’s minds lower prices are far more “volatile” than sharply higher moves.
4. Einstein’s remark that common sense is nothing but a collection of misconceptions acquired by age eighteen.
5. value my methods and hire my services. In other words, I need people to remain fools of randomness, but not all of them
6. When you look at the past, the past will always be deterministic, since only one single observation took place. Our mind will interpret most events not with the preceding ones in mind, but the following ones. Past always deterministic — Hindsight bias.
7. Mistake is not something to be determined after the fact, but in the light of the information until that point — on mistakes.
8. distilled thinking, by which I mean the thinking based on information around us that is stripped of meaningless but diverting clutter.
9. The wise man listens to meaning; the fool only gets the noise. The modern Greek poet C. P. Cavafy wrote a piece in 1915 after Philostratus’ adage “For the gods perceive things in the future, ordinary people things in the present, but the wise perceive things about to happen.”
10. randomness. My allergy to nonsense and verbiage dissipates when it comes to art and poetry
11. I was at the age when one felt like one needed to read everything, which prevented one from making contemplative stops — Contemplative stops.
12. An open society is one in which no permanent truth is held to exist; this would allow counter-ideas to emerge
13. Two brain systems: System 1 is effortless, automatic, associative, rapid, parallel process, opaque (i.e., we are not aware of using it), emotional, concrete, specific, social, and personalized. System 2 is effortful, controlled, deductive, slow, serial, self-aware, neutral, abstract, sets, asocial, and depersonalized.
14. Gigerenzer agrees that we do not understand probability (too abstract), but we react rather well to frequencies (less abstract):
15. dignity. The idea came to me that perhaps I could use a built-in bias, here prejudice, to offset another built-in bias, our predisposition to take information seriously. It seems to work
16. The stoic is a person who combines the qualities of wisdom, upright dealing, and courage. The stoic will thus be immune from life’s gyrations as he will be superior to the wounds from some of life’s dirty tricks. But things can be carried to the extreme; the stern Cato found it beneath him to have human feelings.
17. Don’t do to others what you don’t want them to do to you

On Work and Careers

1. Nero’s objective is not to maximize his profits, so much as it is to avoid having this entertaining machine called trading taken away from him. Blowing up would mean returning to the tedium of the university or the non trading life. (Having the freedom of choice and entertainment in life)
2. at concerns itself with knowledge, called epistemology or methodology, or philosophy of science. We will not get into the topic until later in the book.
3. One of the attractive aspects of my profession as a quantitative option trader is that I have close to 95% of my day free to think, read, and research (or “reflect” in the gym, on ski slopes, or, more effectively, on a park bench)
4. Stealing ideas- by being able to better steal the ideas of others and leverage them, correct the mental defect that seems to block my ability to learn from others
5. To my knowledge there are no studies investigating the exact properties of trader’s burnout, but a daily exposure to such high degrees of randomness without much control will have physiological effects on humans (nobody studied the effect of such exposure on the risk of cancer)
6. We look after our customer’s interests / the road ahead / our assets are our people / creation of shareholder value / our vision / our expertise lies in / we provide interactive solutions / we position ourselves in this market / how to serve our customers better / short-term pain for long-term gain / we will be rewarded in the long run / we play from our strength and
7. am now thinking of the next step: to recreate a low-information, more deterministic ancient time, say in the nineteenth century, all the while benefiting from some of the technical gains (such as the Monte Carlo engine), all of the medical breakthroughs, and all the gains of social justice of our age. I would then have the best of everything. This is called evolution.
8. Gigerenzer agrees that we do not understand probability (too abstract), but we react rather well to frequencies (less abstract):
9. Lower the evidence of contribution higher up: However, and in general (provided we exclude risk-bearing entrepreneurs), the higher up the corporate ladder, the lower the evidence of such contribution. I call this the inverse rule. But top management is only paid on result — no matter the process. There seems to be no such thing as a foolish decision if it results in profits.

On Black Swans

1. that would have hundreds, even thousands, of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. The point is dubbed in this book the black swan problem
2. The blowup, I will repeat, is different from merely incurring a monetary loss; it is losing money when one does not believe that such fact is possible at all. There is nothing wrong with a risk taker taking a hit provided one declares that one is a risk taker rather than that the risk being taken is small or nonexistent.
3. benefit from them. In other words, I aim at profiting from the rare event, with my asymmetric bets.
4. Whenever there is asymmetry in outcomes, the average survival has nothing to do with the median survival
5. simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price.
6. you cannot easily make the logical leap from “has never gone down” to “never goes down”
7. CARNEADES COMES TO ROME: ON PROBABILITY AND SKEPTICISM: uncertainty of knowledge in the most possibly convincing way. How? By proceeding to contradict and refute with no less swaying arguments what he had established so convincingly the day before. He managed to persuade the very same audience and in the same spot that justice should be way down on the list of motivations for human undertakings.

On Rationality

1. Negatives and Positives in different sides of the brain — Consider that they are mediated in different parts of the brain — and that the degree of rationality in decisions made subsequent to a gain is extremely different from the one after a loss.
2. rationality would cause them to figure out predictable patterns from the past and adapt, so that past information would be completely useless for predicting the future (the argument, phrased in a very mathematical form, earned him the Swedish Central Bank Prize in honor of Alfred Nobel)
3. Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath.

On Pain

1. Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.

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