Book Review: Fooled By Randomness

My anti-library has grown (and is growing) at a substantial rate. I was fortunate to ignore my usual forced FIFO indexing system and pick up Taleb's first work as soon as it arrived on my doorstep. A few years ago I read  The Black Swan and related many of Taleb's thoughts. He is an individual and deeply reflective thinker. I finally got around to ordering Fooled By Randomness and was not disappointed. This truly is a seminal work. One, I believe, will lead to Taleb winning the Nobel Prize someday. It would be wise to review the notes from this work the next time hubris in thinking sets it. The highlights:

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 nontrading life. Every time his risks increase, he conjures up the tinge of the quiet hallway at the university, the long mornings at his desk spent in revising a paper, kept awake by bad coffee.

Trading forces someone to think hard. Those who merely work hard generally lose their focus and intellectual energy. In addition, they end up drowning in randomness; work ethics, Nero believes, draw people to focus on noise than the signal. 

"never ask a man if he is from Sparta: If he were, he would have let you know such an important fact - and if he were not, you could hurt his feelings"

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). I also had the privilege of frequently "working" from my well-equipped attic.

A mistake is not something to be determined after the fact, but in the light of the information until that point. A more vicious effect of such hindsight bias is that those who are very good at predicting the past will think of themselves good at predicting the future, and feel confident about their ability to do so. 

The argument in favor of "new things" and even more "new new things" goes as follows: Look at the dramatic changes that have been brought about by the arrival of new technologies, such as the automobile, the airplane, the telephone, and the PC. Middlebrow reference would lead one to believe that all new technologies and inventions would likewise revolutionize our lives. But the answer is not so obvious: Here we only see and count the winners, to the exclusion of the losers. 

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.

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the more information you have, the more you are confident about the outcome. Now the problem: By how much? 

So why do we consider the worst case that took place in our own past as the worst possible case? If the past, by bringing surprises, did not resemble the past previous to it, then why should our future resemble our current past? 

whenever I hear work ethics I interpret inefficient mediocrity 

The major problem with inference in general is that those whose profession is to derive conclusions from data often fall into the trap faster and more confidently than others. The more data we have, the more likely we are to drown in it.

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 - Here I will make note: I recently read an interview with Andreesen where he discussed the adaptability of ideas that are produced in silicon valley - tech entrepreneurs there are caught in a bubble where they have no idea what will work in the rest of the country. On the flip side of that, Schultz was enamored with Italian coffee shops and thought they could be very successful in his adopted hometown of Seattle (also FP) some place he knew very well. 

Aside from the misperception of one's performance, there is a social treadmill effect: You get rich, move to rich neighborhoods, then become poor again.

The mistake of ignoring survivorship bias is chronic, even 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.

Remember that nobody accepts randomness in his own success, only his failure

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The exact same task of looking for the survivor within the set of rules that can possibly work. I am fitting the rule on the data. This activity is called data snooping. The more I try, the more I am likely, by mere luck, to find a rule that worked on past data.

People overvalue their knowledge and underestimate the probability of their being wrong

A journalist is trained in methods to express himself rather than to plumb the depth of things - the selection process favors the most communicative, not necessarily the most knowledgeable.

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.

Dialectitian - someone who never committed himself to any of the premises from which he argued, or to any of the conclusions he drew from them.

There is no rational reason to keep a painting you would not buy at its current market rate - only an emotional investment. Many people get married to their ideas all the way to the grave. 

Certainly, the odds in games where the rules are clearly and explicitly defined are computable and the risks consequently measured. But not in the real world. For mother nature did not endow us with clear rules. The game is not a deck of card (we do not even know how many colors there are). But somehow people "measure" risks, particularly if they are paid for it. 

At the limit, you can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave.

Rereading those sections after a week away from them was incredibly enlightening (again). I just ordered Taleb's newest book and can't wait to jump my FIFO system again.