My Notes on Fooled by Randomness

- book-reviews

I recently read “Fooled by Randomness” by Nassim Taleb.

Here are my notes:

Seratonin and Signaling

Monkeys injected with serotonin will rise in the pecking order, which then begets more serotonin

There’s also a negative feedback cycle

Nobody can hide emotions

Part of how people become leaders through superficial impressions through physical signals, what we call charisma

People can easily tell if traders are making or losing money - they communicate it with their posture or gait

Physical manifestations of one’s performance in life can be used for signaling - it makes winners seem easily signal-able, which is efficient for mate selection

Nero is less wealthy than John but his average life across alternate histories is higher than John’s

10M earned via Russian roulette is qualitatively different than 10M warned through diligent dentistry

Bullish and Bearish

Bullish and bearish is BS

Consider that there might be a 70% prob of something going up 10% but a 30% prob of it being cut in half

You should sell

Price Checking

Checking market prices every year with a strategy that wins with 93% probability Will only show a 50.02% increase every second

Evolution and Natural Selection

Evolution and natural selection do not govern survivability but rather reproductive propagation potential

Refusal to Comment on Markets

“When I ask a lawyer a legal question, he answers me with courtesy and precision. When I ask a doctor a medical question, he gives me his opinion. No specialist ever gives me disrespect. Your insolent and conceited 29 year old son is playing Prima Donna and refuses to answer me about the direction of the market.”

Lawyers do not tell you whether or not you will get sued They tell you how to behave in order to minimize the risk of being sued They tell you about best practices so that you can handle whatever situation comes your way

Doctors do not tell you whether or not you will get cancer They tell you what to do to minimize the chances of getting cancer They tell you about best practices for health so you can handle the situation if you do get cancer

Likewise, financial managers should not tell you whether or not your investments will go up or down They should tell you what to do to maximize the expected gain while simultaneously minimizing the chance of loss They can also tell you what to do if the markets are going down

Stability and Crashes

Currencies that exhibit the largest historical stability are the most prone to crashes

Philosophy

Sir Francis Bacon Empirical observation

Hume Epistemology Methodologists Philosophers of science

Empiricism and Logic

The rarity of finding this in a person: Merging empiricism and logic

Accidents

Accidents may happen closer to home simply because people spend more time driving closer to home

Data and History

I can use data to disprove a proposition Never to prove one

I can use history to refute a conjecture Never to affirm it

One can find counterexamples

John Nash

John Nash

Popper

Takeaway from Popper is that science is not to be taken as seriously as it sounds

Theories that have falsified Theories that have not yet been falsified

Kantian idea in the flaws in our perception

Genetics and Rationality

We are not genetically fit to be rational and act rationally We are genetically fit for the maximum probability of transmitting our genes in some given unsophisticated environment

Biggest Cognitive Biases

3 biggest cognitive biases

  1. Survivorship bias
  2. Luck is most frequently the reason for extreme success
  3. Biological handicap of our inability to understand probability

Linus Pauling and Vitamin C

Linus Pauling Believed Vitamin C was good for you Contributed to its popularity

Spontaneous Remission

Spontaneous remission Explanation for cancer recovery from alternative medicine

Networks

Read the tipping point - it talks about networks

Optimizing vs Satisficing

Herbert Simon

If we were to optimize everything in life it would cost an infinite amount of energy

Satisficing - stop when you get a satisfactory solution

Thinking Fast and Slow

Daniel Kahneman Ames Sverdlovsk

Anchoring

Try anchoring on hotel staff

Ask them how long it takes to get to the airport

Heuristics

  1. Availability heuristic (death from terrorism being more likely than death from all possible sources)
  2. Representativeness heuristic (feminist style philosophy student is more likely to be a feminist bank teller than to be just a bank teller)
  3. Simulation heuristic (imagine what your life would be like today if…)
  4. Effect heuristic

Descartes’ Error

Reference to Descartes’ error

Options

Options sellers eat like chickens and shit like elephants

Options buyers shit often like chickens and eat rarely like elephants

Random Variables

Distribution of the maximum of random variables

The maximum of an average is necessarily less volatile than the average maximum

Close Races

If a bicyclist beat another bicyclist in a 200 mile race by 1 second, it’s nonsensical to make statements about how one is faster than the other and pontificate on what makes that biker a better athlete

Repetition

Repetition is needed for the demonstration of skills because of ergodicity The law of large numbers

Process vs Results

Judged on process vs results

Top management is only paid on results, no matter the process

CEO Skill and Company Success

The link between the skill of the CEO (of a large company) and the success of the company are tenuous (doesn’t apply to entrepreneurs / startup CEOs)

With power laws the differences of outcomes are accentuated

The higher up in a hierarchy, the less evidence there is of skill