Fooled by Randomness : by Nassim Nicholas Taleb
“Mild success can be explainable by skills and labor. Wild success is attributable to variance"
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Are economic risk takers victims of delusion?
“More generally, we underestimate the share of randomness in about everything, a point that may not merit a book—except when it is the specialist who is the fool of all fools. Disturbingly, science has only recently been able to handle randomness (the growth in available information has been exceeded only by the expansion of noise). Probability theory is a young arrival in mathematics; probability applied to practice is almost nonexistent as a discipline. In addition we seem to have evidence that what is called “courage” comes from an underestimation of the share of randomness in things rather than the more noble ability to stick one’s neck out for a given belief. In my experience (and in the scientific literature), economic “risk takers” are rather the victims of delusions (leading to overoptimism and overconfidence with their underestimation of possible adverse outcomes) than the opposite. Their “risk taking” is frequently randomness foolishness.”
On how probability works
“We flipped a coin to see who was going to pay for the meal. I lost and paid. He was about to thank me when he abruptly stopped and said that he paid for half of it probabilistically.”
On the social treadmill effect: How much money is enough money?
“You get rich, move to rich neighborhoods, then become poor again. To that add the psychological treadmill effect; you get used to wealth and revert to a set point of satisfaction. This problem of some people never really getting to feel satisfied by wealth (beyond a given point) has been the subject of technical discussions on happiness.”
Is it our emotions that drive our decisions?
“Damasio reported that the purely unemotional man was incapable of making the simplest decision. He could not get out of bed in the morning, and frittered away his days fruitlessly weighing decisions. Shock! This flies in the face of everything one would have expected: One cannot make a decision without emotion. Now, mathematics gives the same answer: If one were to perform an optimizing operation across a large collection of variables, even with a brain as large as ours, it would take a very long time to decide on the simplest of tasks. So we need a shortcut; emotions are there to prevent us from temporizing. Does it remind you of Herbert Simon’s idea? It seems that the emotions are the ones doing the job.”
Do skills have anything to do with success?
“You attribute your successes to skills, but your failures to randomness. This explains why these scientists attributed their failures to the “ten sigma” rare event, indicative of the thought that they were right but that luck played against them. Why? It is a human heuristic that makes us actually believe so in order not to kill our self-esteem and keep us going against adversity.”
The actual metric of measurement is blind trust
“Wittgenstein's ruler: Unless you have confidence in the ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler. The less you trust a ruler's reliability (in probability called the prior), the more information you are getting about the ruler and the less about the table.”
What are your non-declrative learnings?
“The Swiss doctor Claparède had an amnesic patient completely crippled with her ailment. Her condition was so bad that he would have to reintroduce himself to her at a frequency of once per fifteen minutes for her to remember who he was. One day he secreted a pin in his hand before shaking hers. The next day she quickly withdrew her hand as he tried to greet her, but still did not recognize him. Since then plenty of discussions of amnesic patients show some form of learning on the part of people without their being aware of it and without it being stored in conscious memory. The scientific name of the distinction between the two memories, the conscious and the nonconscious, is declarative and nondeclarative. Much of the risk avoidance that comes from experiences is part of the second.”
Is reality more dangerous than Russian roulette?
“Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver 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. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette - and calling it by some alternative “low risk” game.”
On media and perception
“Try the following experiment. Go to the airport and ask travelers en route to some remote destination how much they would pay for an insurance policy paying, say, a million tugrits (the currency of Mongolia) if they died during the trip (for any reason).Then ask another collection of travelers how much they would pay for insurance that pays the same in the event of death from a terrorist act (and only a terrorist act). Guess which one would command a higher price? Odds are that people would rather pay for the second policy (although the former includes death from terrorism). The psychologists Daniel Kahneman and Amos Tversky figured this out several decades ago.”
Heroes are chosen by their actions, not results
“Recall that epic heroes were judged by their actions, not by the results. No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word. We are left only with dignity as a solution—dignity defined as the execution of a protocol of behavior that does not depend on the immediate circumstance. It may not be the optimal one, but it certainly is the one that makes us feel best. Grace under pressure, for example. Or in deciding not to toady up to someone, whatever”
About: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Fooled by Randomness is a standalone book in Nassim Nicholas Taleb’s landmark Incerto series, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don’t understand. The other books in the series are The Black Swan, Antifragile,and The Bed of Procrustes.
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