“The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.”’
We can be tricked by situations involving mostly the activities of the Goddess Fortuna - Jupiter’s firstborn daughter. 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).
The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness. Solon also had the intuition of a problem that has obsessed science for the past three centuries. It is called the problem of induction. I call it in this book the black swan or the rare event.
I call the skewness issue; it does not matter how frequently something succeeds if failure is too costly to bear.
that serotonin, a neurotransmitter, seems to command a large share of our human behavior. It sets a positive feedback, the virtuous circle, but, owing to an external kick from randomness, can start a reverse motion and cause a vicious circle
A BIZARRE ACCOUNTING METHOD
that one cannot judge a performance in any given field (war, politics, medicine, investments). by the results, but by the costs of the alternative (i.e. if history played out in a different way). Such substitute courses of events are called alternative histories.
the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).
Mathematics is not just a “numbers game”, it is a way of thinking. We will see that probability is a qualitative subject.
A mathematician is absorbed in what goes into his head while a scientist searches into what is outside of himself.
It is difficult to go about life wearing probabilistic glasses, as one starts seeing fools of randomness all around, in a variety of situations - obdurate
Heroes are heroes because they are heroic in behavior, not because they won or lost. Patrocles does not strike us as a hero because of his accomplishments (he was rapidly killed) but because he preferred to die than see Achilles sulking into inaction.
Both risk detection and risk avoidance are not medited 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. Much of what rational thinking seems to do is rationalize one’s actions by fitting some logic to them. it is not natural for us to learn from history. We have enough clues to believe that our genetic endowment as homo erectus does not favor transfers of experience.
It is a platitude that children learn only from their own mistakes; they will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest form of cautiousness.
Adults, too, suffer from such a condition. This point has been examined by behavioral economics pioneers Daniel Kahneman and Amos Tversky with regards to the choices people make in selecting risky medical treatments
the stock market crash of 1987, those who blew up in the Japan meltdown of 1990, those who blew up in the bond market debacle of 1994, those who blew up in Russia in 1998, and those who blew up buying Nasdaq stocks in 2000
The lucky fool might have benefited from some luck in life; over the longer run he would slowly converge to the state of a less-lucky idiot. Those who were unlucky in life in spite of their skills would eventually rise. Each one would revert to his long-term properties.
by Robert Shiller. Not just in financial markets; but overall his 1981 paper may be the first mathematically formulated introspection on the manner society in general handles information.
The principal criticism against Shiller came from Robert C. Merton. that Merton’s hedge fund blew up rather spectacularly
become extremely realistic and intellectual when it comes to such matters as religion and personal behavior, yet as irrational as possible when it comes to markets and matters ruled by randomness.
Hume is the first modern epistemologist,
I believe that I cannot have power over myself as I have an ingrained desire to integrate among people and cultures and would end up resembling them; by withdrawing myself entirely I can have a better control of my fate. I am currently enjoying a thrill of the classics I have not felt since childhood.
we like to emit logical and rational ideas but we do not necessarily enjoy this execution. Strange as it sounds, this point has only been discovered very recently (we will see that we are not genetically fit to be rational and act rationally; we are ‘merely fit for the maximum probability of transmitting our genes in some given unsophisticated environment).
The philosopher Pascal proclaimed that the optimal strategy for humans is to believe in the existence of God. For if God exists, then the believer would be rewarded. If he does not exist, the believer would have nothing to lose. Accordingly, we need to accept the asymmetry in knowledge; there are situations in which using statistics and econometrics can be useful. But I do not want my life to depend on it.
PART II MONKEYS ON TYPEWRITERS. SURVIVORSHIP AND OTHER BIASES
How much can past performance (here the typing of the Iliad) be relevant in forecasting future performance?
it is very unlikely for someone to perform considerably well in a consistent fashion without his doing something right. Track records therefore become preeminent.
But, as usual, beware the middlebrow: a small knowledge of probability can lead to worse results than no knowledge at all.
The greater the number of businessmen, the greater the likelihood of one of them performing in a stellar manner just by luck.
They are hidden away, as one sees only the winners - it is natural for those who failed to vanish completely
Accordingly, one sees the survivors, and only the survivors, which imparts such a mistaken perception of the odds. We do not respond to probability, but to society’s assessment of it.
Part I described situations where people do not understand the rare event, and do not seem to accept either the possibility of its occurrence or the dire consequences of such occurrence.
These biases can be outlined as follows: (a) the survivorship biases (a.k.a. monkeys on a typewriter), arising from the fact that we see only winners and get a distorted view of the odds (Chapters 8 and 9, Too Many Millionaires and Fry an Egg), (b) the fact that luck is most frequently the reason for extreme success ( Chapter 10, Loser Takes All), and (c) the biological handicap of our inability to understand probability (Chapter 11, Randomness and Our Brain).
TOO MANY MIILLIIONAIRES NEXT DOOR
Because he chose to live among the people who have been successful, in an area that excludes failure.
have repeated that becoming more rational, or not feeling emotions of social slights is not part of the human race, at least not with our current DNA code. There is no solace to be found from reasoning - as a trader I have learned something about these unfruitful efforts to reason against the grain.
have no large desire to sacrifice much of my personal habits, intellectual pleasures, and personal standards in order to become a billionaire like Warren Buffett,
The first bias comes from the fact that the rich people selected for their sample are among the lucky monkeys on typewriters.
As to the second, more serious flaw, I have already discussed the problem of induction.
The mistake of ignoring the survivorship bias is chronic, even (or perhaps especially) 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.
In a nutshell, the survivorship bias implies that the highest performing realization will be the most visible. Why? Because the losers do not show up.
Optimism, it is said, is predictive of success. Predictive? It can also be predictive of failure. Optimistic people certainly take more risks as they are overconfident about odds; those who win show up among the rich and famous, others fail and disappear from the analyses. Sadly. IT IS EASIER TO BUY AND SELL THAN FRY AN EGG
It is preferable to be lucky than competent (but you can be caught).
I will probably lecture him that Machiavelli ascribed to luck at least a 50% role in life (the rest was cunning and bravura), and that was before the creation of modern markets.
Why is finance so rich a field? Because it is one of the rare areas of investigation where we have plenty of information (in the form of abundant price series), but no ability to conduct experiments as in, say, physics. This dependence on past data brings about its salient defects.
the old popular saying that even a broken clock is right twice a day.
The Monte Carlo generator will toss a coin; heads and the manager will make $10,000 over the year, tails and he will lose $10,000. We run it for the first year. At the end of the year, we expect 5,000 managers to be up $10,000 each, and 5,000 to be down $10,000. Now we run the game a second year. Again, we can expect 2,500 managers to be up two years in a row; another year, 1,250; a fourth one, 625; a fifth, 313. We have now, simply in a fair game, 313 managers who made money for five years in a row. Out of pure luck.
Remember that nobody accepts randomness in his own success, only his failure.
the survivorship bias depends on the size of the initial population.
We need to know the size of the population from which he came. In other words, without knowing how many maAagers out there have tried and failed, we will not be able to assess the validity of the track record.
Philosophers of statistics call this the reference case problem, to explain that there is no true attainable randomness in practice, only in theory.
To be honest, I am unable to answer it. I can tell that person A seems less lucky than person B, but the confidence in such knowledge can be so weak as to be meaningless. I prefer to remain a skeptic. People frequently misinterpret my opinion. I never said that every rich man is an idiot and every unsuccessful person unlucky, only that in absence of much additional information I prefer to reserve my judgment. It is safer.
LOSER TAKES ALL - ON THE NONLINEARlTlES OF LIFE
The twist: life is unfair in a nonlinear way.
First we define nonlinearity. There are many ways to present it, but one of the most popular ones in science is what is called the Sandpile effect. It could be said that the last grain of sand is responsible for the destruction of the entire structure.
What we are witnessing here is a nonlinear effect resulting from a linear force exerted on an object. A very small additional input, here the grain of sand, caused a disproportionate result, namely the destruction of my starter tower of Babel.
“the straw that broke the camel’s back”
“the drop that caused the water to spill”
These nonlinear dynamics have a bookstore name; chaos theory, which is a misnomer because it has nothing to do with chaos. Chaos theory concerns itself primarily with functions in which a small input can lead to a disproportionate response.
Just planned to have a kiss…but got carried away…and hence the baby…. It is an interesting attribute of fame that it has its own dynamics. An actor becomes known by some parts of the public because he is known by other parts of the public.
It is obvious that the information age, by homogenizing our tastes, is causing the unfairness to be even more acute - those who win capture almost all the customers. The example that strikes most as the most spectacular lucky success is that of the software maker Microsoft and its moody founder Bill Gates. While it is hard to deny that Gates is a man of high personal standards, work ethics, and above average intelligence, is he the best? Does he deserve it? Clearly not. Most people are equipped with his software (like myself) because other people are equipped with his software, a purely circular effect (economists call that “network externalities”). Nobody ever claimed that it was the best software product. Most of Gates’s rivals have an obsessive jealousy of his success. There are maddened by the fact that he managed to win so big while many of them are struggling to make their companies survive.
Note another advantage of Monte Carlo simulations is that we can get results where mathematics fails us and can be of no help.
Studies of the dynamics of networks have mushroomed recently. They become popular with Malcolm Gladwell’s book the tipping point, in which he shows how some of the behaviors of variables such as epidemics spread extremely fast beyond some unspecified critical level (like the use of snickers by inner-city kids or the diffusion of religious ideas) Once one exits the conventional model of randomness (the bell curve family of charted randomness), something acute can happen. Owing to this non-linearity, people cannot comprehend the nature of rare event. This summarizes why there are routes to success that are nonrandom, but few, very few , people have the mental stamina to follow them. Those who go the extra mile are rewarded. Most people give up before rewards.
RANDOMNESS AND OUR BRAIN: WE ARE PROIEBABIILITY BLIND
Text unavailable WAX IN MY EARS - LIVING WlTH RANDOMITIS
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.
The difference between myself and those I ridicule is that I try to be aware of it.
Wittgenstein’s ruler: unless you have confidence in the rulers reliability, if you use a ruler to measure a table you may also be using a table to measure the ruler. The less you trust the rulers reliability (in probability called prior), the more information you are getting about the ruler and the less about the table. This conditionality of information is central in the epistemology, probability, even the studies of consciousness. unless the source of statement has extremely high qualifications, the statement will be more revealing of the author than the information intended by him. GAMBLERS TICKS AND PIGEONS IN A BOX
The Greek philosopher Pyrrho, who advocated a life of equanimity and indifference, was criticized for failing to keep his composure during a critical circumstance (he was chased by an ox). His answer was that he found it sometimes difficult to rid himself of his humanity. humanity. If Pyrrho cannot stop being human, I do not see why the rest pf us should resemble the rational man who acts perfectly under uncertainty as propounded by economic theory.
CARNEADES COMES TO ROME: ON PROBABILITY AND SKEPTICISM
probability is not about the odds, but about the belief in the *existence of an alternative outcome, cause, or motive.
Recall that mathematics is a tool to meditate, not compute.
Carneades was not the first skeptic in classical times, nor was he the first to teach us the true notion of probability.
but only Popper came to elevate his skepticism to an all-encompassing scientific methodology). As the skeptics’ main teaching was that nothing could be accepted with certainty, conclusions of various degrees of probability could be formed, and these supplied a guide to conduct.
The Romans did not have a religion per se; they were too tolerant to accept a given truth.
Indeed, for some strange reason during the middle ages, Arabs were critical thinkers (through their postclassical philosophical tradition) when Christian thought was dogmatic, then after the renaissance, the roles mysteriously reversed.
Self-contradiction is made culturally to be shameful, a matter that can prove disastrous in science.
We are supposed to be faithful to our opinions. One becomes a traitor otherwise.
There is a simple test to define path dependence of beliefs (economists have a manifestation of it called the endowment effect).
There are reasons to believe that, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time
Some medical researchers find that purely rational behavior on the part of humans is a sign of a defect in the amygdala, that the subject is, literally, a psychopath.
An academic who became famous for espousing an opinion is not going to voice anything that can possibly devalue his own past work and kill years of investment.
An immediate result of Dr. Markowitz’s theory was the near collapse of the financial system in the summer of 1998 (as we saw in Chapters 1 and 5) by Long Term Capital Management (“LTCM”), a Greenwich, Connecticut fund that had for principals two of Dr. Markowitz’s colleagues, “Nobel” as well. They are Drs. Robert Merton (the one in Chapter 3 trouncing Shiller) and Myron Scholes.
My lesson from Soros is to start every meeting at my trading boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake prone, but happen to be endowed with the rare privilege of knowing it.
Attribution bias: you attribute your success to skills, but your failures to randomness. 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 attribution bias has another effect: it gives people the illusion of being better at what they do, which explains the finding that 80 to 90% of people think that thay are above the average (and the median) in many things.
BACCHUS ABANDONS ANTONY
Because the stoic’s prescription was precisely to elect what one can do to control one’s destiny in front of a random outcome.
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.
It is worthy of note that before the spread of what can be best called Mediterranean monotheism, the ancients did not believe enough in their prayers to influence the course of destiny.
To many (sophisticated) lovers of poetry, one of the greatest poets who ever breathed is C.P. Cavafy. He provides a classical relief for those of us who were subjected to the middle-class valued melodrama as represented by Dickens’s novels, romantic poetry, and Verdi’s operas.
It is one of the most elevating poems I have ever read, beautiful because it was the epitome of such dignified aestheticism - and because of the gentle but edifying tone of the voice of the narrator advising a man who had just received a crushing reversal of fortune.
The poem addresses Antony, now defeated and betrayed (according to legend, even his horse deserted him to go to his enemy Octavius). It asks him to just bid her farewell, Alexandria the city that is leaving him. It tells him not to mourn his luck, not to enter denial, not to believe that his ears and eyes are deceiving him. Antony, do not degrade yourself with empty hopes. Antony, Just listen while shaken by emotion but not with the coward’s imploration and complaints.
While shaken with emotion. No stiff upper lip. There is nothing wrong and undignified with emotions - we are cut to have them. What is wrong is not following the heroic, or at least, the dignified path. That is what stoicism truly means.
A more human version can be read in Seneca’s Letters From a Stoic, a soothing and surprisingly readable book that I distribute to my trader friends (Seneca also took his own life when cornered by destiny).
Good, enlightened (and “friendly”) advice and eloquent sermons, do not register for more than a few moments when they go against our wiring
Try not to play victim when diagnosed with cancer (hide it from others and only share the information with the doctor - it will avert the platitudes and nobody will treat you like a victim worthy of their pity; in addition the dignified attitude will make both defeat and victory feel equally heroic).
Do not complain. If you suffer from a benign version of the “attitude problem”, like my childhood friend Camille Abousleiman, do not start playing nice guy if your business dries up (he sent a heroic e-mail to his colleagues informing them “less business, but same attitude”). The only article Lady Fortuna has no control over is your behavior. Good luck.