Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by
Nassim Nicholas Taleb
My rating:
4 of 5 stars
"...A book review, good or bad, can be far more descriptive of the reviewer than informational about the book itself. ..."
A book I strongly recommend to all. It takes you into a journey of explaining how the basic principles of probabilities impacts your day-to-day and based on that to allow you to navigate the randomness of life. For me, although some concepts were known, it has opened a window for future readings and fields of study
My key takeaways would be the following:
1.- we need to embrace and accept the lack of certainty of our knowledge and thus develop methods for dealing with our ignorance.
2.- The process followed to achieve an outcome is on the long-run definitely more important than the outcome in itself (that can be significantly skewed by random effects)
3.- The importance of Expected Value vs. Probabilities and how Monte Carlo simulations is one of the most effective tools/methods to explore and calculate both
4.-The past success measured mainly based on outcomes, will be an awful proxy of future performance (Probabilities + Survivorship bias)
5. - The importance to distinguish noise from signal, especially in a world where we get data/info every second. An investment with 15% return and 10% volatility translates into:
- a 93% probability of success if we look at it yearly.
- a 77% probability of success if we look at it quarterly,
- a 67% probability of success if we look at it monthly,
- a 54 % probability of success if we look at it daily,
- a 50.2 % probability of success if we look at it every second,
6.- The absence of evidence is not the evidence of absence....
7.- Probabilities are counter intuitive. Example: a medical exam presents 5% of false positives, the disease impact 1/1000 of the population. If a test is positive what is the probability a tester has the disease? Correct answer <2%, most likely not your answer.
8.- The ability to think overcomes the ability to compute
Quotes:
- Aut tace aut loquere meliora silencio (only when the words outperform silence). When should we speak
- “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.” Solon's warning
- allergic to the vocabulary of business talk, not just on plain aesthetic grounds. Phrases like “game plan,” “bottom line,” “how to get there from here,” “we provide our clients with solutions,” “our mission,” and other hackneyed expressions that dominate meetings lack both the precision and the coloration
-Mild success can be explainable by skills and labor. Wild success is attributable to variance.
- 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).
- use of mathematics is only illustrative, aiming at getting the intuition of the point, and should not be interpreted as an engineering issue. In other words, one need not actually compute the alternative histories so much as assess their attributes. Mathematics is not just a “numbers game,” it is a way of thinking. We will see that probability is a qualitative subject.
- Finally, in economics: Economists studied (perhaps unwittingly) some of the Leibnizian ideas with the possible “states of nature” pioneered by Kenneth Arrow and Gerard Debreu. This analytical approach to the study of economic uncertainty is called the “state space” method—it happens to be the cornerstone of neoclassical economic theory and mathematical finance. A simplified version is called “scenario analysis,” the series of “what-ifs” used in, say, the forecasting of sales for a fertilizer plant under different world conditions and demands for the (smelly) product.
- today—as the world becomes more and more complicated and our minds are trained for more and more simplification.
- Mathematics is principally a tool to meditate, rather than to compute.
- The wise man listens to meaning; the fool only gets the noise.
- Over a short time increment, one observes the variability of the portfolio, not the returns.
- It is preferable to be lucky than competent (but you can be caught).
- Evolutionary theorists agree that brainwork depends on how the subject is presented and the frame offered—and they can be contradictory in their results.
- The trick is to look only at the large percentage changes. Unless something moves by more than its usual daily percentage change, the event is deemed to be noise.
- is not the estimate or the forecast that matters so much as the degree of confidence with the opinion.
Taleb, Nassim Nicholas. Incerto 5-Book Bundle (p. 41). Random House Publishing Group. Kindle Edition.
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