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Fooled by Randomness
The main topic of the book is the fact that all humans are simply terrible at judging probabilities. Taleb is a securities trader, so a lot of the book revolves around financial probabilities, but his argument is mainstream and requires absolutely no knowledge of the markets. The book details examples of people wildly misjudging risks and probabilities in many contexts. Often that misestimation is understandable in advance of certain events, but harder to excuse after they've occurred; Taleb hits pretty hard on what he calls "data snoopers," his term for people who back-fit theories to existing data.
One of the most notorious examples is the Bible code (which has been thoroughly debunked), but Taleb argues that analysts who spend their time trying to find patterns in historical market data are no different: if you try long enough and hard enough, you will unavoidably find apparent regularities, which can be extremely compelling when seen in isolation. In context, though, they dissolve into nothing but meaningless statistical anomalies. Taleb rightfully compares these searches for meaning to the famous monkeys and typewriters parable.
Taleb's best example of poor probability intuition is probably the infamous survivor bias, which is our tendency to be disproportionately impressed by success. We almost always ignore the fact that, for one success story, there are many failures. But we seldom hear about the failures (just like we never hear about the many theories that didn't fit the data). So it's all a game of numbers: out of 10,000 traders, a few are statistically bound to be successful, even if they are nothing more than lucky idiots. The fact that they succeeded does not mean anything. It doesn't mean that they are bad traders, but it doesn't mean that they are good traders either, because on average somebody had to succeed.
One of Taleb's hot buttons is that people tend to be too confident in what they know. He argues convincingly that we should take everything, including science, with a grain of salt. Writing about Karl Popper, he points out that there are only two kinds of scientific theories: those that are demonstrably false, and those that are not yet demonstrably false. An irksome (but sadly true) observation, yet most people behave as if what they know is eternal truth. One could of course argue that Popper's observation is but another kind of truth, but I tend to put a lot more trust in people who question what they know than in people who don't.
Another of Taleb's peeves is the human tendency to over-attribute every random event (the old post hoc, ergo propter hoc). For instance, a commentator saying that "the Dow went down ten points today on concerns about Iraq" is talking nonsense: there is no way anyone can tie such a small market move to any particular reason. I found this specific point (which in retrospect is blindingly obvious) especially enlightening, as I am embarrassed to admit that, until now, I just accepted those market comments at face value.
Taleb also has some fun at the expense of economists and analysts, especially those whose predictions turned out wrong, but who claim that the theories were in fact right, and that the facts simply weren't supposed to be that way. This is what he calls denial of history, and is common among investors and gamblers (the two being of course close cousins).
The style of the book is informal and funny, and often meandering. We hop from one topic to the next, which occasionally may detract from the book's continuity, but overall the author's points come through loud and clear. Ironically for a man who advocates self-doubt, Taleb is starkly self-confident, though not in an irritating way.
Taleb is an intriguing, multi-cultural, iconoclastic character that has been around Wall Street for a while, and now runs his own small firm. Malcolm Gladwell (author of The Tipping Point, an absolute must-read for anyone who owns a brain) has written an excellent article that shows how Taleb's reasoning runs counter to just about every bit of conventional Wall Street wisdom. If you're interested in the markets, especially derivatives, and how Taleb trounces most of Wall Street's voodoo doctors, this moderately technical interview from 1996 is worth reading too.
Overall, a warmly recommended book.
You can purchase Fooled by Randomness from bn.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.
(for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?)
There are times where I feel like I should have died but I haven't. Falling off a ravine into a river, losing control of my car in a turn with traffic on the other side. Just dumb luck.
cat /dev/random > top_secret_data
Good point. I'd say I'm that good and
(ughhhh)
NO CARRIER
> (for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?)
.. unfair things happen through dumb luck.
Thats called the Just World mentality. Its not a Just World
I've found this is the single biggest commenality in partiasian schools of thought:
Conservatives tend to think you are where you are because you deserved it. Dumb and lazy people are poor, smart and hard working people are rich. Dumb people get hit by trains, smart people comment on how dumb they are. Your situation is a result of your disposition.
Liberals go the other way. Luck, circumstance, and opportunity play huge roles in where you are. Poor people are poor because of luck and circumstance. People get hit by trains because they might have just plain been unlucky. Your situation is a result of your environment, including dumb luck.
Personally, this is the single biggest reason I can't stand conservatives. It bothers me to no end how capable they are of assuming that anybody in a bad situation is there because they deserve it.
"Old man yells at systemd"
Anyone else think of the Slashdot lameness filter when reading this?
I work at the crossroads between finance and technology so I eagerly read this book. I agree that many, many people in finance are particularly susceptible to making statistical errors. It is amazing how many people are heavily rewarded for dumb luck or what amounts to survivorship bias. There are some smart people in this industry, but there are more people who have had a lucky run.
What ruined the book for me was Nassir's incessant and shameless self-promotion. He shows the same hubris that he finds reprehensible in others and he seems to be trying to settle a few old scores by maligning people.
But the most ridiculous part of the book is when he starts drawing links between finance and neuroscience and trying to explain traders behavior based on our very preliminary understanding of brain physiology. Utter crap.
The basic message is sound: Wall Street is full of people getting paid millions who haven't the slightest understanding of math, science or technology. But that message is clear in about 10 pages and the rest is self-serving, self-promoting tripe.
Liberals tend to think that luck, circumstance, and opportunity play huge roles in where you are. Poor people are poor because of luck and circumstance. People get hit by trains while trying to get through the tracks before the train gets there, are just plain unlucky. Your situation is a result of your environment, including dumb luck.
Personally, this is the single biggest reason I can't stand liberals. It bothers me to no end how capable they are of assuming that anybody in a bad situation is there because of bad luck or circumstances beyond their control.
Um, yes, that was a super reductionist post. Obviously, there are shades of grey, and even the most hardcore C or L doesn't look at things in a 100% absolute way that I've suggested.
They are just generalizations, and it's too bad that I'm gunna get modded down to hell for it.
I probably should have left off that last line. It's still a valid point, for the most part.
"Old man yells at systemd"
...there are only two kinds of scientific theories: those that are demonstrably false, and those that are not yet demonstrably false.
;)
Well, yeah - that's why they are theories and not laws. The same sort of argument is made by fundamentalists against the "Theory" of Evolution. It can't be proven. It's only a theory (so let's go back to something infinitely less provable/disprovable such as the divine). Theories are meant to be correct in so much as there is overwhelming evidence toward their ideas.
The book appears to make some good points, however. (Just from the synopsis provided.) The infinitude of random factors that may cause market fluctuations makes prediction completely (probably?) intractable. In CS lingo, it would appear to be NP-Complete.
... is Innumeracy: Mathematical Illiteracy and Its Consequences by John Allen Paulos. I read it a couple of years ago, and thoroughly enjoyed it. I think it is an excellent commentary on how probability, large numbers, and basic mathematical principles are largely misunderstood by the general public, and the effects that this phenomenon has both on lives of individuals and society as a whole (e.g. the embrace of numerology, or public policy based on sleight-of-hand statistics). All in all, a short, entertaining, and insightful book.
Life is too important to be taken seriously - Oscar Wilde
Conservatives tend to think you are where you are because you deserved it. Dumb and lazy people are poor, smart and hard working people are rich. Dumb people get hit by trains, smart people comment on how dumb they are. Your situation is a result of your disposition.
This viewpoint is absolutely not essential to conservativism. It is unfair to characterize conservativism as people who punish the poor because they "deserve it."
There is a legitimate conservative idea that many well-meaning social welfare programs actually trap people in poverty by encouraging failure and discouraging success. Clinton famously "ended welfare as we know it" because he believed this kind of reform was the right thing to do.
Of course there is also a wrong kind of conservativism (practiced by many Libertarians and Republicans), in which welfare is cut, while job training programs are cut as well.
Centrists of both parties (such as Clinton) recognize and co-opt the good parts of conservativism and of liberalism. When you say that you can't stand conservatives, I think what you really mean is that you can't stand the self-righteous, self-promoting bigots who make a mockery of the ideology they unfortunately claim to represent.
As provocative as the book's thesis seems to be -- and I must admit that my information on it comes entirely from this review -- it's not new. In the 1970s, Burton Malkiel's A Random Walk Down Wall Street posited that market fluctuations are mutually independent, though the market follows a general upwards trend, and thus it's impossible (ceteris paribus) to make any bets on short-term stock performance. The upshot is that the only way to beat benchmark indexes is to assume additional risk: trying to beat the market in most cases is nothing more than gambling on an upmarket roulette wheel.
"Freedom is kind of a hobby with me, and I have disposable income that I'll spend to find out how to get people more."
The stock market, day traders, etc are all dependant of this sort of thing. even though the possibily that their successes are often not distinguishable from random luck gives them all nightmares.
kinda difficult to pick out signals where they are buried in the noise floor to begin with.
"It is a greater offense to steal men's labor, than their clothes"
I'm not dead because I'm alive.
Very good read.
The main issue I have with what he says is comparing Time Series analysis (a topic that is near and dear to my heart), to the people that read the bible and then find prophetic phrases in there.
Aside from that being a bad analogy (but it sounds good if you don't know anything of time series analysis), it is also misleading in that time series analysis can be proven if it will work or not.
There is an equation (that is f'ing driving me nuts right now that I can't recall the name of it) that will tell you if your time series data is truly random or if it leads to predictability.
It has been shown over and over again that the stock market, were it a perfect market would in fact be random - but since there is human intervention that drives it, it is no longer truly random and there are non-linear patterns that are within the data.
The human brain is wired to pick up on linear patterns (to the point we see them where they are in fact not really there - it is advantageous to us to see a lion in the brush and run - when in fact there isn't a lion there, than the other way around and get mauled by a lion that we never saw).
That is more to what he speaks of, humans seeing what isn't there (there are a crapload of great books written about this - How We Know What Isn't So: The Fallibility of Human Reason in Everyday Life by Thomas Gilovich immediately comes to mind) - but the way he speaks, he also includes computational analysis in there and is wrong in his generalization.
Now it is going to bug me all day as to what that frickin' algorithm is called - the one that shows the strength of your time series data... I know it doesn't start with an A, or a Z... and I don't think there is a C there... other than that, I'm pretty much at a total blank.
There are some odd things afoot now, in the Villa Straylight.
- mailed 1/2 the folks a prediction that stock X would rise, mailed the other 1/2 the opposite.
- threw away the 1/2 who ended up with the incorrect prediction
- repeated until there were a few folks left who had gotten 10 correct predictions (either 4 or 8 people, depending on n)
- asked the remaining folks for investments.
- split with the cash
Now imagine stock analysts all making predictions. Eventually there will be a star.The solution is to PICK something important that may not be meaningless and random. After all, the world just might not be meaningless and random. This is kind of like Pascal's wager. If you go around believing everything is meaningeless and random and act accordingly like it is, than you gain nothing. You'd sit home and drink beers and watch Jerry Springer all day because theoretically, you aren't any worse or better off than Mother Theresa, Bill Gates, or any other "successful" person. If, however, you pick a goal or ideal to work toward and give it meaning, your life does have meaning and value. At the very least, if others around you deem your efforts worthy, you will gain the love and affection of others (which MOST people are biologically wired to need and crave). Therefore, it is possible to gain something (the pleasure of being valued) out of the void of randomness by giving your life some purpose, even if that purpose is ultimately meaningless in the big scheme of things.
So keep playing the game of life. You've got nothing to lose and only stand to gain.
I read it on Slashdot!
<a href="http://www.joblessjimmy.com">Work is dumb and so is Jobless Jimmy.</a>
Something else I've noticed people being bad at is estimating ratios. Example: back in high school an English teacher asked the class what the population ratio of blacks to whites in Michigan was. Some guessed as high as 50%, but I was the only one with the correct (lowest) answer of around 10%.
I have always wondered what affected this the most. It could be that we were a suburb of Detroit, or that the local television stations' news programs may have featured more black people (scaring white viewers makes for good ratings), or that these kids hadn't travelled very far from the Detroit area, or that they were just really lousy at estimation of distances and population and had no concept of the size of the state.
Certainly, some of the error may have come from cultural bias. I didn't notice any overt racism in the school, but the specter of the "dangerous negro" was/is probably still present.
Is this still on-topic? Anyway, it seems that we need to do better in our educational system of teaching people how to get their heads around the concepts of chance and estimation. Letting any bias influence these will cause errors.
Fantastic sounding book, I've ordered it.
:-)
:-)
I've long since been a believer in the "largely random" nature of the world and this puts me in mind of a wonderful piece of "research" I came across in New Scientist a few years ago.
It cut through a lot of bullshit to ask the question:
"can you predict the longevity of a system or state if you know almost nothing about it"?
i.e. life's pretty random and bothering to analyse the details will only get you so far
So how can we address, from a probabalistic standpoint, questions like:
"How long will the pyramids stand"?
"How long before my bank goes bust"?
"How long before we're hit by an asteroid"?
The reasoning went like this:
Take any "thing"/"system" etc. with a finite existance and ask the question:
"With a 95% certainty, how much time does it have left"?
For the sake of argument lets say you plant a tree, and you know nothing about trees.
Ten years later you come back and the tree is still alive and so you ask the above question about the tree.
Well, the tree is clearly alive but you don't know where "now" is in it's lifespan.
From a purely probabalistic point of view you've got a 50% chance that "now" is the middle half of it's life, i.e. you're not in the 25% of it's "youth" or the 25% of it's old age. So thats a 50% chance that it's had 75% of it's life already (middle age + youth).
Turning this into an equation, if:
x = current age
y = total age
p = probability
then: (it helps with a diagram)
x = py + (y-py)/2
or, rearranging to solve for y:
y = 2x/(p+1)
Going back to our tree then, if it's 10 years old
it's got:
95% chance of making it to 10.26 years
50% chance of making it to 13.33 years
The magic figure I keep in my head is that if you know NOTHING about something, you've got a 95% chance that it will last 1/39th as long again.
I find this little nugget invaluable when considering how much to spend on insurance or investments - cos I know/care NOTHING about them.
After all, why bother with the details, life is random
I'm just as suspicious of claims that it's all luck as I am that it's all skill.
Miko O'Sullivan
I read The Fortune Sellers a few years back and it seems to be along the same lines. Basically, people who "predict" the future (be it the stock market, the weather, lifestyle trends, etc.) will highlight the year they got it right and not mention the times they got it wrong. Read it and you'll look at things differently (and never listen to long-range weather forecasts again).
I live ze unknown. I love ze unknown. I am ze unknown.
For instance, if every single person in the world is bullish on the stock market then you can bet that the markets will start to decline immediately because everyone who can get into the market already has, and there are no buyers left. So there are factors that tend to ensure that most people will lose money.
It's why people from "better" backgrounds can recover from poverty quickly - why good business-people can create new businesses from catastrophes repeatedly - and why very hard working people who don't know how to work tactically can still die poor. Knowledge and social networks are what keeps one out of poverty, not hard work.
As an aside, drug addiction exists in that gray area between choice- and not-choice, since it can be thought of practically as a "disease of the choice-making mechanisms of the mind." When drug addiction is responsible for poverty, there's little chance of escaping the poverty without addressing the addiction; likewise for mental illness.
Taleb mentions that the long-term winners like Soros tend to have a trait in common : they hold no pre-conceived ideas, and will swing with the market. In other words, they accept the facts as they are, instead of trying to fit them into theories.
Taleb makes a living from unforeseen events...
That's his job ? Doesn't that make a cashflow forecast a bit tricky ?
Bank Manager: Mr Taleb, you're mortgage payment bounced this month
Taleb: Oh. I never saw that coming...
Never, ever lose a file again. Ever.