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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.
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(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"
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.
... 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"
Very good read.
- 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 infinitude of random factors that may cause market fluctuations makes prediction completely (probably?) intractable. In CS lingo, it would appear to be NP-Complete.
Okay I am a CS theory puritan and a troll. But here is the deal.
Rant #1: Intractable problems are unsolvable problems. Even if you have infinitely powerful machines. Because our logic (the foundation of our math) has "holes" that prevent it from solving them. Halting problem (can you write a program that will verify if a program is correct)is an example. It simply cant be done.
Rant #2: NP hard problems are hard to solve. You just need lots of time. Throw in a trillion years and a very powerful computer and heck - you have a solution. Quantum computing *may* solve these NP hard problems in polynomial time. Still Quantum computing cannot solve intractable problems.
Rand #3: NP problems are not the most difficult to solve problems (among the solvable problems). In fact they are the easiest. There is something called polynomial hierachy of harder and harder problems and NP is at the very bottom.
Rant #4: Only problems that have a one bit solution (yes or no, true or false) can be NP complete. Others are "hard".
Further references to be directed at "computational complexity" by papadimitrou.
Sorry but had to take it out on someone
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>