Fooled by Randomness by Nassim Nicholas Taleb
This is really not a cynical book. It's really a book that chastises those who don't want to admit how much chance really affects our world, our choices, our success and our failures.
It also serves as a lesson to guard your thinking against randomness and, just as importantly, what we mistakenly think randomness is.
We over estimate causality.
We view the world as more explainable than it really is. We look at history and say "This caused that." The reality is that when you make a decision, you don't have the benefit of hind sight and all the choices open to you are not apparent.
"A mistake is not something to be determined after the fact, but in the light of the information until that point"
"Consider that the turkey's experience may have, rather than no value, a negative value. It learned from observation, as we are all advised to do (hey, after all, this is what is believed to be the scientific method). Its confidence increased as the number of friendly feedings grew, and it felt increasingly safe even though the slaughter was more and more imminent. Consider that the feeling of safety reached its maximum when the risk was at the highest!"
We look at the winners and try to learn from them. If we don't know how many losers there are, then these winners may just be the lucky. We should study losers more. He faults "The Millionaire Next Door." series here pointing out that many millionaire habits are also habits of the poor.
He points out that if 10,000 people a year become financial advisers and every advisor is only as good as chance, then after 10 years you will have 10 advisers who have been successful for no reason other than chance, yet these 10 will be studied and admired.
We don't intuitively understand distributions. Random does not mean that everything is 50/50.
Russian Roulette is an example of a distribution that is not 50/50. We play Russian Roulette far more often than we realize. What if you earn a million dollars every time you pulled the trigger and live? What if the gun has a hundred chambers and one bullet? What if you don't know how many chambers the gun has? What if the gun has a thousand chambers but the bullet will kill a hundred people?
He argues that investment banks in the sub prime mortgage market played Russian Roulette without realising it.
Teleb is also the creator of "The Black Swan Theory' of statistics-- the idea that no matter how many white swans you see, you never have proof that there are no black swans.
As a consequence of Black Swan Theory, he argues that it is dangerous make plans that blow up or catastrophically fail. Catastrophes happen far more often than we think and our models and predictions are very likely to be wrong. This was the failure of LTCM. They had a model of how the world worked and this model worked well enough that for a few years they were very successful. But their model didn't accommodate the one-in-a-million chance events that really end up happening once or twice a decade (The sub prime mortgage melt down, 9/11, the Asian financial collapse. The Mexican currency collapse. The Russian currency collapse. the .com boom and bust)
"Don't cross a river if it is four feet deep on average"
"The same past data can confirm a theory and its exact opposite! If you survive until tomorrow, it could mean that either a) you are more likely to be immortal or b) that you are closer to death"
"We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract."
"It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.:'
"Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence.” Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them."
"Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab."
"Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control"
