My Note
My highlights
160 highlights from Kindle. These are the lines I stopped at.
be read (principally) for, and with, pleasure. Much has been written about our biases (acquired or genetic) in dealing with randomness over the past decade.
Everything that remotely felt like work was out.
My motto is “my principal activity is to tease those who take themselves and the quality of their knowledge too seriously.”
In this book probability is principally a branch of applied skepticism, not an engineering discipline (in spite of all the self-important mathematical treatment of the subject matter, problems related to the calculus of probability rarely merit to transcend the footnote).
Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.
Outside of textbooks and casinos, probability almost never presents itself as a mathematical problem or a brain teaser.
Mother nature does not tell you how many holes there are on the roulette table, nor does she deliver problems in a textbook way
(in the real world one has to guess the problem more than the solution).
Markets are a mere special case of randomness traps—but they are by far the most interesting as luck plays a very large role in them
the kind of luck in finance is of the kind that nobody understands but most operators think they understand, which provides us a magnification of the biases.
(there is no such thing as bad publicity: Some people manage to promote your work by insulting it).
I have to confess that I never felt really particularly directly of service to anyone being a trader (except myself); it felt elevating and useful being an essayist.
the idea here was that “it is more random than we think” rather than “it is all random.”
“Most City Hotshots are Lucky Fools” became “All City Hotshots are Lucky Fools” (clearly I lost the debate to the formidable Desmond Fitzgerald in one of the most entertaining discussions in my life—I was even tempted to switch sides!).
Let me make it clear here: Of course chance favors the prepared! Hard work, showing up on time, wearing a clean (preferably white) shirt, using deodorant, and some such conventional things contribute to success—they are certainly necessary but may be insufficient as they do not cause success.
The same applies to the conventional values of persistence, doggedness and perseverance: necessary, very necessary.
Of course skills count, but they do count less in highly random environments than they do in dentistry.
Furthermore, as most successes are caused by very few “windows of opportunity,” failing to grab one can be deadly for one’s career. Take your luck!
Notice how our brain sometimes gets the arrow of causality backward.
(it is remarkable how such a primitive logical fallacy—affirming the consequent—can be made by otherwise very intelligent people, a point I discuss in this edition as the “two systems of reasoning” problem).
chance plays no part in success. My intuition is that if millionaires are close in attributes to the average population, then I would make the more disturbing interpretation that it is because luck played a part.
Plenty of unsuccessful entrepreneurs were persistent, hardworking people.
Clearly risk taking is necessary for large success—but it is also necessary for failure.
This text is a series of logical thought experiments, not an economics term paper; logic does not require empirical verification (again there is what I call a “round-trip fallacy”: It is a mistake to use, as journalists and some economists do, statistics without logic, but the reverse does not hold: It is not a mistake to use logic without statistics).
Most journalists do not take things too seriously: After all, this business of journalism is about pure entertainment, not a search for truth, particularly when it comes to radio and television.
The trick is to stay away from those who do not seem to know that they are just entertainers (like George Will, who will appear in Chapter 2) and actually believe that they are thinkers.
Black swans, those rare and unexpected deviations, can be both good and bad events.
Casually, the quality of the discussion correlates inversely with the luxury of the studios:
Does the book industry suffer from the classical “expert problem” with the buildup of rules of thumb that do not have empirical validity?
More than half a million readers later I am discovering that books are not written for book editors.
art is a tool of investigation of the Truth—rather than an attempt to escape it or make it more palatable.
Regrettably, some people play the game too seriously; they are paid to read too much into things. All my life I have suffered the conflict between my love of literature and poetry and my profound allergy to most teachers of literature and “critics.”
More generally, we underestimate the share of randomness in about everything, a point that may not merit a book—except
when it is the specialist who is the fool of all fools.
Probability theory is a young arrival in mathematics; probability applied to practice is almost nonexistent as a discipline.
what is called “courage” comes from an underestimation of the share of randomness in things rather than the more noble ability to stick one’s neck out for a given belief.
economic “risk takers” are rather the victims of delusions (leading to overoptimism and overconfidence with their underestimation of possible adverse outcomes) than the opposite. Their “risk taking” is frequently randomness foolishness.
bad information is worse than no information at all.
There is one world in which I believe the habit of mistaking luck for skill is most prevalent—and most conspicuous—and that is the world of markets.
As a practitioner of uncertainty I have seen more than my share of snake-oil salesmen dressed in the garb of scientists, particularly those operating in economics. The greatest fools of randomness will be found among these.
On the other hand there is the Tragic Vision of humankind that believes in the existence of inherent limitations and flaws in the way we think and act and requires an acknowledgment of this fact as a basis for any individual and collective action.
This category of people includes Karl Popper (falsificationism and distrust of intellectual “answers,” actually of anyone who is confident that he knows anything with certainty), Friedrich Hayek and Milton Friedman (suspicion of governments), Adam Smith (intention of man), Herbert Simon (bounded rationality), Amos Tversky and Daniel Kahneman (heuristics and biases), the speculator George Soros, etc.
We are faulty and there is no need to bother trying to correct our flaws. We are so defective and so mismatched to our environment that we can just work around these flaws.
it does not matter how frequently something succeeds if failure is too costly to bear.
Blowing up would mean returning to the tedium of the university or the nontrading life.
“I am shooting for longevity,”
Blow up in the lingo has a precise meaning; it does not just mean to lose money; it means to lose more money than one ever expected, to the point of being thrown out of the business
This risk aversion prevented him from making as much money as the other traders on Wall Street who are often called “Masters of the Universe.”
Trading forces someone to think hard; those who merely work hard generally lose their focus and intellectual energy.
In addition, they end up drowning in randomness; work ethics, Nero believes, draw people to focus on noise rather than the signal (the difference we established in Table P.1).
risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.
Every one of his losses is limited. His trader’s dignity will never, never be threatened.
Nero felt ashamed of his feelings of Schadenfreude, the joy humans can experience upon their rivals’ misfortunes.
Part of Nero’s elation also came from the fact that he felt proud of his sticking to his strategy for so long, in spite of the pressure to be the alpha male.
It was also because he would no longer question his trading style when others were getting rich because they misunderstood the structure of randomness and market cycles.
Can we judge the success of people by their raw performance and their personal wealth? Sometimes—but not always.
Lucky fools do not bear the slightest suspicion that they may be lucky fools—by definition, they do not know that they belong to such a category.
“never ask a man if he is from Sparta: If he were, he would have let you know such an important fact—and if he were not, you could hurt his feelings.”
The fact that he did not experience John’s success was the reason he did not suffer his downfall.
The reader can see my unusual notion of alternative accounting: $10 million earned through Russian roulette does not have the same value as $10 million earned through the diligent and artful practice of dentistry. They are the same, can buy the same goods, except that one’s dependence on randomness is greater than the other. To an accountant, though, they would be identical; to your next-door neighbor too. Yet, deep down, I cannot help but consider them as qualitatively different.
Mathematics is not just a “numbers game,” it is a way of thinking. We will see that probability is a qualitative subject.
We flipped a coin to see who was going to pay for the meal. I lost and paid. He was about to thank me when he abruptly stopped and said that he paid for half of it probabilistically. I thus view people distributed across two polar categories: On one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.
Heroes are heroes because they are heroic in behavior, not because they won or lost.
mathematical truths make little sense to our mind, particularly when it comes to the examination of random outcomes.
Most results in probability are entirely counterintuitive;
business that MBAs tend to blow up in financial markets, as they are trained to simplify matters a couple of steps beyond their requirement. (I beg the MBA reader not to take offense; I am myself the unhappy holder of the degree.)
It is a fact that our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease with which they come to mind.
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.
Another example concerns the volatility of markets. In people’s minds lower prices are far more “volatile” than sharply higher moves. In addition, volatility seems to be determined not by the actual moves but by the tone of the media.
journalism may be the greatest plague we face today—as the world becomes more and more complicated and our minds are trained for more and more simplification.
Borrowed wisdom can be vicious. I need to make a huge effort not to be swayed by well-sounding remarks.
Einstein’s remark that common sense is nothing but a collection of misconceptions acquired by age eighteen.
What sounds intelligent in a conversation or a meeting, or, particularly, in the media, is suspicious.
I think of Monte Carlo mathematics, I think of a happy combination of the two: The Monte Carlo man’s realism without the shallowness, combined with the mathematician’s intuitions without the excessive abstraction.
became addicted to it the minute I became a trader. It shaped my thinking in most matters related to randomness.
Yet it is far more a way of thinking than a computational method. Mathematics is principally a tool to meditate, rather than to compute.
A random sample path, also called a random run, is the mathematical name for such a succession of virtual historical events, starting at a given date and ending at another, except that they are subjected to some varying level of uncertainty. However, the word random should not be mistaken for equiprobable (i.e., having the same probability).
Stochastic processes refer to the dynamics of events unfolding with the course of time. Stochastic is a fancy Greek name for random.
Mathematicians are born, never made. Physicists and quants too. I do not care about the “elegance” and “quality” of the mathematics I use so long as I can get the point right.
Indeed, probability is an introspective field of inquiry, as it affects more than one science, particularly the mother of all sciences: that of knowledge.
Learning from history does not come naturally to us humans, a fact that is so visible in the endless repetitions of identically configured booms and busts in modern markets.
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.
Actually, things can be worse than that: In some respects we do not learn from our own history. Several branches of research have been examining our inability to learn from our own reactions to past events:
The blowup, I will repeat, is different from merely incurring a monetary loss; it is losing money when one does not believe that such fact is possible at all.
Characteristically, blown-up traders think that they knew enough about the world to reject the possibility of the adverse event taking place: There was no courage in their taking such risks, just ignorance.
They all made claims to the effect that “these times are different” or that “their market was different,” and offered seemingly well-constructed, intellectual arguments (of an economic nature) to justify their claims; they were unable to accept that the experience of others was out there, in the open, freely available to all, with books detailing crashes in every bookstore.
Every man believes himself to be quite different, a matter that amplifies the “why me?” shock upon a diagnosis.
Things are always obvious after the fact.
information. When you look at the past, the past will always be deterministic, since only one single observation took place.
but here is a possible explanation: Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny.
Psychologists call this overestimation of what one knew at the time of the event due to subsequent information the hindsight bias, the “I knew it all along” effect.
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. Each one would revert to his long-term properties.
For an idea to have survived so long across so many cycles is indicative of its relative fitness.
will say here that such respect for the time-honored provides arguments to rule out any commerce with the babbling modern journalist and implies a minimal exposure to the media as a guiding principle for someone involved in decision making under uncertainty.
People do not realize that the media is paid to get your attention. For a journalist, silence rarely surpasses any word.
Like the lawyer in Chapter 11 who does not care about the truth, but about arguments that can sway a jury whose intellectual defects he knows intimately, journalism goes to what can capture our attention, with adequate sound bites.
the problem with my profession is that we depend on them for what information we need to obtain.
A preference for distilled thinking implies favoring old investors and traders, that is, investors who have been exposed to markets the longest, a matter that is counter to the common Wall Street practice of preferring those that have been the most profitable, and preferring the youngest whenever possible.
those who will survive are not necessarily those who appear to be the fittest.
Curiously, it will be the oldest, simply because older people have been exposed longer to the rare event and can be, convincingly, more resistant to it.
The wise man listens to meaning; the fool only gets the noise.
I thought hard and long on how to explain with as little mathematics as possible the difference between noise and meaning, and how to show why the time scale is important in judging a historical event.
(If you think that you can control your emotions, think that some people also believe that they can control their heartbeat or hair growth.)
If an event is important enough, it will find its way to my ears.
Finally, this explains why people who look too closely at randomness burn out, their emotions drained by the series of pangs they experience.
Fed with “postmodernist” texts, they can randomize phrases under a method called recursive grammar, and produce grammatically sound but entirely meaningless sentences that sound like Jacques Derrida, Camille Paglia, and such a crowd.
the literary intellectual can be fooled by randomness.
Keep a language away from the rationalization of daily use and avoid the corruption of the vernacular.
There is a Yiddish saying: “If I am going
to be forced to eat pork, it better be of the best kind.” If I am going to be fooled by randomness, it better be of the beautiful (and harmless) kind.
Let us remember that economists are evaluated on how intelligent they sound, not on a scientific measure of their knowledge of reality. However,
“Economics Schmeconomics. It is all market dynamics.”
the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle.
This does not happen too often with dentists or pianists—because these professions are more immune to randomness.
As in a biblical cycle, it took seven years to make John a hero and just seven days to make him a failure.
Loyalty to ideas is not a good thing for traders, scientists—or anyone.
expected and median do not mean the same thing at all.
Whenever there is asymmetry in outcomes, the average survival has nothing to do with the median survival.
Asymmetric odds means that probabilities are not 50% for each event, but that the probability on one side is higher than the probability on the other.
Why do they confuse probability and expectation, that is, probability and probability times the payoff?
In most disciplines, such asymmetry does not matter. In an academic pass/fail environment, where the cumulative grade does not matter, only frequency matters. Outside of that it is the magnitude that counts.
history teaches us that things that never happened before do happen.
history teaches us to avoid the brand of naive empiricism that consists of learning from casual historical facts.
If there is a very small probability of finding a red ball in an urn dominated by black ones, then our knowledge about the absence of red balls will increase very slowly—more slowly than at the expected square root of n rate. On the other hand, our knowledge of the presence of red balls will dramatically improve once one of them is found.
This asymmetry in knowledge is not trivial; it is central in this book—it is a central philosophical problem for such people as the ancient skeptics David Hume and Karl Popper (on that, later).
For a sum of zeros, even repeated a billion times, remains zero;
Pseudoscience came with a collection of idealistic nerds who tried to create a tailor-made society, the epitome of which is the central planner.
The practice of “financial engineering” came along with massive doses of pseudoscience.
Practitioners of these methods measure risks, using the tool of past history as an indication of the future.
I also learned to stay away from people of a competitive nature, as they have a tendency to commoditize and reduce the world to categories, like how many papers they publish in a given year, or how they rank in the league tables.
“my house/library/car is bigger than that of others in my category”—it is downright foolish to claim to be first in one’s category all the while sitting on a time bomb.
To conclude, extreme empiricism, competitiveness, and an absence of logical structure to one’s inference can be a quite explosive combination.
it is reminiscent of postmodern writers who play philosophers and scientists by using complicated references.
“work ethics” (whenever I hear work ethics I interpret inefficient mediocrity). I needed the backing of my bank account so I could buy time to think and enjoy life.
The simple notion of a good model for society that cannot be left open for falsification is totalitarian.
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.
Optimistic people certainly take more risks as they are overconfident about the odds; those who win show up among the rich and famous, others fail and disappear from the analyses. Sadly.
A result is that in real life, the larger the deviation from the norm, the larger the probability of it coming from luck rather than skills:
difference between the average of such distribution and the unconditional distribution of winners and losers the survivorship bias—here
Remember that nobody accepts randomness in his own success, only his failure.
without knowing how many managers out there have tried and failed, we will not be able to assess the validity of the track record.
wonder if those “experts” who make foolish (and self-serving) statements like “markets will always go up in any twenty-year period” are aware of this problem.
Next I put the platitude life is unfair under some examination, but from a new angle. The twist: Life is unfair in a nonlinear way.
Too much success is the enemy (think of the punishment meted out on the rich and famous); too much failure is demoralizing. I would
like the option of having neither.
rules have their value. We just follow them not because they are the best but because they are useful and they save time and effort.
A normative science (clearly a self-contradictory concept) offers prescriptive teachings; it studies how things should be. Some economists, for example those of the efficient-market religion, believe that our studies should be based on the hypothesis that humans are rational and act rationally because it is the best thing for them to do (it is mathematically “optimal”). The opposite is a positive science, which is based on how people actually are observed to behave.
In spite of economists’ envy of physicists, physics is an inherently positive science while economics, particularly microeconomics and financial economics, is predominantly a normative one.
Normative economics is like religion without the aesthetics.
“Sophisticated” people make worse mistakes. I can surprise people by saying that the probability of the joint event is lower than either. Recall the availability heuristic: with the Linda problem rational and educated people finding the likelihood of an event greater than that of a larger one that encompasses it. I am glad to be a trader taking advantage of people’s biases but I am scared of living in such a society.
People overvalue their knowledge and underestimate the probability of their being wrong.
I am just intelligent enough to understand that I have a predisposition to be fooled by randomness—and to accept the fact that I am rather emotional.
Life would be unbearably bland if we had no enemies on whom to waste efforts and energy.
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. If Pyrrho cannot stop being human, I do not see why the rest of us should resemble the rational man who acts perfectly under uncertainty as propounded by economic theory.
Recall that mathematics is a tool to meditate, not compute.
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.
The only article Lady Fortuna has no control
over is your behavior. Good luck.
Causality is not clear: The question remains whether optimizers are unhappy because they are constantly seeking a better deal or if unhappy people tend to optimize out of their misery. In any case, randomness seems to operate either as a cure or as Novocain!
I am convinced that we are not made for clear-cut, well-delineated schedules. We are made to live like firemen, with downtime for lounging and meditating between calls, under the protection of protective uncertainty.