Fooled by Randomness

Nassim Nicholas Taleb

Treasury bonds are safe; they are issued by the US government, and government can hardly go bankrupt since they can freely print their own currency to pay back their obligation.

“Nero believes that risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability.”

Lucky fools do not bear the slightest suspicion that they may be lucky fools – by definition, they do not know that they belong to a such category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin that they will even fool themselves about their ability to outperform markets.

Taleb mentions Survivorship bias (bullet holes in airplanes during WWII) – seeing just winners.

“I have two ways of learning from history; from the past, by reading the elders; and from the future, thanks to my Monte Carlo toy”.

A mistake is not something to be determined after the fact, but in the light of the information until that point.

People do not realize that the media is paid to get your attention. For a journalist, silence rarely surpasses any word.

People often think that it will surely be next batch of news that will really make a difference to their understanding of things.

If a event is important enough, it will find its way to my ears. I will return to this point in time.

We do not need to be rational and scientific when it comes to the details of our daily life – only in those that can harm usand threaten our survival. Modern life seems to invite us to do the exact opposite; become extremely realistic and intellectual when it comes to such matters as religion and personal behavior, yet as irrational as possible when it comes to matters ruled by randomness (say portfolio or real estate investments).

“The richest traders are often the worst traders.”

Rare events are always unexpected, otherwise they would not occur.

Look like rich people – it clearly costs money to look and behave rich, not to count the time demands of spending money.

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 disapper from the analyses.

“Even a broken clock is right twice a day.”

Remember that nobody accpets randomness in his own success, only his failure.

Recall that the survivorship bias depends on the size of the initial population.

“I am convinced that there exists a tradable security in the Western world that would be 100% correlated with the changes in temperature in Ulan Bator, Mongolia.”

Those who go the extra mile are rewarded. In my profession one may own security that benefits from lower market prices, but may not react at all until some critical point. Most people give up before the rewards.

Consumers consider a 75% fat-free hamburger to be different from a 25% fat one.

Things appear to be more predictable after the fact.

When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other. Our bias is immediately to establish a causal link.

Probability is not about odds, but the belief in the existence of an alternative outcome, cause, or motive.

“Say you own a painting you bought for $20.000, and owing to rosy conditions in the art market, it is now worth $40.000. If you owned no painting, would you still acquire it at the current price ? If you would not, then you are said to be married to your position. There is no rational reason to keep a painting you would not buy at its current market rate – only an emotional investment. Many people get married to their ideas all the way to the grave.”

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happend to be endowed with the rare privilege of knowing it.

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