Fooled by Randomness

Nassim Nicholas Taleb

p.24
Chance plays a big role in life which must be considered when evaluating the worth of an accomplishment. A dentist who makes one million dollars has made a greater accomplishment than a Russian roulette player making the same amount. Due to the role of chance, the one accomplished by skill is worth more.

p.26
Reality is much worse than Russian roulette. Random chance delivers its fatal blows much less frequently thereby making us complacent about its existence. It doesn’t provide us with any foreseeable knowledge about its existence either. In Russian roulette we’re aware of the rules of the game, but within reality, we have no rules, no way of knowing when the bullet of randomness will strike.

p.34
History is written by the victor. It is difficult to imagine a world where Alexander the great did not conquer the known world. When we look back into history it seems inevitable that his faith was destined. However, many others exhibited his traits, strengths and over the course of history and they have perished. Hindsight is 20/20, but who would have bet their life on Alexander conquering the know world when his father died?

p.37
Humans tend to make a clear error in judging the risk of the general (or abstract) versus the risk of the more detailed and known. A lot of people are more likely to purchase insurance for the event an earthquake happens in California, for the same price as a policy covering the entire United States.

p.38
Most of risk avoidance actions originate in the emotional part of our brain. Risk is something which is perceived as an essential threat and thereby controlled by our emotions. Evolutionary biology tells us that we use emotions to quickly escape the lion, while our thinking brain simply rationalizes that we escaped. While this is quite useful in the jungle it is not useful at all in a bond risk assessment department of a bank.

p.56
A mistake should not be evaluated with present information, but only the information that were available at the time.

p.61
The time spent reading quarterly news reports, forecasts and other financial information dealing with the future is a complete waste of time.

p.63
Wallstreet tends to favor investors who have been the most profitable in recent times. They often praise their approach as the new way of investing. Counter to popular news media one should favor investors who have been around the longest because they have survived the most randomness in markets and are still kicking.

p.67
We are not immune to the influences of the news media. Our brain is simply not wired to ignore the flashy red and green numbers and headlines. We need to construct our environment to be new information free to not be influenced by it. Information that is of importance to us will always find a way to reach us.

p.77
We should not be overly focused on rational thinking and probability when it comes to our daily lives. We should be concerned with it when our money or survival is in danger.

p.91
Investors can be in markets where almost anything they do will work. This does not make it a proper process. Investors should at least go back and test what is currently working against the most unfavorable historic backdrop. They will usually find that it didn’t work then.

p.96
The path or randomness can make someone appear quite successful in the short term, even though a rare event would wipe them out. A man appearing to be successful may find a suitable mate quickly, but what if he gets wiped out by a random event, which he did not protect for? In evolutionary terms, these mates pass their genes along in the short term, but over the long-term survival of the fittest holds.

p.99
We need never confuse the probability of an investment working out with the probability times the expected return.

p.102
It is the magnitude of the outcome (total return) that matters in the end. Making a lot of quick money doesn’t matter if one big event wipes one out. It is the outcome that is important

p.103
The emotional wiring of our brain is not suitable to consider the probability of rare or unforeseen events. Most investors get complacent and do not plan for the black swan event. This opens opportunities for those who do plan for the worst-case scenarios.

p.108
Pegged currencies are pegged until the government unpegs them. This is important to keep in mind for crypto stable coins. They will only be stable if they are told to be stable.

Short term history is not a good teacher. Long term history teaches us that the improbable does happen.

p.119
We can more safety use information to reject hypothesis than to confirm them. Our investment process should be built upon rejecting our ideas, rather than proving them.

p.126
We can never be 100% sure if all the swans are white when considering a theory. It is difficult to prove something with 100% certainty, but it is possible to disprove something with certainty.

p.130
It is much simpler for the human brain to remember pieces of information that link together to create a story. Our brain wants to compress the detailed pieces into a generalization because it is easier to store and recall. This leads us to unknowingly create links that aren’t there.

We want to use inductive reasoning to make aggressive bets, but never to manage our risk. We need to use as much power as me can muster to force our brain to be rational when considering the improbable worst-case outcome.

p.136
A small knowledge of probability can lead to worse outcomes than no knowledge at all.

The initial sample size is critical in considering the validity of a theory. If billions of investors run strategies, just by sheer luck some will win a lot. But if the sample size is smaller and someone is consistently successful, we should take note.

p.147
The survivorship bias is present in a lot of our thinking. If we have a sample size that only includes the successful investors and excludes the failures, we’re exposing our data to a grievous error. We need to include the failures as well as the winners.

p.151
Finance is so rich in data but lacks the ability to conduct true controlled experiments. In physics one can run controlled experiments, because the rules affecting our research are clearer. In finance this is not possible, which causes us to rely too much on past data with the effects outline before.

p.154
Volatility helps bad investment decisions.

p.162
A large series of data will always fit a specific rule if one looks long enough. It is almost certain that a specific stock or class of assets performed in line with the temperature variations in a country. If we torture the data until it confesses, we will always find what we want.

p.178
We need to free ourselves from mathematical equations that cannot help us in the real world. Equations create a false sense of accuracy when in fact they’re more likely to be precisely wrong.

p.179
Our emotions react to linearity. If we study hard, we want to see an outcome in proportion to our effort. When we do not receive the outcome, we feel demoralized. But if you continue the brain will suddenly give you advancement in a flash out of nowhere. Therefore, people are so short term focused and give up early. This is also why there is an opportunity for those of us who know when to trust our emotions and when to think.

p.193
Our brain perceives the immediate much stronger than the overall effect. If you make a million

p.196
The affect heuristic: the emotions that we feel elicited by events determine our probability assessment of that future

p198
Our brain is still more closely resembling that of our savannah day, because we still experience strong emotions to stock market moves as if a tiger were prowling through the office.

p.199
Most of humankind lived in a world where information was scarce if available at all. We never had the need to make many probability decisions daily, because our lives didn’t require them. We have changed our own environment at a much faster pace than our genes can follow

p.202
Humans need emotions to make decisions. Emotions are our shortcut mechanism to making choices, which otherwise would take too long to be analyzed. The neocortex still responds mostly to emotion rather than emotion responding to the cortex

p.209
We would be much better off if we suited our actions to our emotions and brain rather than try to force it the other way around

p.222
The true epiphany comes when we realize that we’re not strong enough to counteract our emotions. We’re only able to shape our environment around them.

p.232
We need to shape our environment so that it produces emotions which support us reaching our goal. If we tend to feel the fear of missing out when reading the news, because we see prices all the time, we need to stop reading the news instead of trying to ignore the emotions

p.236
Nothing can be said with 100% certainty. This was known in ancient Greece already. We can only assign probabilities to possible future outcomes and act accordingly.

p.240
The best way to determine if you should think about selling is if you would still buy the same company at the current price.