Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

by Nassim Nicholas Taleb

Placebo Investors I have often been faced with questions of the sort: “Who do you think you are to tell me that I might have been plain lucky in my life?” Well, nobody really believes that he or she was lucky. My approach is that, with our Monte Carlo engine, we can manufacture purely random situations. We can do the exact opposite of conventional methods; in place of analyzing real people hunting for attributes we can create artificial ones with precisely known attributes. Thus we can manufacture situations that depend on pure, unadulterated luck, without the shadow of skills or whatever we have called nonluck in Table P.1. In other words, we can man-make pure nobodies to laugh at; they will be by design stripped of any shadow of ability (exactly like a placebo drug). We saw in Chapter 5 how people may survive owing to traits that momentarily fit the given structure of randomness. Here we take a far simpler situation where we know the structure of randomness; the first such exercise is a finessing of the old popular saying that even a broken clock is right twice a day. We will take it a bit further to show that statistics is a knife that cuts on both sides. Let us use the Monte Carlo generator introduced earlier and construct a population of 10,000 fictional investment managers (the generator is not terribly necessary since we can use a coin, or even do plain algebra, but it is considerably more illustrative—and fun). Assume that they each have a perfectly fair game; each...