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November 3, 2017 - April 7, 2018
“fat tails,” that wild brand of uncertainty that causes large deviations (rare events explain more and more of the world we live in, but at the same time remain as counterintuitive to us as they were to our ancestors).
As I increasingly started living this book after the initial composition, I found luck in the most unexpected of places. It is as if there were two planets: the one in which we actually live and the one, considerably more deterministic, on which people are convinced we live.
Past events will always look less random than they were (it is called the hindsight bias). I would listen to someone’s discussion of his own past realizing that much of what he was saying was just backfit explanations concocted ex post by his deluded mind.
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.
For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.”
that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.
Yet the story of Croesus has another twist. Having lost a battle to the redoubtable Persian king Cyrus, he was about to be burned alive when he called Solon’s name and shouted (something like) “Solon, you were right” (again this is legend). Cyrus asked about the nature of such unusual invocations, and he told him about Solon’s warning. This impressed Cyrus so much that he decided to spare Croesus’ life, as he reflected on the possibilities as far as his own fate was concerned.
Nero believes that 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:
Psychologists have shown that most people prefer to make $70,000 when others around them are making $60,000 than to make $80,000 when others around them are making $90,000.
Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets (our hormonal system does not know whether our successes depend on randomness).
Some traders can be unexpectedly introspective about randomness. Not long ago I had dinner at the bar of a Tribeca restaurant with Lauren Rose, a trader who was reading an early draft of this book. 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 am convinced that X, a likeable Russian man of my acquaintance, has two brains: one for math and another, considerably inferior one, for everything else (which included solving problems related to the mathematics of finance].
The second, whom I will call Jean-Patrice, in contrast, was a moody Frenchman with an explosive temper and a hyperaggressive personality. Except for those he truly liked (not that many), he was expert at making his subordinates uncomfortable, putting them in a state of constant anxiety. He greatly contributed to my formation as a risk taker; he is one of the very rare people who have the guts to care only about the generator, entirely oblivious of the results.
(My very first impression upon a recent rereading of the Iliad, the first in my adulthood, is that the epic poet did not judge his heroes by the result: Heroes won and lost battles in a manner that was totally independent of their own valor; their fate depended upon totally external forces, generally the explicit agency of the scheming gods (not devoid of nepotism). Heroes are heroes because they are heroic in behavior, not because they won or lost. Patrocles does not strike us as a hero because of his accomplishments (he was rapidly killed) but because he preferred to die than see Achilles
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It is an important and attractive fact that the average risk manager earns more than the average trader
“Traders come and go; risk managers are here to stay.” I keep thinking of taking such a position both on economic grounds (as it is probabilistically more profitable) and because the job offers more intellectual content than the one consisting in just buying and selling, and allows one to integrate research and execution. Finally, a risk manager’s blood has smaller quantities of the harmful kind of stress hormones.
Their focus becomes to play politics, cover themselves by issuing vaguely phrased internal memoranda that warn against risk-taking activities yet stop short of completely condemning it, lest they lose their job.
Many compulsive gamblers, who otherwise would be of middling intelligence, acquire remarkable card-counting skills thanks to their passionate greed.
My models showed that ultimately almost nobody really survived; bears dropped out like flies in the rally and bulls ended up being slaughtered, as paper profits vanished when the music stopped. But there was one exception; some of those who traded options (I called them option buyers) had remarkable staying power and I wanted to be one of those. How? Because they could buy the insurance against blowup; they could get anxiety-free sleep at night, thanks to the knowledge that if their careers were threatened, it would not be owing to the outcome of a single day.
When you look at the past, the past will always be deterministic, since only one single observation took place.
Middlebrow inference (inference stripped of probabilistic thinking) would lead one to believe that all new technologies and inventions would likewise revolutionize our lives. But the answer is not so obvious: Here we only see and count the winners, to the exclusion of the losers (it is like saying that actors and writers are rich, ignoring the fact that actors are largely waiters—and lucky to be ones, for the less comely writers usually serve French fries at McDonald’s).
(It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.
My problem is that I am not rational and I am extremely prone to drown in randomness and to incur emotional torture. I am aware of my need to ruminate on park benches and in cafés away from information, but I can only do so if I am somewhat deprived of it. My sole advantage in life is that I know some of my weaknesses, mostly that I am incapable of taming my emotions facing news and incapable of seeing a performance with a clear head. Silence is far better.
True traders, I believe, dress sloppily, are often ugly, and exhibit the intellectual curiosity of someone who would be more interested in the information-revealing contents of the garbage can than the Cézanne painting on the wall.
There is asymmetry. Those who die do so very early in the game, while those who live go on living very long. Whenever there is asymmetry in outcomes, the average survival has nothing to do with the median survival. This prompted Gould, who thus understood the hard way the concept of skewness, to write his heartfelt piece “The Median Is Not the Message.” His point is that the concept of median used in medical research does not characterize a probability distribution.
Visibly, the statistic that 90% of all option positions lost money is meaningless, (i.e., the frequency) if we do not take into account how much money is made on average during the remaining 10%.
people in finance borrow the technique and ignore infrequent events, not noticing that the effect of a rare event can bankrupt a company.
Hume said things far worse than that; he was an obsessive skeptic and never believed that a link between two items could be truly established as being causal.
No rare event should harm me. In fact, I would like all conceivable rare events to help me.
by withdrawing myself entirely I can have a better control of my fate. I am currently enjoying a thrill of the classics I have not felt since childhood. I am now thinking of the next step: to recreate a low-information, more deterministic ancient time, say in the nineteenth century, all the while benefiting from some of the technical gains (such as the Monte Carlo engine), all of the medical breakthroughs, and all the gains of social justice of our age. I would then have the best of everything. This is called evolution.
Aside from the misperception of one’s performance, there is a social treadmill effect: You get rich, move to rich neighborhoods, then become poor again.
I will set aside the point that I see no special heroism in accumulating money, particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from the wealth (aside from the pleasure of regularly counting the beans).
I have no large desire to sacrifice much of my personal habits, intellectual pleasures, and personal standards in order to become a billionaire like Warren Buffett, and I certainly do not see the point of becoming one if I were to adopt Spartan (even miserly) habits and live in my starter house. Something about the praise lavished upon him for living in austerity while being so rich escapes me; if austerity is the end, he should become a monk or a social worker—we should remember that becoming rich is a purely selfish act, not a social one.
Remember that nobody accepts randomness in his own success, only his failure.