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November 30 - December 24, 2019
Even popular opinion warns that bad information is worse than no information at all.
mistaking luck for skill
he can lose more than, say, $1 million—regardless of the probability of such an event.
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.
worlds of possibilities,
A mathematician is absorbed in what goes into his head while a scientist searches into what is outside of himself.)
the cemetery of markets is disproportionately well stocked with the self-styled “bottom line” people.
Prepare the unexpected
What sounds intelligent in a conversation or a meeting, or, particularly, in the media, is suspicious.
two types of errors, the false positive (telling the patient he has cancer when in fact he does not) and the false negative (telling the patient he is healthy when in fact he has cancer),
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,
“brute force.”
My models showed that ultimately almost nobody really survived;
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
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.
systemic blowups,
He analyzed a large segment of foreign exchange traders’ transactions, then wrote a report explaining that only close to 1% of these transactions generated significant profits;
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.
A mistake is not something to be determined after the fact, but in the light of the information until that point.
history is potent enough to deliver, on time, in the medium to long run, most of the possible scenarios, and to eventually bury the bad guy.
To be competent, a journalist should view matters like a historian, and play down the value of the information
For a journalist, silence rarely surpasses any word.
such information as too statistically insignificant for the derivation of any meaningful conclusion, I currently look at it with delight.
(efficient markets meant, in a nutshell, that prices should adapt to all available information in such a way as to be totally unpredictable to us humans and prevent people from deriving profits).
It is as if the Pope converted to Islam.
“Survival of the fittest,” a term so hackneyed in the investment media, does not seem to be properly understood:
Under regime switching, as we will see in Chapter 5, it will be unclear who is actually the fittest, and those who will survive are not necessarily those who appear to be the fittest.
women prefer (on balance) to mate with healthy older men over healthy younger ones, everything else being equal, as the former provide some evidence of better genes.
life insurers in renaissance Italy reached the same conclusion, by charging the same insurance for a man in his twenties as they did for a man in his fifties, a sign that they had the same life expectancy; once a man crossed the forty-year mark, he had shown that very few ailments could harm him.
The wise man listens to meaning; the fool only gets the noise.
I always remind myself that what one observes is at best a combination of variance and returns, not just returns
Clearly, to a scientist, science lies in the rigor of the inference, not in random references to such grandiose concepts as general relativity or quantum indeterminacy.
Something in our human genes is deeply moved by the fuzziness and ambiguity of language; then why fight it?
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 us and 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).
A trader’s mental construction should direct him to do precisely what other people do not do.
at any point in time, the richest traders are often the worst traders.
No matter what John and Carlos do, they will remain fools of randomness.
The difference between a trader and an investor lies in the duration of the bet, and the corresponding size.
it is just that many people become long-term investors after they lose money, postponing their decision to sell as part of their denial.
Darwinian ideas are about reproductive fitness, not about survival.
Zoologists found that once randomness is injected into a system, the results can be quite surprising: What seems to be an evolution may be merely a diversion, and possibly regression.
Negative mutations are traits that survive in spite of being worse, from the reproductive fitness standpoint, than the ones they replaced. However, they cannot be expected to last more than a few generations (under what is called temporal aggregation).
time aggregation eliminates much of the effects of randomness; things (I read noise) balance out over the long run, as people say.
I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price. In addition to my own empiricism, I think that the counterintuitive aspect of the trade (and the fact that our emotional wiring does not accommodate it) gives me some form of advantage.
If we were dealing with a deterministic world—that is, a world stripped of randomness (the right-column world in Table P.1), and we knew with certainty that it was the case, things would be rather easy.
We could be either too lax or too stringent in accepting past information as a prediction of the future.
history teaches us that things that never happened before do happen. It can teach us a lot outside of the narrowly defined time series; the broader the look, the better the lesson.
