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February 17 - June 28, 2021
The best way to summarize the major thesis of this book is that it addresses situations (many of them tragicomical) where the left column is mistaken for the right one.
in my opinion, mistaking the right column for the left one is not as costly as an error in the opposite direction. Even popular opinion warns that bad information is worse than no information at all.
There is one world in which I believe the habit of mistaking luck for skill is most prevalent—and most conspicuous—and that is the world of markets.
this book has two purposes: to defend science (as a light beam across the noise of randomness), and to attack the scientist when he strays from his course (most disasters come from the fact that individual scientists do not have an innate understanding of standard error or a clue about critical thinking, and likewise have proved both incapable of dealing with probabilities in the social sciences and incapable of accepting such
Schadenfreude, the joy humans can experience upon their rivals’ misfortunes.
Randomness will be ruled out as a possible factor in the performance, until it rears its head once again and delivers the kick that will induce the downward spiral.
The idea of taking into account both the observed and unobserved possible outcomes sounds like lunacy.
We see the wealth being generated, never the processor, a matter that makes people lose sight of their risks, and never consider the losers. The game seems terribly easy and we play along carelessly.
the fact that people who have decided at some point in their lives to devote themselves to scientific research tend to have an ingrained intellectual curiosity and a natural tendency for such introspection.
(There is a distinction, however, between the mind of a pure mathematician thriving on abstraction and that of a scientist consumed by curiosity. A mathematician is absorbed in what goes into his head while a scientist searches into what is outside of himself.)
people distributed across two polar categories: On one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.
Many people were capable of the most complex calculations with utmost rigor when it came to equations, but were totally incapable of solving a problem with the smallest connection to reality;
has two brains: one for math and another, considerably inferior one, for everything else
Realism can be punishing. Probabilistic skepticism is worse. It is difficult to go about life wearing probabilistic glasses, as one starts seeing fools of randomness all around,
Heroes are heroes because they are heroic in behavior, not because they won or lost.
George Will was very famous and extremely respected (that is, for a journalist). He might even be someone of the utmost intellectual integrity; his profession, however, is merely to sound smart and intelligent to the hordes. Shiller, on the other hand, understands the ins and outs of randomness; he is trained to deal with rigorous argumentation, but does sound less smart in public because his subject matter is highly counterintuitive.
Mixing forecast and prophecy is symptomatic of randomness-foolishness (prophecy belongs to the right column; forecast is its mere left-column equivalent).
the existence of a risk manager has less to do with actual risk reduction than it has to do with the impression of risk reduction.
definition, I go against the grain, so it should come as no surprise that my style and methods are neither popular nor easy to understand. But I have a dilemma: On the one hand, I work with others in the real world, and the real world is not just populated with babbling but ultimately inconsequential journalists. So my wish is for people in general to remain fools of randomness (so I can trade against them), yet for there to remain a minority intelligent enough to value my methods and hire my services. In other words, I need people to remain fools of randomness, but not all of them.
If the tone of this book seems steeped in the culture of Darwinism and evolutionary thinking, it does not come from any remotely formal training in the natural sciences, but from the evolutionary way of thinking taught by my Monte Carlo simulators.
I can no longer visualize a realized outcome without reference to the nonrealized ones. I call that “summing under histories,” borrowing the expression from the colorful physicist Richard Feynman
Indeed, 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.
The only way I developed a respect for history is by making myself aware of the fact that I was not programmed to learn from it in a textbook format.
There is nothing wrong with a risk taker taking a hit provided one declares that one is a risk taker rather than that the risk being taken is small or nonexistent.
offered seemingly well-constructed, intellectual arguments (of an economic nature) to justify their claims;
Kaneman rationalization
Things are always obvious after the fact.
the way our mind handles historical information. When you look at the past, the past will always be deterministic, since only one single observation took place. Our mind will interpret most events not with the preceding ones in mind, but the following ones.
A mistake is not something to be determined after the fact, but in the light of the information until that point.
Exante vs expost. Case method.
his estate having been blown up during the Lebanese civil war. Incidentally, having experienced the ravages of war, I find undignified impoverishment far harsher than physical danger (somehow dying in full dignity appears to me far preferable to living a janitorial life, which is one of the reasons I dislike financial risks far more than physical ones).
Those who were unlucky in life in spite of their skills would eventually rise. The lucky fool might have benefited from some luck in life; over the longer run he would slowly converge to the state of a less-lucky idiot. Each one would revert to his long-term properties.
The opportunity cost of missing a “new new thing” like the airplane and the automobile is minuscule compared to the toxicity of all the garbage one has to go through to get to these jewels
the exact same argument applies to information. The problem with information is not that it is diverting and generally useless, but that it is toxic.
Shiller then pronounced markets to be not as efficient as established by financial theory (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).
Aint all available information the same? "bounded rationality "
This scaling property of randomness is generally misunderstood, even by professionals.
In the long run we are all dead
this explains why people who look too closely at randomness burn out, their emotions drained by the series of pangs they experience.
Is social media a variation of fooled by randomness?
To my knowledge there are no studies investigating the exact properties of trader’s burnout, but a daily exposure to such high degrees of randomness without much control will have physiological effects on humans
Evolutionary missmatch
What does this point have to do with a book on randomness? Our human nature dictates a need for péché mignon.
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).
cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle.
What he meant by that statement was that the “noise” was mean reverting, and would likely be offset by “noise” in the opposite direction. That was the translation in plain English of what Henry explained to him. But the “noise” kept adding up in the same direction.
The reason is that John was never skilled in the first place. He is one of those people who happened to be there when it all happened. He
The road from $16 million to $1 million is not as pleasant as the one from 0 to $1 million.
Because by discussing the situation with each of them, one can rapidly see that they share the traits of the acute successful randomness fool
Consider that of all the possible economic theories available, one can find a plausible one that explains the past, or a portion of it.
survivorship bias. We tend to think that traders were successful because they are good. Perhaps we have turned the causality on its head; we consider them good just because they make money. One can make money in the financial markets totally out of randomness.
Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration.
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. In other words, history teaches us to avoid the brand of naive empiricism that consists of learning from casual historical facts.
If the fund manager or trader expected it, he and his like-minded peers would not have invested in it, and the rare event would not have taken place.
the concept was generalized to every form of investment that was based on a naive interpretation of the volatility of past time series.
Accordingly investors, merely for emotional reasons, will be drawn into strategies that experience rare but large variations. It is called pushing randomness under the rug.
