Notes: Fooled by Randomness

by Nassim Taleb.

Very smart book. But I only read it to learn how to make a profit from "black swans" and on that note, it fails.

• Probability - acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance. 
• main idea - more random than we think Book about luck disguised and perceived as nonluck (skills), and randomness disguised and perceived as non-randomness (determinism). 
• Symbolism is the child of our inability and unwillingness to accept randomness. We underestimate the share of randomness in about everything. 
• One world where the habit of mistaking luck for skill is most prevalent -- and most conspicuous-- in the world of markets. 
• Fierce fight between my brain (not fooled by randomness) and my emotions (completely fooled by randomness).
• Rare events (black swans). 
• skewness issue - it does not matter how frequently something succeeds if failure is too costly to bear. 
• Nero: "I love taking small losses. I just need my winners to be large."
• Risk and finding the "generator"; the roulette wheel, so to speak of the machine.
• Key: be an option buyer. 
• Hindsight bias. Because only one event took place, but a mistake is not something to be determined after the fact, but in light of the info until that point. 
• Difference between noise and info. Noise has more randomness. 
• News is full of noise, history is largely stripped of it. 
• Turing's test: A computer is said to be intelligent if it can fool a human into mistaking it for another human. 
• 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. 
• The "best" operators in a given business can come from a subset of operators who survived because of overfitness (lucky) to a sample path--a sample path that was free of the evolutionary rare event. The longer these animals can go without encountering the rare event, the more vulnerable they will be to it. 
• How frequent the profit is irrelevant; it is the magnitude of the outcome that counts. 
• Taleb's biz: "skewed bets"; tries to benefit from rare events; large payoff when they occur. Asymetric bets. 
• History teaches us that things that never happened before do happen. 
• Art De Vany (movies and health). 
• Theories: 1. known to be wrong; 2. have not yet proven wrong. Why is a theory never right? Because we will never know if all the swans are white. It can only be provisionally accepted. 
• If someone performed better than the crowd in the past, there is a presumption of his ability to do better in the future. But the presumption might be weak. Because it all depends on the randomness content of his profession and the number of monkeys in operation. 
• Few count the investors in the market. In real life the other monkeys are not countable or visible. Survivorship bias. 
• Ergodicity - time will eliminate the annoying effects of randomness.
• Nobody accepts randomness in his own success, only his failure.
• data snooping - fitting the rule on the data. Rules that may be successful today may be the result of survivorship bias. 
• People tend to undervalue options, as they are usually unable to correctly mentally evaluate instruments that deliver an uncertain payoff. 
• Trick is to only look at large percentage changes (in the market). Otherwise it's noise. Moves more than the daily percentage. 
• Tricks to not get mad: avoid eye contact. 
• Wittgenstein's ruler: unless you have reliable ruler, getting more info about the ruler than the table. Random Amazon review - more info about the person, than the product.
• Beware of reduced or small sample size. It means nothing. 
• B.F. Skinner and his pigeons. Random delivery of food. Astonishing behavior to connect food and their behavior.
• We are not made to view things as independent from each other. Our bias is immediately to establish a causal link. 
• Most of us know how we should behave. It is the execution that is the problem, not the absence of knowledge. We are mere animals in need of lower forms of tricks, not lectures.
• Soros' ability to reverse his opinion in a flash. Their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate. 
• Beliefs are path dependent if the sequence of ideas is such that the first one dominates. Such trait of absence of marriage to ideas is indeed rare among humans. 
• we know nothing and are mistake-prone, but have the rare privilege of knowing it. 
• manner in which a man of virtue and dignity deals with randomness. Stoicism - it plays on dignity and personal aesthetics. 
• A slightly random schedule prevents us from optimizing and being exceedingly efficient, particularly in the wrong things. Research on happiness shows that those who live under a self-imposed pressure to be optimal in their enjoyment of things suffer a measure of distress. 
• No alarm clocks for Taleb, or schedules.
• You can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave.