Fooled by Randomness - emilkirkegaard.dk

219 Pages·2012·6.06 MB·English

About the author
assim Nicholas Taleb is the founder of Empirica Capital LLC, a
crisis-hunting hedge fund operator, and a fellow at the Courant
Institute of Mathematical Sciences of New York University. He has held
a variety of derivative trading positions in New York and London and
worked as an independent floor trader in Chicago. Taleb was inducted
in February 2001 in the Derivatives Strategy Hall of Fame.
Taleb received an MBA from the Wharton School and a Ph.D. from
University Paris-Dauphine. He is the author of Dynamic Hedging:
Managing Vanilla and Exotic Options (Wiley, 1997).
BY
The Hidden Role of Chance
in the Markets and in Life
NASSIM NICHOLAS TALEE
eg
•
TEXE RE
New York • London

CONTENTS
Preface and Acknowledgments xiii
Chapter Summaries xvii
Prologue 1
Mosques in the Clouds 1
PART I: SOLON'S WARNING - SKEWNESS, ASYMMETRY,
INDUCTION 7
One: If You're So Rich Why Aren't You So Smart? 11
Nero Tulip 11
Hit by Lightning 11
Temporary Sanity 12
Modus Operandi 14
No Work Ethics 16
There Are Always Secrets 17
John the High-Yield Trader 17
An Overpaid Hick 19
viii CONTENTS
The Red-Hot Summer 21
Serotonin and Randomness 22
Your Dentist Is Rich, Very Rich - 24
Two: A Bizarre Accounting Method 26
Alternative History 26
Russian Roulette 27
An Even More Vicious Roulette 28
Smooth Peer Relations 29
Salvation Via Aeroflot 30
Solon Visits Regine's Night Club 32
George Will Is No Solon: On Counterintuitive Truths 34
Humiliated in Debates 37
Risk Managers 38
Three: A Mathematical Meditation on History 40
Europlayboy Mathematics 40
The Tools 41
Monte Carlo Mathematics 43
Fun in My Attic 45
Making History 45
Zorglubs Crowding the Attic 46
Denigration of History 47
The Stove Is Hot 48
My Solon 50
Distilled Thinking on Your PalmPilot 51
Breaking News 51
Shiller Redux 53
Gerontocracy 55
Philostratus in Monte Carlo: On the Difference Between Noise
and Information 56
Four: Randomness, Nonsense, and the Scientific Intellectual 60
Randomness and the Verb 60
Reverse Turing Test 62
CONTENTS ix
The Father of All Pseudothinkers 64
Monte Carlo Poetry 64
Five: Survival of the Least Fit - Can Evolution Be Fooled by
Randomness? 68
Carlos the Emerging Markets Wizard 68
The Good Years 71
Averaging Down 72
Lines in the Sand 72
John the High-Yield Trader 74
The Quant Who Knew Computers and Equations 75
The Traits They Shared 78
A Review of Market Fools of Randomness Constants 78
Naive Evolutionary Theories 81
Can Evolution be Fooled by Randomness? 82
Six: Skewness and Asymmetry 84
The Median Is Not the Message 84
Bull and Bear Zoology 86
An Arrogant 29-Year-Old Son 88
Rare Events 89
Symmetry and Science 90
The Rare Event Fallacy 93
The Mother of All Deceptions 93
Why Don't Statisticians Detect Rare Events? 96
A Mischievous Child Replaces the Black Balls 97
Seven: The Problem of Induction 99
From Bacon to Hume 99
Cygnus Atratus 100
Niederhoffer, Victorian Gentleman 100
Sir Karl's Promoting Agent i03
Location, Location 105
Popper's Answer 106
Open Society 108
vii
CONTENTS
Nobody Is Perfect 108
Pascal's Wager 109
Thank You Solon _ 110
PART lis MONKEYS ON TYPEWRITERS - SURVIVORSHIP AND
OTHER BIASES 111
It Depends On the Number of Monkeys 114
Vicious Real Life 115
This Section 115
Eight: Too Many Millionaires Next Door 117
How To Stop the Sting of Failure 117
Somewhat Happy 117
Too Much Work 118
You're a Failure 119
Double Survivorship Biases 120
More Experts 120
Visibility Winners 122
It's a Bull Market 122
A Guru's Opinion 123
Nine: It Is Easier To Buy and Sell Than Fry an Egg 125
Fooled by Numbers 127
Placebo Investors 127
Nobody Has To Be Competent 128
Ergodicity 129
Life Is Coincidental 131
The Mysterious Letter 131
An Interrupted Tennis Game 132
The Birthday Paradox 132
It's a Small World! 132
Data Mining, Statistics, and Charlatanism 133
The Best Book I Have Ever Read! 134
The Backtester 134
A More Unsettling Extension 136
CONTENTS XI
The Earnings Season: Fooled by the Results 136
Cancer Cures 137
Professor Pearson Goes to Monte Carlo (Literally):
Randomness Does Not Look Random! 139
The Dog That Did Not Bark: On Biases in Scientific
Knowledge 140
I Have No Conclusion 141
Ten: Loser Takes All - On the Nonlinearities of Life 142
The Sandpile Effect 142
Enter Randomness 144
Learning to Type 144
Mathematics Inside and Outside the Real World 146
Buridan's Donkey or the Good Side of Randomness 147
When It Rains, It Pours 148
Eleven: Randomness and Our Brain: We Are Probability
Blind 149
Paris or the Bahamas? 149
Some Architectural Considerations 150
From Psychology to Neurobiology 152
Our Natural Habitat 153
Kafka in a Courtroom 154
An Absurd World 156
Kahneman and Tversky 157
Neurobiology 158
Examples of Biases in Understanding Probability 159
We Are Option Blind 160
Probabilities and the Media (More Journalists) 162
CNBC at Lunch Time 163
You Should Be Dead by Now 163
The Bloomberg Explanations 164
Filtering Methods 166
We Do Not Understand Confidence Levels 168
An Admission 168
xii CONTENTS
PART Ills WAX IN MY EARS - LIVING WITH RANDOMITIS 169
I Am Not So Intelligent _ 172
The Odyssean Mute Command 173
Twelve: Gamblers' Ticks and Pigeons in a Box 175
Taxi-Cab English and Causality 175
The Skinner Pigeon Experiment 178
Philostratus Redux 179
Thirteen: Carneades Comes to Rome: On Probability and
Skepticism 182
Carneades Comes to Rome 183
Probability the Child of Skepticism 184
Monsieur de Norpois's Opinions 185
Path Dependence of Beliefs 187
Computing Instead of Thinking 188
From Funeral to Funeral 190
Fourteen: Bacchus Abandons Antony 191
Notes on Jackie O.'s Funeral 192
Randomness and Personal Elegance 194
Epilogue: Solon Told You So 196
Beware the London Traffic Jams 196
Notes 197
Index 198
About TEXERE 204
PREFACE AND ACKNOWLEDGMENTS
his book is the synthesis of, on one hand, the no-nonsense
mathematical trader (self-styled "practitioner of uncertainty") who
spent his life trying to resist being fooled by randomness and trick the
emotions associated with uncertainty and, on the other, the aesthetically
obsessed, literature-loving human being willing to be fooled by any form
of nonsense that is polished, refined, original, and tasteful. I am not
capable of avoiding being the fool of randomness; what I can do is
confine it to where it brings some aesthetic gratification.
Much has been written about our biases (acquired or genetic) in
dealing with randomness over the past decade. My rules while writing
this book have been to avoid discussing (a) anything that I did not either
personally witness on the topic or develop independently, and (b)
anything that I have not distilled well enough to be able to write on the
subject with the slightest effort. Everything that remotely felt like work
was out. I had to purge the text from passages that seemed to come from
a visit to the library, including the scientific name dropping. I tried to
use no quote that does not naturally spring from my memory and does
not come from a writer whom I have intimately frequented over the
years (I detest the practice of random use of borrowed wisdom - much
on that, later). Aut tace aut loquere meliora silencio (only when the
words outperform silence).