Fooled by Randomness by Nassim Taleb - Chapters 1-3 notes
Fortune that comes from chance can just as easily be lost by chance. Fortune that comes from good decisions is resistant to chance.
Taking inspiration from Dominic Cummings’s blog, where he publishes his notes from books publicly in blog posts, I’ve decided to do the same with books that I want to improve retention, NOT books that I read for pleasure.
I’ve decided to start with Nassim Taleb’s Incerto series, which my friend Conor has raved about and has been on my list for a while. It has proved a very thought-provoking book so far which I have really enjoyed. It is not a typical non-fiction book full of statistics and specific advice. It is a collection of ideas and logic told through very entertaining stories. These might be referred to as mental models, but that word is never used in the book.
I’ve put my thoughts in [square brackets], everything else is a summary of the text.
Introduction
Humans are inherently flawed and far from rational. We behave largely based on emotion, which we rationalize after the fact. If you believe otherwise then read ‘Thinking, Fast and Slow’, which is about dozens of known human biases.
Trying to battle with your brain to behave rationally is a losing game, we are much better off trying to adjust our environment to improve our behaviour than through brute force and discipline. [Atomic Habits, a how-to guide for behaviour change, makes the same point].
[When I complain to people about my problems I hate when they try to fix them for me with well-intentioned but unsolicited advice. This is probably why: I don’t have this problem because I don’t know how to fix it, I generally know how to fix it but don’t do the things I know I should do].
Chapter 1: If you’re so rich, why aren’t you so smart?
Fortune that comes from chance can just as easily be lost by chance, conversely, fortune that comes from good decisions in spite of chance is resistant to chance. This books talks a lot about not being fooled by randomness i.e. misinterpreting fortune from chance as fortune from good decisions. [reminds me of the saying ‘a fool and his money are soon parted’]
Over the long run, all variance gets filtered out and all that is left behind is trends. All noise gets filtered and all that’s left behind is signal. Those who are so busy that they are caught up in day-to-day events cannot see the big picture. These are the people who have constantly busy schedules, constantly reading the news, constantly checking their portfolio, constantly watching signal instead of noise.
Mild success can be attributed to skills and labour. Wild success is attributable to variance.
Those who are successful only by chance, who Taleb refers to as ‘lucky fools’, rarely know how lucky they are.
Do not confuse the necessary traits with causual traits; it is necessary to buy a lottery ticket to win the lotto, but buying a lottery ticket does not cause you to win the lotto. This is the problem with looking only at winners instead of looking at all players of the game, it is impossible to identify the difference between necessary and causual traits. All players will possess the necessary traits, winners will display more of the causual traits.
Chapter 2: A bizarre accounting method
Since the outcome was unknown at the time of the decision, the outcome of a decision does not impact the quality of the decision. If I decide today not to buy a lottery ticket for €1, and tomorrow I find out that that lottery ticket would’ve won me €1 million, was it the correct decision to not buy the lottery ticket? Of course.
Decisions should be based not on the outcome, but on the average value of all possible outcomes, weighted by probability, aka the expected outcome. A conservative trader who never makes trades that could bankrupt him and invests his savings in US Treasury bonds could live 1 million different lives and be expected to live a good life in almost all of them. In contrast, a frisky trader who makes dangerous trades that could ruin him but have huge upside would live some slightly better lives but some much worse ones. The expected life of the conservative trader is better than the expected life of the frisky trader. [This makes me want to put all my savings into boring 3% p.a. pension funds and become a dentist]
Life is not a well-defined game like blackjack or russian roulette. It is impossible to know all of the possible outcomes and their probabilities in reality. Decision-making largely comes down to dealing with uncertainty.
The very small risk of very bad events is easy to forget about because, by their nature, they are very rare. We must never forget the risk of terrible rare events (black swan events) and mitigate this risk wherever possible. [I have become a much safer driver after reading this part of the book. I may get away with speeding or running an orange light 999999/1000000 times, but there is a outcome where I knock down a child and have to deal with that guilt for the rest of my life. It is worth always driving slowly and stopping at orange lights to mitigate this risk].
Humans deal with risk in the emotional part of the brain, not the rational part. In a famous experiment, professional forecasters were surveyed at a conference in California and asked to estimate the probability of a freak flood happening anywhere in North America, and the probability of a freak flood in California. They estimated the probability of a freak flood happening in California as greater than a freak flood happening anywhere in North America. In another similar experiment, people were asked how much they would pay for travel insurance to Mongolia that would pay out $1m if they were killed by a terrorist attack, and the same policy that paid out no matter the cause of death. People consistently paid more for the first policy.
What sounds right, what our emotional brain thinks is rational, is rarely right when dealing with randomness, because humans have no intuitive feel for randomness or abstract probabilities. This is the problem with journalism, since most journalists are paid simply to sound right with little incentive to be accurate. As the world becomes more and more complex, the degree to which journalists must summarize matters increases, making them more and more inaccurate. Taleb describes journalism as ‘one of the great plagues we face today’ for this among other reasons.
Chapter 3
Much of what we have learned and know is subconscious [maybe ‘listening to your gut’ is really listening to your subconscious]. Taleb mentions an experiment where a doctor is treating an amnesic patient who he must constantly reintroduce himself to. One day when reaching out to shake the patients hand he hold a pin in his hand, pricking the patient. When the patient forgets who he is the next day the doctor reintroduces himself and reaches out his hand, and the patient goes to shake the doctors hand but instinctively pulls his hand back, not knowing why. [I’ve heard before that our brains are a pattern recognition machine, always trying to predict the future. this would make sense, as these patterns that our brain has picked up wouldn’t be known consciously to ourselves].
We often do not learn from the mistake of others simply because we believe ourselves to be different and special. [using the bizarre accounting method in the last chapter can help avoid this. Instead of thinking that a rare event won’t happen to you, which you are probably right about, you instead acknowledge that it will happen to you in a few possible outcomes.]
In the long run there is no luck. The shorter the timescale, the more variance and noise.
If you have a great portfolio that will return 10% per year, the likelihood that it is up on any given day is only slightly above 50%. That means if you check it everyday you’re almost as likely to see your portfolio has declined in value rather than increased. The ‘pang’ of pain when you see you’ve lost money is greater than the pleasure of gaining money, about 2.5x. Checking your portfolio or reading the news everyday is a recipe for misery, anxiety, stress, and all the negative consequences that come with it.
Ancient wisdom has had the noise filtered out, leaving behind timeless signal. [I’ve noticed this with fitness and productivity protocols and tools. The newest, latest gym equipment or workout routine probably isn’t the best one. It hasn’t been around long enough for the flaws in it to be discovered. Fitness protocols that have stayed the same for decades are generally the best. The best results I’ve seen from my own training have been from old fashioned, simple workouts like the deadlift and bench press, and not from machines. The only productivity tools I use are a notebook and calendar, and I’ve tried loads. The healthiest diet is probably one with lots of veg, nuts, and meat, as these are foods we have eaten for millennia. It’s probably not protein bars and kombucha.]
If you can’t tell the difference between text that was randomly generated and text that was written by a person, then you can’t learn anything from it.
“Sound is the change in the specific condition of segregation of the material parts, and in the negation of this condition; merely an abstract or an ideal ideality, as it were, of that specification. But this change, accordingly, is itself immediately the negation of the material specific subsistence; which is, therefore, real ideality of specific gravity and cohesion, i.e.—heat. The heating up of sounding bodies, just as of beaten and or rubbed ones, is the appearance of heat, originating conceptually together with sound.”
“However, the main theme of the works of Rushdie is not theory, as the dialectic paradigm of reality suggests, but pretheory. The premise of the neosemanticist paradigm of discourse implies that sexual identity, ironically, has significance.
Many narratives concerning the role of the writer as observer may be revealed. It could be said that if cultural narrative holds, we have to choose between the dialectic paradigm of narrative and neoconceptual Marxism. Sartre’s analysis of cultural narrative holds that society, paradoxically, has objective value.
Thus, the premise of the neodialectic paradigm of expression implies that consciousness may be used to reinforce hierarchy, but only if reality is distinct from consciousness; if that is not the case, we can assume that language has intrinsic meaning.”
Can you tell which one was written by a famous humanities professor, and which one was randomly generated? Both managed to get published in the same humanities journal. [not sure how I feel about this, if I read a medical textbook I probably wouldn’t be able to tell the difference between it and randomly generated medical text. I’ve read data science textbooks that look like gibberish to me. I suppose just because something looks like random to you doesn’t necessarily mean no intelligence is involved.]
Being fooled by randomness can be beautiful and harmless, in the case of enjoying poetry or music that is indistinguishable from random generation. Just be sure you know you’re being fooled by randomness, and make sure it’s the best kind. Be fooled by randomness listening to music or watching a movie, not by analyzing the stock market or reading the news.