Fooled by Randomness is a standalone book in Nassim Nicholas Taleb’s landmark Incerto series, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don’t understand.
- One cannot consider a profession without taking into account the average of the people who enter it, not the sample of those who have succeeded in it.
Monte Carlo methods consist of creating artificial history. The invisible histories are called ‘alternative sample paths’, a name borrowed from the field of mathematics of probability called stochastic processes. The notion of path indicates that it is not a mere scenario analysis, but the examination of a sequence of scenarios along the course of time. We are not concerned with what the investor’s worth would be in a year, but rather of the heart-wrenching rides he may experience during that period. The word sample stresses that one sees only one realization among a collection of possible ones. A sample path can be either deterministic or random.
- A random sample path, also called a random run, is the mathematical name for a succession of virtual historical events, starting at a given date, and ending at another, except that they are subjected to some varying level of uncertainty.
- Stochastic processes refer to the dynamics of events unfolding with the course of time. Stochastic is a fancy Greek name for random. This branch of probability concerns itself with the study of the evolution of successive random events - One could call it the mathematics of history.
- In Monte Carlo Simulation, one can generate thousands, perhaps millions of random sample paths, and look at the prevalent characteristics of some of their features. One sets conditions believed to resemble the ones that prevail in reality, and launches a collection of simulations around possible events.
- Things are always obvious after the fact. When we look at the past, the past will always be deterministic, since only one single observation took place. Psychologists call this overestimation of what one knew at the time of the event due to subsequent information the hindsight bias.
- The opportunity cost of missing a ‘new new thing” like the airplane and the automobile is miniscule compared to the toxicity of all the garbage one has to go through to get to these jewels,. People who look too closely at randomness burn out, their emotions drained by the series of pangs they experience. Regardless of what people claim, a negative pang is not offset by a positive one (some psychologoists estimate the negative effect for an average loss to be upto 2-5 the magnitude of a positive one); it will lead to an emotional deficit.
- Rare events are not fairly valued, and the rarer the event, The more undervalued it will be in price.
- Survivorship Bias: When we see only the winner and get a distorted view of the odds. The losers do not show up in the sample.
- Chaos Theory concerns itself primarily with functions in which a small input can lead to a disproportionate response. For e.g. the last grain of sand that will topple the sandcastle.
- Attribution bias: You attribute your success to skill, but your failures to randomness.