Taleb | Fooled by Randomness

• Results from luck are more prone to be taken away by luck; results achieved with less luck are more resistant to randomness.
• Skewness issue: it does not matter how frequent a person succeeds if failure is too costly to bear.
• Retired Dentist Checking Portfolio Returns
• Difference between noise and meaning: all observations are at best a combination of return (meaning) and variance (noise); and on a short time increment, it is entirely variance.
• News is full of noise, where history is largely stripped of it; however, it does not mean that histories are good indicators of the future. Length and breadth of history considered matters.
• We do not react to positive and negative noise equally. Even if the distribution of noise is symmetrical, the emotional torture from short term negative noise is felt far greater than their positive counterparts. Paying attention to short term noise, on balance, lead to emotional deficit. Hence, stay away from noise.
• Importance to understand the mean and variance of any field: dentists and pianists face much less career randomness; the jungle where traders live, on the other hand, is ruled by randomness.
• Cross sectional problem or survivial of the least fit: at a given time in the market, the most profitable traders are likely ones best fit to the latest cycle (eg “dip buyers” of EM and HY bonds 1992 to 1998); if the latest cycle dynamics are random, these traders are also by definition most prone to a randomness reversal or regime change
• Traits of bad trader: married to position; switching narrative (become “investor” just to hold on to losing bets); no game plan for losing times as such periods are deemed too improbable
• Bull & Bear Zoology: bullish and bearish only suggests view on direction, but not magnitude... I can be bullish on a stock yet shorting it, because of asymmetry of payoffs. What informs a trading decision is a prob distribution table. TV commentators use these terms because they are rewarded only by the frequency of their correctness but not magnitude
• Separating risk taking and risk management decisions where risk taking is informed by past data but risk management is not ie prob of some events occuring are not derived from past data.
• Randomness does not mean patternless and most often it does not look random; purposefully creating randomness is a paradox and it never works
• Humans have evolved as a separate species for 130,000 year, majority of which is spent in the African savannah where field of probabilities is narrow – information transmission is limited by physical distance; limited number of people we meet over a lifetime etc. Later on, even when probabilitic fiend widened over history, religious suppression of any thought contrary to determinism has delayed the development of probability studies. Hence, our brains have never acquired the proper probabilistic depth to deal with the complexity of modern world. E.g. when only one of two outcomes will occur, we can not imagine an outcome that is the linear combination of the two – a vacation spend 50% Bahamas and 50% Paris, or a cancer patient 28% death and 72% survival. To the patient, he only sees himself dying or survive. This inability causes us to make irational choices.