Living in the real world may be painful particularly if one finds statements more informative about the people making them than the intended message:
I got sucked into the implications of the difference between Montaigne and Descartes—and how we strayed by following the latter’s quest for certitudes.
Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.
Symbolism is the child of our inability and unwillingness to accept randomness;
probability applied to practice is almost nonexistent as a discipline.
economic “risk takers” are rather the victims of delusions
If there is one cause for this confusion between the left and the right sides of our table, it is our inability to think critically
“The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.
that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.
skewness issue; it does not matter how frequently something succeeds if failure is too costly to bear.
love taking small losses,”he says. “I just need my winners to be
he was cash-flow rich,
work ethics, Nero believes, draw people to focus on noise rather than the signal
Mild success can be explainable by skills and labor. Wild success is attributable to variance.
In addition, there seems to be curious evidence of a link between leadership and a form of psychopathology (the sociopath) that encourages the non-blinking, self-confident, insensitive person to rally followers.
Had Nero had to relive his professional life a few million times, very few sample paths would be marred by bad
The idea of taking into account both the observed and unobserved possible outcomes
I start with the platitude that one cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e., if history played out in a different
Mathematics is not just a “numbers game,” it is a way of thinking.
(certainty is something that is likely to take place across the highest number of different alternative histories; uncertainty concerns events that should take place in the lowest number of them).
This analytical approach to the study of economic uncertainty is called the “state space” method—it happens to be the cornerstone of neoclassical economic theory and mathematical finance. A simplified version is called “scenario analysis,” the series of “what-ifs”
It is also related to a problem called denigration of history, as gamblers, investors, and decision-makers feel that the sorts of things that happen to others would not necessarily happen to them.
Finally, there is an ingratitude factor in warning people about something abstract (by definition anything that did not happen is abstract).
Heroes are heroes because they are heroic in behavior, not because they won or lost.
As a derivatives trader I noticed that people do not like to insure
against something abstract; the risk that merits their attention is always something vivid.
It is a fact that our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease with which they come to mind.
It means that rational thinking has little, very little, to do with risk avoidance.
that one would realize informational gains by dispensing with the news.
I need to make a huge effort not to be swayed by well-sounding remarks.
Monte Carlo generator, which I introduce in this chapter. Yet it is far more a way of thinking than a computational method. Mathematics is principally a tool to meditate, rather than to compute.
Those of us in the second category are called “quants”—like physicists, we have more interest in the employment of the mathematical tool than in the tool itself.
Indeed, probability is an introspective field of inquiry, as it affects more than one science, particularly the mother of all sciences: that of
As for Keynes, to the literate person he is not the political economist that tweed-clad leftists love to quote, but the author of the magisterial, introspective, and potent Treatise on Probability.
The reader can guess that the next step from such probabilistic introspection is to get drawn into philosophy, particularly the branch of philosophy that concerns itself with knowledge, called epistemology or methodology, or philosophy of science.
One of the attractive aspects of my profession as a quantitative option trader is that I have close to 95% of my day free to think, read, and research
Every man believes himself to be quite different, a matter that amplifies the “why me?” shock upon a diagnosis.
A mistake is not something to be determined after the fact, but in the light of the information until that point.
ergodicity. It means, roughly, that (under certain conditions) very long sample paths would end up resembling each other.
The problem with information is not that it is diverting and generally useless, but that it is toxic.
minimal exposure to the media as a guiding principle for someone involved in decision making under uncertainty.
(It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world. This problem is similar to the weaknesses in our ability to correct for past errors: Like a health club membership taken out to satisfy a New Year’s resolution, people often think that it will surely be the next batch of news that will really make a difference to their understanding of things.)
(I would suggest London’s Anatole Kaletsky and New York’s Jim Grant and Alan Abelson as the underrated representatives of such a class among financial journalists; Gary Stix among scientific journalists);
The wise man listens to meaning; the fool only gets the noise.
In their intense meditation the hidden sound of things approaching reaches them and they listen reverently while in the street outside the people hear nothing at all.
Probability
If an event is important enough, it will find its way to my ears. I will return to this point in time.
problem—and empiricism can be worse than any other form of hogwash when it gives someone confidence
“If I am going to be forced to eat pork, it better be of the best kind.
A trader’s mental construction should direct him to do precisely what other people do not do.
An overestimation of the accuracy of their beliefs in some measure, either economic (Carlos) or statistical (John)
A tendency to get married to positions
The tendency to change their story
No precise game plan ahead of time as to what to do in the event of losses
Absence of critical thinking expressed in absence of revision of their stance with “stop losses.
For all his flaws, we will see that Soros seems rarely to examine an unfavorable outcome without testing his own framework of analysis.
Denial
Note | Due to short term success, the man may have more opportunity to pass his flawed genes on as opposed to the man positioned for long term success and anti fragility
Whenever there is asymmetry in outcomes, the average survival has nothing to do with the median survival.
The problem is that we read too much into shallow recent history,
I associate rare events with any misunderstanding of the risks derived from a narrow interpretation of past time series.
No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.
He also figured out the uselessness of the news, as he showed that reading the newspaper did not confer a predictive advantage to its readers.
A testable statement is one that can be broken down into quantitative components and subjected to statistical examination.
But there is a more severe aspect of naive empiricism. I can use data to disprove a proposition, never to prove one.
I can use history to refute a conjecture, never to affirm it.
asymmetry between the two statements; and, furthermore, such asymmetry lies in the foundations of knowledge. It is also at the core of my operation as a decision maker under uncertainty.
So why do we consider the worst case that took place in our own past as the worst possible case?
Maximizing the probability of winning does not lead to maximizing the expectation from the game when one’s strategy may include skewness, i.e., a small chance of large loss and a large chance of a small win.
extreme empiricism, competitiveness, and an absence of logical structure to one’s inference can be a quite explosive combination.
Pink highlight | Newtonian physics is scientific because it allowed us to falsify it, as we know that it is wrong, while astrology is not because it does not offer conditions under which we could reject it.
Pink highlight | Astrology cannot be disproved, owing to the auxiliary hypotheses that come into play. Such point lies at the basis of the demarcation between science and nonsense (called “the problem of demarcation
He refused to blindly accept the notion that knowledge can always increase with incremental information—which is the foundation of statistical inference.
These are men with bold ideas, but highly critical of their own ideas; they try to find whether their ideas are right by trying first to find whether they are not perhaps wrong. They work with bold conjectures and severe attempts at refuting their own conjectures.
I speculate in all of my activities on theories that represent some vision of the world, but with the following stipulation: No rare event should harm me. In fact, I would like all conceivable rare events to help me.
Popper believed that any idea of Utopia is necessarily closed owing to the fact that it chokes its own refutations. The simple notion of a good model for society that cannot be left open for falsification is totalitarian.
we like to emit logical and rational ideas but we do not necessarily enjoy this execution.
Induction is going from plenty of particulars to the general.
The effect of such compression is the reduction in the degree of detected randomness.
I will use statistics and inductive methods to make aggressive bets, but I will not use them to manage my risks and exposure.
A small knowledge of probability can lead to worse results than no knowledge at all.
Accordingly, one sees the survivors, and only the survivors, which imparts such a mistaken perception of the odds.
the survivorship bias implies that the highest performing realization will be the most visible. Why? Because the losers do not show up.
Remember that nobody accepts randomness in his own success, only his failure.
Judging an investment that comes to you requires more stringent standards than judging an investment you seek,
single random run is bound to exhibit some pattern—if one looks hard enough.
The problem is that a finding of absence and an absence of findings get mixed together.
case—the curious thing was that the dog did not bark.
A very small additional input, here the grain of sand, caused a disproportionate result,
“the straw that broke the camel’s back
These nonlinear dynamics have a bookstore name, “chaos theory,
Forcing rational dynamics on the process would be superfluous, nay, impossible. This is called a path dependent outcome, and has thwarted many mathematical attempts at modeling behavior.
It is obvious that the information age, by homogenizing our tastes, is causing the unfairness to be even more
Brian Arthur,
chance events coupled with positive feedback rather than technological superiority will determine economic superiority—not some abstrusely defined edge in a given area of expertise.
Arthur suggests models such as the Polya process, which is mathematically very difficult to work with,
Note that it is sometimes foolish to look for precise “critical points” as they may be unstable and impossible to know except, like many things, after the fact.
I am also realizing the nonlinear effect behind success in anything:
When you take a gamble, do you say: “My net worth will end up at $99,000 or $101,500 after the gamble” or do you say “I lose $1,000 or make $1,500?
he made the mistake of overstating the importance of small samples (in this case just one single observation, the worst possible inferential mistake a person can make).
For instance, when you learn to play chess, you use System 2. After a while things become intuitive and you are able to gauge the relative strength of an opponent by glancing at the board.
We do not think when making choices but use heuristics; (2) We make serious probabilistic mistakes in today’s world
The real problem is, as I have mentioned, that such a natural habitat does not include much information.
The psychologists’ framework is built around the distinction between the domain-specific and domain-general adaptations.
(note that even institutional investors seem to have a neocortex).
So we need a shortcut; emotions are there to prevent us from temporizing. Does it remind you of Herbert Simon’s idea? It seems that the emotions are the ones doing the job. Psychologists call them “lubricants of reason.
much of the opinions and assessments that we have concerning risks may be the simple result of emotions.
probability—for we still cannot have a court of law properly compute the joint probability of events
They do not realize that evidence compounds.
multiplying the two (obviously independent) events.
Deborah Bennett’s Randomness).
Less than one in five professionals got it right.
I discovered very few people who accepted losing $1 for most expirations and making $10 once in a while, even if the game were fair (i.e., they made the $10 more than 9.1% of the time).
People overvalue their knowledge and underestimate the probability of their being wrong.
(it is the consequence because it came after).
The trick is to look only at the large percentage changes.
Unless something moves by more than its usual daily percentage change, the event is deemed to be noise.
The answer is that too many people read explanations. We cannot instinctively understand the nonlinear aspect of probability.
The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions.
Unless the source of the statement has extremely high qualifications, the statement will be more revealing of the author than the information intended by him.
Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.
A compliment is always pleasant, regardless of its authorship—something manipulators know rather well.
gambling to me is best defined as an activity where the agent gets a thrill when confronting a random outcome, regardless of whether he has the odds stacked in his favor or against him.
literally all of the birds developed a specific ritual that progressively became hardwired into their mind as linked to their feeding.
For it is harder to act as if one were ignorant than as if one were smart;
probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive.
Carneades in their rigorous skepticism
Indeed, for some strange reason during the Middle Ages, Arabs were critical thinkers (through their postclassical philosophical tradition) when Christian thought was dogmatic; then, after the Renaissance, the roles mysteriously reversed.
Monsieur de Norpois was not lying. He had just forgotten. One forgets rather quickly what one has not thought about with depth, what has been dictated to you by imitation, by the passions surrounding you. These change, and with them so do your memories. Even more than diplomats, politicians do not remember opinions they had at some point in their lives and their fibbings are more attributable to an excess of ambition than a lack of memory.
We are supposed to be faithful to our opinions. One becomes a traitor otherwise.
Many people get married to their ideas all the way to the grave. Beliefs are said to be path dependent if the sequence of ideas is such that the first one dominates.
Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath.
Such trait of absence of marriage to ideas is indeed rare among humans.
My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.
For most scientists are hard-headed, otherwise they would not derive the patience and energy to perform the Herculean tasks asked of them, like spending eighteen hours a day perfecting their doctoral thesis.
Recall that epic heroes were judged by their actions, not by the results.
C. P. Cavafy.
That is what stoicism truly means. It is the attempt by man to get even with probability.
The stoic is a person who combines the qualities of wisdom, upright dealing, and courage.
Try not to blame others for your fate, even if they deserve blame.
If you slice your gamble into a series of one million bets of one dollar each, the amount you recover will systematically show the casino’s advantage. This is the core of sampling theory, traditionally called the law of large numbers.
Our attribution of heroism to those who took crazy decisions but were lucky enough to win
maximizing)—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.
The question remains whether optimizers are unhappy because they are constantly seeking a better deal or if unhappy people tend to optimize out of their
At the limit, you can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave.
Unpredictability is a strong deterrent.
Don’t do to others what you don’t want them to do to
We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract.
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Brock, W. A., D. A. Hsieh, and B. LeBaron, 1991, Nonlinear Dynamics, Chaos, and Instability: Statistical Theory and Economic Evidence, Cambridge, Mass.: MIT Press.
Buehler, R., D. Griffin, and M. Ross, 2002, “Inside the Planning Fallacy: The Causes and Consequences of Optimistic Time Predictions.” In Gilovich, Griffin and Kahneman.
Gigerenzer, Gerd, 2003, Calculated Risks: How to Know When Numbers Deceive You. New York: Simon & Schuster.
Gigerenzer G., P. M. Todd, and ABC Research Group, 2000, Simple Heuristics That Make Us Smart. Oxford: Oxford University Press.
Hsieh, David A., 1991, “Chaos and Nonlinear Dynamics: Application to Financial Markets.” The Journal of Finance, 46(5), 1839
Jaynes, E. T., 2003, Probability Theory: The Logic of Science. Cambridge, Eng.: Cambridge University Press.
Knight, Frank, 1921 (1965), Risk, Uncertainty and Profit. New York: Harper and Row.
MacKay, Charles, 2002, Extraordinary Popular Delusions and the Madness of Crowds. New York: Metro Books.
2002, The Logic of Scientific Discovery, 15th ed. London: Routledge.
Searle, John, J., 2001, Rationality in Action. Cambridge, Mass.: The MIT Press.