I recently read Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb. This book was a tour de force in philosophy, logic and statistics. Taleb makes a strong argument that much of life is random. He cautions the reader to not put too much weight on someone's success because it may have largely been the result of luck. There are two primary ways to prove ones success exclusive of luck.
One of these ways occurs when one takes extreme precaution to avoid dramatically negative events or "blowups". Thus it is better to make small incremental gains while minimizing the downside than it is to take high risks in the attempt to make a massive profit.
The other factor to consider when evaluating one's success is to adjust for survivorship bias. This entails considering the number of players that began their work at the beginning of the period of time under review. If one of five players generated an impressive performance, it is likely to be attributable to skill. If one of one thousand players generated an impressive performance, it is not very impressive because his performance could be simply a random occurrence.
Among the other insights imparted are:
- A mistake is not something to be determined after the fact, but in the light of the information available until that point.
- The firehouse effect holds that firemen with much downtime who talk to each other for too long come to agree on many things that an outside, impartial observer would find ludicrous (they develop political ideas that are very similar).
- It is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration. How frequent the profit is irrelevant; it is the magnitude of the outcome that counts.
- It is important to be aware that the following is fallacy: The more information you have, the more you are confident about the outcome.
- Taleb recommends using statistics and inductive methods to make aggressive bets, but not to use them to manage risks and exposure because of randomness.
- It is better to have a handful of enthusiastic advocates than hordes of people who appreciate your work - better to be loved by a dozen than liked by the hundreds.
- It is not the estimate or the forecast that matters so much as the degree of confidence with the opinion. This can be seen with weather predictions. You would rather know which kind of clothing to take on a trip. This requires a high degree of certainty that the estimate will be in a given range rather than a low degree of certainty that the weather will reach an exact temperature.
- Unless the source of a statement has extremely high qualifications, the statement will be more revealing of the author than the information intended by him. This applies to matters of judgment. According to Wittgenstein's ruler: 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. The less you trust the ruler's reliability, the more information you are getting about the ruler and the less about the table. A practical example of Wittgenstein's ruler is: The information from an anonymous reader on Amazon.com is all about the person, while that of a qualified person, is going to be all about the book.
- 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.