He is so contemptuous of the ignorance and foolishness of others that it does become a bit of a sport for him. The one thing you can say about Taleb is that he is not like Heraclitus when it comes to being obscure. He is always very clear, very comprehensive and very interesting.
We should now do some of the people he particularly hates. And in the first rank of those he hates are probably Journalists. Now, it is hard not to agree with him there.
Then there are business people, who he believes are mostly thick. One of the main contentions of his book is that successful people are often successful by pure chance. As such their abiding emotion should be gratitude. However, as he repeatedly points out, we all tend to believe our successes are proof of our own genius, and that it is only our failings that are the result of bad luck and chance.
This book gives a wonderful introduction to many of the fallacies we humans are all too prone to make. This book is also a great introduction to probability theory without too many numbers — to the theory without the calculus. Some of his verbal explanations of mistakes are remarkably clear — so clear they virtually jump from the page. One of the constant themes that I found particularly interesting was that we all suffer from hindsight bias.
This risk aversion prevented him from making as much money as the other traders on Wall Street who are often called "Masters of the Universe". The firms he has worked for generally allocate more money to traders with a different style, like John whom we will encounter soon. Nero's temperament is such that he does not mind losing small money. To the contrary, he wants to benefit from them.
When people ask him why he does not hold on to losers, he invariably answers that he was trained by "the most chicken of them all", the Chicago trader Stevo who taught him the business. This is not true; the real reason is his training in probability and his innate skepticism. There is another reason why Nero is not as rich as others in his situation.
His skepticism does not allow him to invest any of his own money outside of treasury bonds. He therefore missed out on the great bull market. The reason he offers is that it could have turned out to be a bear market and a trap. Nero harbors a deep suspicion that the stock market is some form of an investment scam and cannot bring himself to own a stock. The difference with people around him who were enriched by the stock market was that he was cash-flow rich, but his assets did not inflate at all along with the rest of the world his treasury bonds hardly changed in value.
He contrasts himself with one of those startup technology companies that were massively cash-flow negative, but for which the hordes developed some infatuation. This allowed the owners to become rich from their stock valuation, and thus dependent on the randomness of the market's election of the winner. The difference with his friends of the investing variety is that he did not depend on the bull market, and, accordingly, does not have to worry about a bear market at all.
His net worth is not a function of the investment of his savings - he does not want to depend on his investments, but on his cash earnings, for his enrichment. He takes not an inch of risk with his savings, which he invests in the safest possible vehicles. Treasury bonds are safe; they are issued by the United States Government, and governments can hardly go bankrupt since they can freely print their own currency to pay back their obligation.
His personal portfolio contains several million dollars in medium maturity Treasury Bonds, enough to eliminate any worry about the future. Trading forces someone to think hard; those who merely work hard generally lose their focus and intellectual energy. In addition, they end up drowning in randomness; work ethics, Nero believes, draw people to focus on noise rather than the signal the difference we established in Table P.
This free time has allowed him to carry on a variety of personal interests. As Nero reads voraciously and spends considerable time in the gym and museums, he cannot have a lawyer's or a doctor's schedule. Nero found the time to go back to the statistics department where he started his doctoral studies and finished the "harder science" doctorate in statistics, by rewriting his thesis in more concise terms.
Nero now teaches, once a year, a half-semester seminar called History of Probabilistic Thinking in the mathematics department of New York University, a class of great originality that draws excellent graduate students. He has saved enough money to be able to maintain his lifestyle in the future and has contingency plans perhaps to retire into writing popular essays of the scientific-literary variety, with themes revolving around probability and indeterminism - but only if some event in the future causes the markets to shut down.
A penetrating observer might detect in Nero a measure of suspicious exuberance, an unnatural drive. For his life is not as crystalline as it may seem. Nero harbors a secret, one that will be discussed in time. John the High-Yield Trader Through most of the s, across the street from Nero's house stood John's - a much larger one. A brief professional conversation with him would have revealed that he presented the intellectual depth and sharpness of mind of an aerobics instructor though not the-physique.
A purblind man could have seen that John had been doing markedly better than Nero or, at least, felt compelled to show it. He parked two top- of-the-line German cars in his driveway his and hers , in addition to two convertibles one of which was a collectible Ferrari , while Nero had been driving the same VW cabriolet for almost a decade - and still does.
The wives of John and Nero were acquaintances, of the health-club type of acquaintance, but Nero's wife felt extremely uncomfortable in the company of John's. She felt that the lady was not merely trying to impress her, but was treating her like someone inferior. While Nero had become inured to the sight of traders getting rich and trying too hard to become sophisticated by turning into wine collectors and opera lovers , his wife had rarely encountered repressed new wealth - the type of people who have felt the sting of indigence at some point in their lives and want to get even by exhibiting their wares.
The only dark side of being a trader, Nero often says, is the sight of money being showered on unprepared people who are suddenly taught that Vivaldi's Four Seasons is "refined" music. But it was hard for his spouse to be exposed almost daily to the neighbor who kept boasting of the new decorator they just hired. John and his wife were not the least uncomfortable with the fact that their "library" came with the leather-bound books her readings at the health club was limited to People Magazine but her shelves included a selection of untouched books by dead American authors.
She also kept discussing unpronounceable exotic locations where they would repair during their vacations without so much as knowing the smallest thing about the place - she would have been hard put to explain in which continent the Seychelles Islands were located. Nero's wife is all too human; although she kept telling herself that she did not want to be in the shoes of John's wife, she felt as if she had been somewhat swamped in the competition of life.
Somehow words and reason became ineffectual in front of an oversized diamond, a monstrous house, and a sports car collection. He was quite contemptuous of John, who represented about everything he is not and does not want to be - but there was the social pressure that was starting to weigh in on him.
In addition, he too would like to have sampled such excessive wealth. Intellectual contempt does not control personal envy. That house across the street kept getting bigger, with addition after addition - and Nero's discomfort kept apace. While Nero had succeeded beyond his wildest dreams, both personally and intellec- tually, he was starting to consider himself as having missed a chance somewhere. In the pecking order of Wall Street, the arrival of such types as John had caused him no longer to be a significant trader - but while he used to not care about this, John and his house and his cars had started to gnaw away at him.
All would have been well if Nero had not had that stupid large house across the street judging him with a superficial standard every morning. Was it the genetic pecking order at play, with John's house size making him a beta male? Worse even, John was about five years his junior, and, despite a shorter career, was making at least ten times his income.
When they used to run into each other Nero had a clear feeling that John tried to put him down - with barely detectable but no less potent signs of condescension. Some days John ignored him completely. Had John been a remote character, one Nero could only read about in the papers, the situation would have been different. But there John was in flesh and bones and he was his neighbor. The mistake Nero made was to start talking to him, as the rule of pecking order immediately emerged.
Nero tried to soothe his discomfort by recalling the behavior of Swann, the character in Proust's In Search of Time Lost, a refined art dealer and man of leisure who was at ease with such men as his personal friend the then Prince of Wales, but acted like he had to prove something in the presence of the middle class.
It was much easier for Swann to mix with the aristocratic and well established set of Guermantes than it was with the social-climbing one of the Verdurins, no doubt because he was far more confident in their presence. Likewise Nero can exact some form of respect from prestigious and prominent people.
A very famous billionaire speculator calls him regularly to ask him his opinion on the valuation of some derivative securities. But there he was obsessively trying to gain the respect of some overpaid hick with a cheap New Jersey "Noo-Joyzy" accent. Had I been in Nero's shoes I would have paraded some of my scorn to John with the use of body language, but again, Nero is a nice person. Clearly, John was not as well educated, well bred, physically fit, or perceived as being as intelligent as Nero - but that was not all; he was not even as street-smart as him!
Nero has met true street-smart people in the pits of Chicago who exhibit a rapidity of thinking that he could not detect in John. Nero was convinced that the man was a confident shallow-thinker who had done well because he never made an allowance for his vulnerability. But Nero could not, at times, repress his envy - he wondered whether it was an objective evaluation of John, or if it was his feelings of being slighted that led him to such an assessment of John.
Perhaps it was Nero who was not quite the best trader. Maybe if he had pushed himself harder or had sought the right opportunity - instead of "thinking", writing articles and reading complicated papers. Perhaps he should have been involved in the high-yield business, where he would have shined among those shallow-thinkers like John. So Nero tried to soothe his jealousy by investigating the rules of pecking order. Economics, schmeconomics, it is all pecking order, he thought.
No such analysis could prevent him from assessing his condition in an absolute rather than a relative way. With John, Nero felt that, for all his intellectual training, he was just another one of those who would prefer to make less money provided others made even less. Nero thought that there was at least one piece of evidence to support the idea of John being merely lucky - in other words Nero, after all, might not need to move away from his neighbor's starter palazzo.
There was hope that John would meet his undoing. For John seemed unaware of one large hidden risk he was taking, the risk of blow up, a risk he could not see because he had too short an experience of the market but also because he was not thoughtful enough to study history.
This business of junk bonds depends on some knowledge of the "odds", a calculation of the probability of the rare or random events. What do such fools know about odds? These traders use "quantitative tools" that give them the odds - and Nero disagrees with the methods used. This high-yield market resembles a nap on a railway track. One afternoon, the surprise train would run you over. You make money every month for a long time, then lose a multiple of your cumulative performance in a few hours.
He has seen it with option sellers in , , , and One day they are taken off the exchange floors, accompanied by oversized security men, and nobody ever sees them again. The big house is simply a loan; John might end up as a luxury car salesman somewhere in New Jersey, selling to the new newly rich who no doubt would feel comfortable in his presence.
Nero cannot blow up. His less oversized abode, with its 4, books, is his own. No market event can take it away from him. Every one of his losses is limited. His trader's dignity will never, never, be threatened. John, for his part, thought of Nero as a loser, and a snobbish over- educated loser at that.
Nero was involved in a mature business. He believed that he was way over the hill. One morning while leaving to go to work he saw John in his front yard unusually smoking a cigarette.
He was not wearing a business suit. He looked humble; his customary swagger was gone. Nero immediately knew that John had been fired. What he did not suspect was that John also lost almost everything he had.
We will see more details of John's losses in Chapter 5. Nero felt ashamed of his feelings of schadenfreude, the joy humans can experience upon their rivals' misfortune. But he could not repress it. But in this case, Nero's merriment did not come from the fact that John went back to his place in life, so much as it was from the fact that Nero's methods, beliefs, and track-record had suddenly gained in credibility.
Nero would be able to raise public money on his track record precisely because such a thing could not possibly happen to him. A repetition of such an event would pay off massively for him. Part of Nero's elation also came from the fact that he felt proud of his sticking to his strategy for so long, in spite of the pressure to be the alpha male. It was also because he would no longer question his trading style when others were getting rich because they misunderstood the structure of randomness and market cycles.
Sometimes - but not always. We will see how, at any point in time, a large section of businessmen with outstanding track records will be no better than randomly thrown darts.
More curiously, and owing to a peculiar bias, cases will abound of the least-skilled businessmen being the richest. However, they will fail to make an allowance for the role of luck in their performance. Lucky fools do not bear the slightest suspicion that they may be lucky fools - by definition, they do not know that they belong to such category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin or some similar substance that they will even fool themselves about their ability to outperform markets our hormonal system does not know whether our successes depend on randomness.
One can notice it in their posture; a profitable trader will walk upright, dominant "style - and will tend to talk more than a losing trader. Scientists found out that serotonin, a neurotransmitter, seems to command a large share of our human behavior. It sets a positive feedback, the virtuous circle, but, owing to an external kick from randomness, can start a reverse motion and cause a vicious circle.
Likewise, an increase in personal performance regardless of whether it is caused deterministically or by the agency of lady Fortuna induces a rise of serotonin in the subject, itself causing an increase of what is commonly called leadership ability.
One is "on a roll". Some imperceptible changes in deportment, like an ability to express oneself with serenity and confidence, makes the subject look credible - as if he truly deserved the shekels. Randomness will be ruled out as a possible factor in the performance, until it rears its head once again and delivers the kick that will induce the vicious cycle. People have often had the bad taste of asking me in a social setting if my day in trading was profitable.
If my father were there, he would usually stop them by saying "never ask a man if he is from Sparta: if he were, he would have let you know such an important fact - and if he were not, you could hurt his feelings".
Likewise, never ask a trader if he is profitable; you can easily see it in his gesture and gait. People in the profession can easily tell if traders are making or losing money; head traders are quick at identifying an employee who is faring poorly.
But the way they walk, the way they hold the telephone, and the hesitation in their behavior, will not fail to reveal their true disposition. On the morning after John had been fired, he certainly lost much of his serotonin - unless it was another substance that researchers will discover in another decade. One cab driver in Chicago explained to me that he could tell if traders he picked up near the Chicago Board of Trade, a futures exchange, were doing well.
I found it interesting and mysterious that he could detect it so rapidly. I later got some plausible explanation from evolutionary psychology, which claims that such physical manifesta- tions of one's performance in life, just like an animal's dominant condition, can be used for signaling: it makes the winners seem easily visible, which is efficient in mate selection.
Recall that Nero can considered prosperous but not "very rich" by his day's standards. However, according to some strange accounting measure we will see in the next chapter, he is extremely rich on the average of lives he could have led - he takes so little risk in his trading career that there could have been very few disastrous outcomes.
The fact that he did not experience John's success was the reason he did not suffer his downfall. He would be therefore wealthy according to this unusual and probabilistic method of accounting for wealth. Recall that Nero protects himself from the rare event. Had Nero had to relive his professional life a few million times, very few sample paths would be marred by bad luck - but, owing to his conservatism, very few as well would be affected by extreme good luck.
That is, his life in stability would be similar to that of an ecclesiastic clock repairman. Naturally, we are discussing only his professional life, excluding his sometimes volatile private one. Arguably, in expectation, a dentist is considerably richer than the rock musician who is driven in a pink Rolls Royce, the speculator who bids up the price of impressionist paintings, or the entrepreneur who collects private jets.
For 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. We will examine the point later from the vantage point of the survivorship bias, but here, in Part I, we will look at it with respect to "resistance to randomness. Consider two neighbors, John Doe A, a janitor who won the New Jersey lottery and moved to a wealthy neighborhood, compared to John Doe B, his next-door neighbor of more modest condition who has been drilling teeth eight hours a day over the past 35 years.
Clearly one can say that, thanks to the dullness of his career, if John Doe B had to reiive his life a few thousand times since graduation from dental school, the range of possible outcomes would be rather narrow assuming he is properly insured. At the best, he would end up drilling the rich teeth of the New York Park Avenue residents, while the worst would show him drilling those of some semi-deserted town full of trailers in the Catskills. As to John Doe A, if he had to relive his life a million times, almost all of them would see him performing janitorial activities and spending endless dollars on fruitless lottery tickets , and one in a million would see him winning the New Jersey lottery.
The idea of taking into account both the observed and unobserved possible outcomes sounds like lunacy. I have discussed the point with many people who platitudi- nously accuse me of confusing myth and reality. Myths, particularly well-aged ones, as we saw with Solon's warning, can be far more potent and provide us with more experience than plain reality. How journalists are bred to not understand random series of events. Alternative History start with the platitude that one cannot judge a performance in any I given field war, politics, medicine, investments.
Such substitute courses of events are called alternative histories. Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail those who succeed attribute their success to the quality of their decision.
And like many platitudes, this one, while being too obvious, is not easy to carry out in practice. Each realization would count as one history, for a total of six possible histories of equal probabilities.
We do not guarantee that these techniques will work for you. Some of the techniques listed in Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets may require a sound knowledge of Hypnosis, users are advised to either leave those sections or must have a basic understanding of the subject before practicing them.
DMCA and Copyright : The book is not hosted on our servers, to remove the file please contact the source url. Advanced embedding details, examples, and help! Publication date Topics Investments. I was told it was supposed to be a classic, it was but not in the way intended. If you want to listen to someone who thinks he's always right and everyone else is wrong, this is it. According to Taleb: 'Option sellers, it is said, eat like chickens and go to the bathroom like elephants', which is to say, option sellers may earn a steady small income from selling the options, but when a disaster happens they lose a fortune.
In , Random House published a softback edition with more changes. Further editions have been published by Penguin softback, May and Random House hardback, October A Today. Retrieved 28 August
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