Fooled by Randomness by Nassim Taleb

1. Humans have a really hard time intuitively understanding randomness.
2. People who are really successful are usually the beneficiaries of variance & luck, rather than skill.
3. We tend to seek patterns where there are none, let emotions influence our thinking and are affected by other cognitive biases.

• Randomness, chance, and luck influence our lives and our work more than we realize. Because of hindsight bias and survivorship bias, in particular, we tend to forget the many who fail, remember the few who succeed, and then create reasons and patterns for their success even though it was largely random. Mild success can be explainable by skills and hard work, but wild success is usually attributable to variance and luck.
• There are professions with low randomness (e.g. dentist) that can only be successful with skill; and professions with high randomness (e.g. day trader) that could see someone unskilled get successful purely based on luck and variance. “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.”
• “Thus, if a twenty-five-year-old played Russian roulette, say, once a year, there would be a very slim possibility of his surviving until his fiftieth birthday— but, if there are enough players, say thousands of twenty-five-year-old players, we can expect to see a handful of (extremely rich) survivors (and a very large cemetery).”
• “The reader can see my unusual notion of alternative accounting: $ 10 million earned through Russian roulette does not have the same value as $ 10 million earned through the diligent and artful practice of dentistry. They are the same, can buy the same goods, except that one’s dependence on randomness is greater than the other.”

💡 People often mistake luck and variance for skill, i.e. survivor-ship bias Successful performers will emerge even among a group of very poor performers, provided that there’s enough of them. External observers will easily misconstrue results for skills.

• Nature and life are non-linear. We can build a sandcastle with a million grains of sand, yet adding another single grain of sand would bring the whole thing down. One small change can have a disproportionate effect on results. Thus, grade yourself on process rather than outcome. [James Clear talks about this re: heating up an ice cube. The temperature is changing but nothing happens until 32 degrees]
• The human mind is not evolved to handle sophisticated statistics and randomness. We depend on heuristics, e.g. availability heuristics where we value things that are easily visible more. Many references to Kahneman and cognitive biases (hindsight, survivorship, narrative, feeling losses more than wins, hot hand fallacy, tendency overvalue the things that trigger an emotional response and undervalue the things that aren't as emotional.)

“Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny. If they were made for us to understand things, then we would have a machine in it that would run the past history as in a VCR, with a correct chronology, and it would slow us down so much that we would have trouble operating.”

• Instead we use heuristics, which leads us to attribute the wrong thing as a cause. e.g. our success is caused by our skills, but failure is bad luck
• “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.”
• We are driven by emotion which helps us to make a quick decision, even though it is sub-optimal. Emotion influences our rational thinking, not the other way around.

We fancy ourselves rational beings but the truth is we are inescapably emotional.

• Overfitting is when we try to find pattern, rule or formula to fit historical data too much that it becomes less able to predict future events.
• Consider for both chance and magnitude of an event. e.g. 99.9% chance of winning $1 with 0.1% chance of losing $10,000 looks good on paper, but the expected outcome is a loss of ~$9.
• “It's more random than we think, not it is all random.” Chance favors preparedness, but it is not caused by preparedness (same for hard work, skills, etc.). Necessary, but not sufficient.
• There is nothing wrong with losing. The problem is losing more than you plan to lose. You need clear rules that limit your downside.
• Much of what is randomness is timing. The best strategy for a given time period is often not the best strategy overall. In any given cycle, certain places will be dangerous, certain trading strategies will be fruitful, etc.
• Science is speculation. Scientists are simply creating well-formed and well-educated conjectures about the world. But they are still conjectures that can be proved incorrect by one random event. There are only two types of ideas. Those that have been proven wrong and those which have yet to be proved wrong. (Feynman said something similar.)
• Science is great, scientists are not. Scientists tend to marry their own positions. Hence the saying science advances one funeral at a time.
• Emotions are “lubricants of reason.” We actually need to feel things to make decisions. Emotions give us energy and they are actually critical to life in the day-to-day world. -
• See Buridan’s Donkey.
• Even if you know about randomness and cognitive biases, you are still just as likely to fall victim to them.How to overcome these biases? We need tricks. We are just animals and we need to re-structure our environment to control our emotions in a smart way.
• Comments on inverse relationship between the work actually being done in a company and the height of the title. Despises overpaid CEOs, “empty suits”.
• Cites that CEO vs. janitor pay used to be maybe 10-20x. Now you can find 1,000x.
• Distinguishes between CEOs and entrepreneurs. Entrepreneurs bear great risk that their business will end up in the vast probabilistic graveyard of failures, which he thinks makes them more deserving of great rewards.

His magnus opus statement: “We favor the visible, the embedded, the personal, the narrated, and the tangible. We scorn the abstract. Everything good — aesthetics, ethics — and wrong — fooled by randomness — with us seems to flow from it.”

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