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Nicholas Nassim Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. Random House, 2005 (first published in 2001). Excerpts here for educational purposes only and constitutes fair use. This book I'd rate +2: can't miss. Please buy!

(Page 36. Taleb is fond of saying "picking up nickels in front of steamrollers.")
    Here I could not help seeing in the person of George Will the representative of so many nightmares in my career; my attempting to prevent someone from playing Russian roulette for $10 million and seeing journalist George Will humiliating me in public by saying that had the person listened to me it would have cost them a considerable fortune.

(Page 51-53)
    The journalist, my bete noire, entered this book with George Will dealing with random outcomes. In the next step I will show how my Monte Carlo toy taught me to favor distilled thinking, by which I mean the thinking based on information around us that is stripped of meaningless but diverting clutter. For the difference between noise and information, the topic of this book (noise has more randomness) has an analog: that between journalism and history. To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing, such as by saying: "today the market went up, but this information is not too relevant as it emanates mostly from noise." He would certainly lose his job by trivializing the value of the information in his hands. Not only is it difficult for the journalist to think more like a historian, but it is alas the historian who is becoming more like the journalist.

    For an idea, age is beauty (it is premature to discuss the mathematics of the point). The applicability of Solon's warning to a life in randomness, in contrast with the exact opposite message delivered by the prevailing media-soaked culture, reinforces my instinct to value distilled thought over newer thinking, regardless of its apparent sophistication --- another reason to accumulate the hoary volumes by my bedside (I confess that the only news items I currently read are the far more interesting upscale social gossip stories found in Tatler, Paris Match and Vanity Fair --- in addition to The Economics). Aside from the decorum of ancient thought as opposed to the coarseness of fresh ink, I spent some time phrasing the idea in the mathematics of evolutionary arguments and conditional probability. For an idea to have survived so long across so many cycles is indicative of its relative fitness. Noise, at least some noise, was filtered out. Mathematically, progress means that some new information is better than past information, not that the average of new information will supplant past information, which means that it is optimal for someone, when in doubt, to systematically reject the new idea, information, or method. Clearly and shockingly, always. Why?

    The argument in favor of "new things" and even more "new new things" goes as follows: look at the dramatic changes that have been brought about by the arrival of new technologies, such as the automobile, the airplane, the telephone, and the personal computer. Middlebrow inference (inference stripped of probabilistic thinking) would lead one to believe that all new technologies and inventions would likewise revolutionize our lives. But the answer is not so obvious: here we only see and count the winners, to the exclusion of the losers (it is like saying that actors and writers are rich, ignoring the fact that actors are largely waiters --- and lucky to be ones for the less comely writers usually serve French fries at McDonald's). Losers? The Saturday newspaper lists dozens of new patents of such items that can revolutionize our lives. People tend to infer that because some inventions have revolutionized our lives that inventions are good to endorse and we should favor the new over the old. I hold the opposite view. The opportunity cost of missing a "new new thing" like the airplane and the automobile is miniscule compared to the toxicity of all the garbage one has to go through to get to these jewels (assuming these have brought some improvement to our lives, which I frequently doubt).

    Now the exact same argument applies to information. The problem with information is not that it is diverting and generally useless, but that it is toxic. We will examine the dubious value of the highly frequent news with a more technical discussion of signal filtering and observation frequency further down. I will say here that such respect for the time honored provides arguments to rule out any commerce with the babbling modern journalist and implies a minimal exposure to the media as a guiding principle for someone involved in decision-making under uncertainty. If there is anything better than noise in the mass of "urgent" news pounding us, it would be like a needle in a haystack. People do not realize that the media is paid to get your attention. For a journalist, silence rarely surpasses any word.

    On the rare occasions when I boarded the 6:42 train to New York I observed with amazement the hordes of depressed business commuters (who seemed to have preferred to be elsewhere) studiously buried in the Wall Street Journal, appraised of the minutiae of companies that, at the time of writing, are probably out of business. Indeed it is difficult to ascertain whether they seem depressed because they are reading the newspaper, or if depressive people tend to read the newspaper, or if people who are living outside their genetic habitat both read the newspaper and look sleepy and depressed. But while early on in my career such focus on noise would have offended me intellectually, as I would have deemed such information as too statistically insignificant for the derivation of any meaningful conclusion, I currently look at it with delight. I am happy to see such mass-scale idiotic decision-making, prone to overreaction in their post-perusal investment orders --- in other words I currently see in the fact that people read such material an insurance for my continuing in the entertaining business of option trading against fools of randomness.

(Page 16)
There is another reason Nero is not as rich as others in his situation. His skepticism does not allow him to invest any of his money outside of treasury bonds. He therefore missed out on the great bull market. The reason he offered is that it could have turned out to be a bear market and a trap. The difference with people around him who were enriched by the stock-market was that he was cash-flow rich, but that his assets did not inflate at all along with the rest of the world. He contrasted 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, thus depending on the randomness of the market's election of the winner. The difference with his friends of the investing variety was that he did not depend on the bull market, and, accordingly, would not have to worry about the bear market at all. His net worth was not a function of the investment of his savings---he did not want to depend on his investments, but on his cash earnings, for his enrichment. He took not an inch of risk with his savings, which he invested in the safest possible vehicles.

 (Page 24)
Arguably, on average, a dentist is considerably richer than the rock musician who is driven in a pink Bentley, 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.

(Page 28-29)
Reality is far more vicious than a Russian Roulette.

First, it delivers the fatal bullet rather infrequently, like a roulette that would have hundreds, even thousand of holes instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. The point is dubbed in this book the the black swan problem...

Second, unlike a well defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. Very rarely is the generator visible to the naked eye. One is thus capable of unwittingly playing Russian roulette---and call it by some alternative "low risk" name. We see the wealth being generated, never the processor, a matter that makes people lose sight of their risks.

(Page 37)
Beware the confusion between quality and intelligibility. Part of conventional wisdom favors things that can be explained rather instantly and "in a nutshell"--in many circles it is considered law.

(Page 38-39)
Wall Street firms have recently created the strange position of a risk manager, someone who is supposed to monitor the institution and verify that it is not in the business of playing Russian roulette. ... But their job feel strange, for the following reason. As we said, the generator of reality is not observable. They are limited in their power to stop profitable traders from taking risks, given that they would, ex post be accused by the George Wills around of costing the shareholder some precious opportunity shekels. On the other hand, the occurrence of a blowup would cause them to be responsible for it. What to do in such circumstances?

Their focus becomes to play politics, cover themselves by issuing vaguely phrased internal memoranda that warn against risk-taking activities yet stops short from completely condemning it, lest they lose their job.

(Page 66)
We do not need to be rational and scientific when it comes to the details of our daily life---only in those that can harm us and threaten our survival. Mordern life seems to invite us to do the exact opposite; become extremely realistic and intellectual when it comes to such matters as religion and personal behavior, yet as irrational as possible when it comes to markets and matters ruled by randomness.

(Page 74)
At any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: at a given time in the market, the most profitable traders are likely to be those that are best fit to the latest cycle.

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