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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto Book 1) (English Edition) eBook Kindle
Descrição do produto
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Croesus, King of Lydia, was considered the richest man of his time. To this day Romance languages use the expression “rich as Croesus” to describe a person of excessive wealth. He was said to be visited by Solon, the Greek legislator known for his dignity, reserve, upright morals, humility, frugality, wisdom, intelligence, and courage. Solon did not display the smallest surprise at the wealth and splendor surrounding his host, nor the tiniest admiration for their owner. Croesus was so irked by the manifest lack of impression on the part of this illustrious visitor that he attempted to extract from him some acknowledgment. He asked him if he had known a happier man than him. Solon cited the life of a man who led a noble existence and died while in battle. Prodded for more, he gave similar examples of heroic but terminated lives, until Croesus, irate, asked him point-blank if he was not to be considered the happiest man of all. Solon answered: “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.”
The modern equivalent has been no less eloquently voiced by the baseball coach Yogi Berra, who seems to have translated Solon’s outburst from the pure Attic Greek into no less pure Brooklyn English with “it ain’t over until it’s over,” or, in a less dignified manner, with “it ain’t over until the fat lady sings.” In addition, aside from his use of the vernacular, the Yogi Berra quote presents an advantage of being true, while the meeting between Croesus and Solon was one of those historical facts that benefited from the imagination of the chroniclers, as it was chronologically impossible for the two men to have been in the same location.
Part I is concerned with the degree to which a situation may yet, in the course of time, suffer change. For we can be tricked by situations involving mostly the activities of the goddess Fortuna—Jupiter’s firstborn daughter. Solon was wise enough to get the following point; 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. Solon also had the intuition of a problem that has obsessed science for the past three centuries. It is called the problem of induction. I call it in this book the black swan or the rare event. Solon even understood another linked problem, which I call the skewness issue; it does not matter how frequently something succeeds if failure is too costly to bear.
Yet the story of Croesus has another twist. Having lost a battle to the redoubtable Persian king Cyrus, he was about to be burned alive when he called Solon’s name and shouted (something like) “Solon, you were right” (again this is legend). Cyrus asked about the nature of such unusual invocations, and he told him about Solon’s warning. This impressed Cyrus so much that he decided to spare Croesus’ life, as he reflected on the possibilities as far as his own fate was concerned. People were thoughtful at that time.
If You’re So Rich, Why Aren’t You So Smart?
An illustration of the effect of randomness on social pecking order and jealousy, through two characters of opposite attitudes. On the concealed rare event. How things in modern life may change rather rapidly, except, perhaps, in dentistry.
Hit by Lightning
Nero Tulip became obsessed with trading after witnessing a strange scene one spring day as he was visiting the Chicago Mercantile Exchange. A red convertible Porsche, driven at several times the city speed limit, abruptly stopped in front of the entrance, its tires emitting the sound of pigs being slaughtered. A visibly demented athletic man in his thirties, his face flushed red, emerged and ran up the steps as if he were chased by a tiger. He left the car double-parked, its engine running, provoking an angry fanfare of horns. After a long minute, a bored young man clad in a yellow jacket (yellow was the color reserved for clerks) came down the steps, visibly untroubled by the traffic commotion. He drove the car into the underground parking garage—perfunctorily, as if it were his daily chore.
That day Nero Tulip was hit with what the French call a coup de foudre, a sudden intense (and obsessive) infatuation that strikes like lightning. “This is for me!” he screamed enthusiastically—he could not help comparing the life of a trader to the alternative lives that could present themselves to him. Academia conjured up the image of a silent university office with rude secretaries; business, the image of a quiet office staffed with slow thinkers and semislow thinkers who express themselves in full sentences.
Unlike a coup de foudre, the infatuation triggered by the Chicago scene has not left him more than a decade and a half after the incident. For Nero swears that no other lawful profession in our times could be as devoid of boredom as that of the trader. Furthermore, although he has not yet practiced the profession of high-sea piracy, he is now convinced that even that occupation would present more dull moments than that of the trader.
Nero could best be described as someone who randomly (and abruptly) swings between the deportment and speech manners of a church historian and the verbally abusive intensity of a Chicago pit trader. He can commit hundreds of millions of dollars in a transaction without a blink or a shadow of a second thought, yet agonize between two appetizers on the menu, changing his mind back and forth and wearing out the most patient of waiters.
Nero holds an undergraduate degree in ancient literature and mathematics from Cambridge University. He enrolled in a Ph.D. program in statistics at the University of Chicago but, after completing the prerequisite coursework, as well as the bulk of his doctoral research, he switched to the philosophy department. He called the switch “a moment of temporary sanity,” adding to the consternation of his thesis director, who warned him against philosophers and predicted his return back to the fold. He finished writing his thesis in philosophy. But not the Derrida continental style of incomprehensible philosophy (that is, incomprehensible to anyone outside of their ranks, like myself). It was quite the opposite; his thesis was on the methodology of statistical inference in its application to the social sciences. In fact, his thesis was indistinguishable from a thesis in mathematical statistics—it was just a bit more thoughtful (and twice as long).
It is often said that philosophy cannot feed its man—but that was not the reason Nero left. He left because philosophy cannot entertain its man. At first, it started looking futile; he recalled his statistics thesis director’s warnings. Then, suddenly, it started to look like work. As he became tired of writing papers on some arcane details of his earlier papers, he gave up the academy. The academic debates bored him to tears, particularly when minute points (invisible to the noninitiated) were at stake. Action was what Nero required. The problem, however, was that he selected the academy in the first place in order to kill what he detected was the flatness and tempered submission of employment life.
After witnessing the scene of the trader chased by a tiger, Nero found a trainee spot on the Chicago Mercantile Exchange, the large exchange where traders transact by shouting and gesticulating frenetically. There he worked for a prestigious (but eccentric) local, who trained him in the Chicago style, in return for Nero solving his mathematical equations. The energy in the air proved motivating to Nero. He rapidly graduated to the rank of self-employed trader. Then, when he got tired of standing on his feet in the crowd, and straining his vocal cords, he decided to seek employment “upstairs,” that is, trading from a desk. He moved to the New York area and took a position with an investment house.
Nero specialized in quantitative financial products, in which he had an early moment of glory, became famous and in demand. Many investment houses in New York and London flashed huge guaranteed bonuses at him. Nero spent a couple of years shuttling between the two cities, attending important “meetings” and wearing expensive suits. But soon Nero went into hiding; he rapidly pulled back to anonymity—the Wall Street stardom track did not quite fit his temperament. To stay a “hot trader” requires some organizational ambitions and a power hunger that he feels lucky not to possess. He was only in it for the fun—and his idea of fun does not include administrative and managerial work. He is susceptible to conference room boredom and is incapable of talking to businessmen, particularly the run-of-the-mill variety. Nero is allergic to the vocabulary of business talk, not just on plain aesthetic grounds. Phrases like “game plan,” “bottom line,” “how to get there from here,” “we provide our clients with solutions,” “our mission,” and other hackneyed expressions that dominate meetings lack both the precision and the coloration that he prefers to hear. Whether people populate silence with hollow sentences, or if such meetings present any true merit, he does not know; at any rate he did not want to be part of it. Indeed Nero’s extensive social life includes almost no businesspeople. But unlike me (I can be extremely humiliating when someone rubs me the wrong way with inelegant pompousness), Nero handles himself with gentle aloofness in these circumstances.
So, Nero switched careers to what is called proprietary trading. Traders are set up as independent entities, internal funds with their own allocation of capital. They are left alone to do as they please, provided of course that their results satisfy the executives. The name proprietary comes from the fact that they trade the company’s own capital. At the end of the year they receive between 7% and 12% of the profits generated. The proprietary trader has all the benefits of self-employment, and none of the burdens of running the mundane details of his own business. He can work any hours he likes, travel at a whim, and engage in all manner of personal pursuits. It is paradise for an intellectual like Nero who dislikes manual work and values unscheduled meditation. He has been doing that for the past ten years, in the employment of two different trading firms.
A word on Nero’s methods. He is as conservative a trader as one can be in such a business. In the past he has had good years and less than good years—but virtually no truly “bad” years. Over these years he has slowly built for himself a stable nest egg, thanks to an income ranging between $300,000 and (at the peak) $2.5 million. On average, he manages to accumulate $500,000 a year in after-tax money (from an average income of about $1 million); this goes straight into his savings account. In 1993, he had a bad year and was made to feel uncomfortable in his company. Other traders made out much better, so the capital at his disposal was severely reduced, and he was made to feel undesirable at the institution. He then went to get an identical job, down to an identically designed workspace, but in a different firm that was friendlier. In the fall of 1994 the traders who had been competing for the great performance award blew up in unison during the worldwide bond market crash that resulted from the random tightening by the Federal Reserve Bank of the United States. They are all currently out of the market, performing a variety of tasks. This business has a high mortality rate.
Why isn’t Nero more affluent? Because of his trading style—or perhaps his personality. His risk aversion is extreme. Nero’s objective is not to maximize his profits, so much as it is to avoid having this entertaining machine called trading taken away from him. Blowing up would mean returning to the tedium of the university or the nontrading life. Every time his risks increase, he conjures up the image of the quiet hallway at the university, the long mornings at his desk spent in revising a paper, kept awake by bad coffee. No, he does not want to have to face the solemn university library where he was bored to tears. “I am shooting for longevity,” he is wont to say.
Nero has seen many traders blow up, and does not want to get into that situation. Blow up in the lingo has a precise meaning; it does not just mean to lose money; it means to lose more money than one ever expected, to the point of being thrown out of the business (the equivalent of a doctor losing his license to practice or a lawyer being disbarred). Nero rapidly exits trades after a predetermined loss. He never sells “naked options” (a strategy that would leave him exposed to large possible losses). He never puts himself in a situation where he can lose more than, say, $1 million—regardless of the probability of such an event. That amount has always been variable; it depends on his accumulated profits for the year. 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 from Nero, like John, whom we will encounter soon.
Nero’s temperament is such that he does not mind losing small change. “I love taking small losses,” he says. “I just need my winners to be large.” In no circumstances does he want to be exposed to those rare events, like panics and sudden crashes, that wipe a trader out in a flash. 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. --Este texto se refere à uma edição alternativa kindle_edition
Everyone wants to succeed in life. But what causes some of us to be more successful than others? Is it really down to skill and strategy; or something altogether more unpredictable? This book is the word-of-mouth sensation that will change the way you think about business and the world. It is all about luck: more precisely, how we perceive luck in our personal and professional experiences. Nowhere is this more obvious than in the markets we hear an entrepreneur has vision or a trader is talented, but all too often their performance is down to chance rather than skill. It is only because we fail to understand probability that we continue to believe events are non-random, finding reasons where none exist. This irreverent bestseller has shattered the illusions of people around the world by teaching them how to recognize randomness. Now it can do the same for you. --Este texto se refere à uma edição alternativa kindle_edition
Detalhes do produto
- ASIN : B001FA0W5W
- Editora : Random House; Updated edição (6 outubro 2008)
- Idioma : Inglês
- Tamanho do arquivo : 1756 KB
- Leitura de texto : Habilitado
- Configuração de fonte : Habilitado
- X-Ray : Habilitado
- Dicas de vocabulário : Habilitado
- Número de páginas : 317 páginas
- Ranking dos mais vendidos: Nº 21,724 em Loja Kindle (Conheça o Top 100 na categoria Loja Kindle)
- Avaliações dos clientes:
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When compared to Antifragile, Taleb’s third book, one can see the same ideas in a somewhat raw and less polished version. Fooled By Randomness is much more focused on economics and finance than Antifragile’s, which, in a way, turns it more palpable but provides a less “unified” theory on randomness, its impacts on daily life and how to survive and thrive under it. However, this book benefits from delving deeper than Antifragile’s in the topics that it discusses, which contributes to a better understanding of them. Additionally, by staying closer to the “source” of the discussion, Fooled by Randomness is more focused and has fewer ups and downs, in my view.
It’s difficult for me to rank this book in Taleb’s corpus. My only certainty is that I’m much less certain about what I truly know and that my list of books to read and authors to explore has grown considerably.
Principais avaliações de outros países
In another instance, Nassim criticises an interviewer for pointing out to an expert that his ideas if followed would have caused a loss. Nassim doesn't explain why this objection is invalid.
On the plus side, there are some interesting ideas here:
- We're good at understanding even bets, where there's a 50% chance in your favor, not skewed bets, where the chance is more on one side.
- A 20% chance of making 1 crore is not the same as a 10% chance of making 2 crores, though both have the same expected value of 20 lac. Expected value is not the only factor in analysing bets.
- The human mind is poor at understanding probabilistic thinking, because it's counter-intuitive.
- When Nassim was asked on one instance whether he thinks the market will go up or down, he said that it's likely to go up but he bet that it went down. Why? Because if it goes up, it goes up only a little, but if it goes down, it's expected to go down a lot, so the expected value is negative.
- The more often you check your portfolio, the more likely you'll find dips, which will make you feel bad. A negative event isn't counter-balanced by a positive event — it requires roughly two positive events to counter-balance it. So Nassim, aware of his own irrational mind, checks his portfolio rarely. And so should we.
- Randomness plays a big part in outcomes, and most people take credit for good luck but blame bad luck on things beyond their control. Plus there's so much ego involved.
- A family earning half a million dollars a year and staying in fashionable Park Avenue in New York, where they're the poorest in their apartment building, will be happier if they move to a middle-class area, where people will look up to, not down at, them.
- A person who repeatedly takes bets and is proven right for a decade can still be wrong, and gives us the example of a trader who was right for two decades, and then went bankrupt. If you bet that rare things won't happen, it may take a decade or two for luck to catch up with you.
- Everyone assumes rare things won't happen, while Nassim bets that they will. Nassim loses money every day for years, and finally earns a lot to make up for all the losses, though it's emotionally draining to see money go out every day. Nassim knows his worst-case scenario, while others don't.
- Wall St banks have bad incentives and will never behave properly. Bad behavior is ignored as long as it produces a profit.
- "Stochastic" means a process consisting of a sequence of random events. Not one event.
- Monte Carlo techniques are computer programs that simulate thousands of scenarios, all random, and give you a conclusion like: 20% of the time, you go bankrupt. 30% of the time, you make a million dollars. The rest of the time, you earn a modest return of 10-20% on your investment. This is a much better way of analysing things than a single number, like: what is the probability that this investment technique produces a 15% profit?
- Monte Carlo techniques are the only option when the equations to model things are too complex. Monte Carlo is brute force, and works.
- Survivorship bias means that the average fund manager has a high return because the rest are out of business. If you count them, the average return is low.
- Nassim is an intellectual and prefers thinking to working.
Avoid this empty piece of fluff and go read "thinking fast and slow".
This was my first Nassim Taleb book I've read, so I can't compare to his two main books Anti-fragile & The Black Swan, although I will be reading those next.
Is it only for numberphiles? No, it probably is too basic for the ‘initiated’; even though they still might enjoy the examples and life stories.
Everything is well explained in a simple manner; probably also because Taleb is not as brilliant as he thinks.
The outcome is a practical theory, exciting, and filled with anecdotes of an unusual character.
Lets put it this way, this book makes a dry theory entertaining and accessible to everyone. That should be applauded.
"The Black Swan" taught me about something I sort of intuitively knew about, but couldn't quite articulate, and doubted myself when I tried: the importance of very unlikely, but very costly risks ("'black swan' events"). But this earlier work seems a better place to start. While Taleb writes well, it's not an easy read. He keeps saying that people misrepresent him for a reason: it's very easy to do. The digested NN Taleb is that success is *partly* down to luck (and the "*partly*" gets omitted by a lot of people). This isn't the place to summarise why he thinks that. Read the damn book.
Coda: this book covered a lot of material that was in my undergraduate degree and quite a lot that should have been. If you're an undergraduate in *any* of the sciences, this book will at the least, do you no harm, and may come in useful at some unexpected moment. If you've got a degree, you should have read this book, so if you haven't, make good that omission now. If you have the sense not to have a degree, well, this book is for you too.