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The Almighty Buck Books Media Book Reviews Science

Fooled by Randomness 291

Posted by timothy from the likely-story dept.
Max Tardiveau writes "I just finished Nassim Nicholas Taleb's Fooled by Randomness. It is an enjoyable book, written engagingly by an interesting character -- the kind of book that makes you think twice about certain things (for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?) Although written all the way back in 2001, this book is more relevant than ever, since one of its major topics is the impact of unpredictable events on markets, insurance, and our perception of life in general. In fact, Taleb makes a living from unforeseen events; these days, that seems like a rather cunning niche." Read on for the rest of his review of this book.
Fooled by Randomness
author Nassim Nicholas Taleb
pages 220
publisher Texere
rating 8
reviewer Max Tardiveau
ISBN 1587990717
summary Debunking fallacies of observation, Taleb reminds us of the pervasive ineffables that complicate life at every turn.

The main topic of the book is the fact that all humans are simply terrible at judging probabilities. Taleb is a securities trader, so a lot of the book revolves around financial probabilities, but his argument is mainstream and requires absolutely no knowledge of the markets. The book details examples of people wildly misjudging risks and probabilities in many contexts. Often that misestimation is understandable in advance of certain events, but harder to excuse after they've occurred; Taleb hits pretty hard on what he calls "data snoopers," his term for people who back-fit theories to existing data.

One of the most notorious examples is the Bible code (which has been thoroughly debunked), but Taleb argues that analysts who spend their time trying to find patterns in historical market data are no different: if you try long enough and hard enough, you will unavoidably find apparent regularities, which can be extremely compelling when seen in isolation. In context, though, they dissolve into nothing but meaningless statistical anomalies. Taleb rightfully compares these searches for meaning to the famous monkeys and typewriters parable.

Taleb's best example of poor probability intuition is probably the infamous survivor bias, which is our tendency to be disproportionately impressed by success. We almost always ignore the fact that, for one success story, there are many failures. But we seldom hear about the failures (just like we never hear about the many theories that didn't fit the data). So it's all a game of numbers: out of 10,000 traders, a few are statistically bound to be successful, even if they are nothing more than lucky idiots. The fact that they succeeded does not mean anything. It doesn't mean that they are bad traders, but it doesn't mean that they are good traders either, because on average somebody had to succeed.

One of Taleb's hot buttons is that people tend to be too confident in what they know. He argues convincingly that we should take everything, including science, with a grain of salt. Writing about Karl Popper, he points out that there are only two kinds of scientific theories: those that are demonstrably false, and those that are not yet demonstrably false. An irksome (but sadly true) observation, yet most people behave as if what they know is eternal truth. One could of course argue that Popper's observation is but another kind of truth, but I tend to put a lot more trust in people who question what they know than in people who don't.

Another of Taleb's peeves is the human tendency to over-attribute every random event (the old post hoc, ergo propter hoc). For instance, a commentator saying that "the Dow went down ten points today on concerns about Iraq" is talking nonsense: there is no way anyone can tie such a small market move to any particular reason. I found this specific point (which in retrospect is blindingly obvious) especially enlightening, as I am embarrassed to admit that, until now, I just accepted those market comments at face value.

Taleb also has some fun at the expense of economists and analysts, especially those whose predictions turned out wrong, but who claim that the theories were in fact right, and that the facts simply weren't supposed to be that way. This is what he calls denial of history, and is common among investors and gamblers (the two being of course close cousins).

The style of the book is informal and funny, and often meandering. We hop from one topic to the next, which occasionally may detract from the book's continuity, but overall the author's points come through loud and clear. Ironically for a man who advocates self-doubt, Taleb is starkly self-confident, though not in an irritating way.

Taleb is an intriguing, multi-cultural, iconoclastic character that has been around Wall Street for a while, and now runs his own small firm. Malcolm Gladwell (author of The Tipping Point, an absolute must-read for anyone who owns a brain) has written an excellent article that shows how Taleb's reasoning runs counter to just about every bit of conventional Wall Street wisdom. If you're interested in the markets, especially derivatives, and how Taleb trounces most of Wall Street's voodoo doctors, this moderately technical interview from 1996 is worth reading too.

Overall, a warmly recommended book.

You can purchase Fooled by Randomness from bn.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.
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Fooled by Randomness

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  • Dumb Luck (Score:3, Offtopic)

    by Anonymous Coward on Thursday February 20, 2003 @12:04PM (#5344048)
    (for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?)

    There are times where I feel like I should have died but I haven't. Falling off a ravine into a river, losing control of my car in a turn with traffic on the other side. Just dumb luck.

  • Fooled by Randomness (Score:5, Funny)

    by Anonymous Coward on Thursday February 20, 2003 @12:08PM (#5344088)
    cat /dev/random > top_secret_data

  • Good point! (Score:4, Funny)

    by Anonymous Coward on Thursday February 20, 2003 @12:09PM (#5344093)
    (for instance, the fact that you're not dead: is that really because you are so darn good, or does dumb luck play a part?)

    Good point. I'd say I'm that good and

    (ughhhh)

    NO CARRIER

  • Conservative/Liberal take on it (Score:5, Interesting)

    by SirSlud ( 67381 ) on Thursday February 20, 2003 @12:10PM (#5344098) Homepage
    > (for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?)

    Thats called the Just World mentality. Its not a Just World .. unfair things happen through dumb luck.

    I've found this is the single biggest commenality in partiasian schools of thought:

    Conservatives tend to think you are where you are because you deserved it. Dumb and lazy people are poor, smart and hard working people are rich. Dumb people get hit by trains, smart people comment on how dumb they are. Your situation is a result of your disposition.

    Liberals go the other way. Luck, circumstance, and opportunity play huge roles in where you are. Poor people are poor because of luck and circumstance. People get hit by trains because they might have just plain been unlucky. Your situation is a result of your environment, including dumb luck.

    Personally, this is the single biggest reason I can't stand conservatives. It bothers me to no end how capable they are of assuming that anybody in a bad situation is there because they deserve it.

    • Yep (Score:2, Interesting)

      by Anonymous Coward
      Liberals tend to think that luck, circumstance, and opportunity play huge roles in where you are. Poor people are poor because of luck and circumstance. People get hit by trains while trying to get through the tracks before the train gets there, are just plain unlucky. Your situation is a result of your environment, including dumb luck.

      Personally, this is the single biggest reason I can't stand liberals. It bothers me to no end how capable they are of assuming that anybody in a bad situation is there because of bad luck or circumstances beyond their control.
      • A child born to parents in a "bad situation" is not there by his or her choice. Time to use a different stereotype to hate liberals.

    • Re:Conservative/Liberal take on it (Score:5, Funny)

      by smack_attack ( 171144 ) on Thursday February 20, 2003 @12:17PM (#5344174) Homepage
      The only difference between liberals and conservatives these days is that they both think they can do socialism better than the other.

    • Re:Conservative/Liberal take on it (Score:5, Insightful)

      by EatHam ( 597465 ) on Thursday February 20, 2003 @12:17PM (#5344181)
      I am a conservative. I don't think that *everyone* is where they are because they deserve it; just that there is a definate relation between action and reaction. So not everyone is in the position they are in because it's what they deserve, but they're not all in it because of bad luck either. I'm a firm believer that overall, hard work will improve your situation.
      • While I agree that hard work will improve your situation, this sentence maybe right for the USA and the Europe but it downplays the situation the majority of the people living in this planet where hard work is necessary to just be able to eat!

    • Re:Conservative/Liberal take on it (Score:5, Insightful)

      by SnowDog_2112 ( 23900 ) on Thursday February 20, 2003 @12:18PM (#5344187) Homepage
      I think the truth is more complex than your cardboard liberals or conservatives would have us believe.

      The truth is that while some people may become successful or suffer terribly largely through luck, there are situations where you can drastically improve or destroy your life through your own choices.

      You can't blame everything on circumstance, but you can't take credit for every good thing that happens to you, either.

      That's why I can't stand cardboard conservatives or cardboard liberals. The world is so much more complicated than either of them give it credit for.

      (Yeah, I know, off-topic :) )
      • People break down into two groups when the experience something lucky. Group number one sees it as more than luck, more than coincidence. They see it as a sign, evidence, that there is someone up there, watching over them. Group number two sees it as just pure luck. Just happy chance. And surely, the people in Group number two are looking at those fourteen lights in very suspicious way. For them, the situation is fifty-fifty. Could be bad, Could be good. But deep down, they feel that whatever happens, they're on their own. And that fills them with fear. Yeah, there are those people. But there's a whole lot of people in the Group number one. When they see those fourteen lights, they're looking at a miracle. And deep down, they feel that whatever's going to happen, there will be someone their to help them. And that fills them with hope. So what you have to ask yourself is what kind of person are you: are you the kind that sees signs, sees miracles? Or do you believe that people just get lucky? Or, look at the question this way: Is it possible that there are no coincidences?

        Huh ? this seems to be a perfect plot for a movie. Wait - nevermind ;)

      • Choices. (Score:3, Interesting)

        by Lemmy Caution ( 8378 )
        The thing is that "choices" is bandied about in this situation as a complete black-box, without asking how people make choices, how they percieve what those choices are, and when the understand what the consequences are. Largely, the "choice-making" facility that the poor and unfortunate are failing at are failures of education to begin with (both formal - understand just what is possible and what input creates what output - and informal - understanding social patterns and behaviour outside of one's own in-group).

        It's why people from "better" backgrounds can recover from poverty quickly - why good business-people can create new businesses from catastrophes repeatedly - and why very hard working people who don't know how to work tactically can still die poor. Knowledge and social networks are what keeps one out of poverty, not hard work.

        As an aside, drug addiction exists in that gray area between choice- and not-choice, since it can be thought of practically as a "disease of the choice-making mechanisms of the mind." When drug addiction is responsible for poverty, there's little chance of escaping the poverty without addressing the addiction; likewise for mental illness.

        • Re:Choices. (Score:3, Interesting)

          by osgeek ( 239988 )
          It's why people from "better" backgrounds can recover from poverty quickly - why good business-people can create new businesses from catastrophes repeatedly

          It could be equally argued that they were in those "better" backgrounds because of some genetic advantage. You'd really need to do a large number of controlled studies to determine the order of the cause and effect there. My suspicion is that both genetic propensities and social frameworks play a part.

          Knowledge and social networks are what keeps one out of poverty, not hard work.

          Hard work is an important element, and you can't just discount it out of hand.

          As an aside, drug addiction exists in that gray area between choice- and not-choice

          What is a choice, then? I know smart people who are "addicted" to EverQuest to the point that their work quality seriously suffers. Are they making a choice? If I go home early to watch TV or read a book, am I making a choice or just a slave to some electrochemical impulse in my brain?
    • Um, yes, that was a super reductionist post. Obviously, there are shades of grey, and even the most hardcore C or L doesn't look at things in a 100% absolute way that I've suggested.

      They are just generalizations, and it's too bad that I'm gunna get modded down to hell for it.

      I probably should have left off that last line. It's still a valid point, for the most part.

    • Comment removed (Score:4, Insightful)

      by account_deleted ( 4530225 ) on Thursday February 20, 2003 @12:20PM (#5344208)
      Comment removed based on user account deletion

    • Mischaracterization of conservativism (Score:5, Informative)

      by Anonymous Coward on Thursday February 20, 2003 @12:26PM (#5344258)
      Conservatives tend to think you are where you are because you deserved it. Dumb and lazy people are poor, smart and hard working people are rich. Dumb people get hit by trains, smart people comment on how dumb they are. Your situation is a result of your disposition.

      This viewpoint is absolutely not essential to conservativism. It is unfair to characterize conservativism as people who punish the poor because they "deserve it."

      There is a legitimate conservative idea that many well-meaning social welfare programs actually trap people in poverty by encouraging failure and discouraging success. Clinton famously "ended welfare as we know it" because he believed this kind of reform was the right thing to do.

      Of course there is also a wrong kind of conservativism (practiced by many Libertarians and Republicans), in which welfare is cut, while job training programs are cut as well.

      Centrists of both parties (such as Clinton) recognize and co-opt the good parts of conservativism and of liberalism. When you say that you can't stand conservatives, I think what you really mean is that you can't stand the self-righteous, self-promoting bigots who make a mockery of the ideology they unfortunately claim to represent.

    • Re:Conservative/Liberal take on it (Score:5, Insightful)

      by CommieLib ( 468883 ) on Thursday February 20, 2003 @12:28PM (#5344284) Homepage
      Thats called the Just World mentality. Its not a Just World .. unfair things happen through dumb luck.

      I've found this is the single biggest commenality in partiasian schools of thought:

      Conservatives tend to think you are where you are because you deserved it. Dumb and lazy people are poor, smart and hard working people are rich. Dumb people get hit by trains, smart people comment on how dumb they are. Your situation is a result of your disposition.

      As a conservative, I'll take the bait. I think that "deserve" is too complex an issue to really know (abused as a child, ends up as a criminal, etc.). It is a core conservative belief, however, that people's fates are in their own hands. I certainly won't sign on to that smart and hard working people automatically get rich, but I've had pretty extensive personal experience with why people end up poor:

      #1 reason: being part of a couple that gets pregnant outside of marriage. If you're the woman, you now have the financial burden of a child without the full support of a father. Additionally, you don't enjoy the economies of scale enjoyed when two or more income earners live together. If you're the father, the latter point still applies, and you have child support to pay.

      #2 Reason: not completing high school. In our society, for better or worse, this is a signal to all employers that you haven't got your shit together. There are, however, many cases where high school dropout succeed as entrepreneurs.

      #3 Reason: Drug / alcohol abuse. No explanation necessary, presumably.

      Here's the defining characterstic of a conservative: the belief that if someone works hard and consistently, they can improve their condition. Not everyone who believes this is a conservative, but if you don't believe it, you can't call yourself a conservative. To address your definition of a conservative, I would say that conservatives believe that in almost every circumstance, people are poor as a consequence of poor choices they made.

      So, I'm one of the kind of people you can't stand. I suspect that you don't know me very well. I believe that power over one's circumstances comes from persistent personal action and not from authority. Do people end up with bad luck out of no action of their own? Of course, everyday. But is that the defining circumstance of human existence, or is persistence, faith and audacity?

      • the belief that if someone works hard and consistently, they can improve their condition

        Unfortunately, a huge number of people who identify themselves as conservative don't seem to realize that condition++ doesn't necessarily meet condition >= decency, or even condition >= survival. It is easily, easily possible to be so low that incremental improvement through hard work is still not enough to get you to the point where you'll be on your own. There is a threshold below which basic 'modern' living is not possible. This is where having basic social services is really handy. If you can get someone above that threshold, they can often stay above that threshold on their own. It's kind of the modern equivalent of knowing how to make fire, or knowing how to fish...

        It's also a shame that so few people in the US have any understanding - or put any thought into - the meanings of their tidy political categories (e.g. "liberal" and "conservative"). It's sickening how often those terms are applied in total disregard to their denotations.

        Ok, that's all for now. Time for more coffee.

    • I don't know how you can be more angry at Conservatives and not at Liberals considering the kind of society we live in where the first response to any incident is "sue". There is no longer a concept of personal responsibility. Its always "the other guy's" fault.

      You fat? Sue McDonalds.
      You fail your classes? Sue your teachers.
      You offended by something someone has said? Sue the author.
      You want to maintain your manufacturing job that is an overpriced labor cost to your company? Sue to prevent outsourcing.....etc.

      • Terrorists crash into the building housing the brokerage firm your spouse worked for? Don't stop at suing the airlines, whine about not getting enough money from the government because he/she made a lot of money (and wasn't smart enough to have life insurance).

        Oh, I'm sorry. People at brokerage houses tend to be conservative. I was hoping to help your argument. Looks like you'll have to find another stereotype to liberal-bait.

    • Re:Conservative/Liberal take on it (Score:5, Insightful)

      by Dun Malg ( 230075 ) on Thursday February 20, 2003 @12:35PM (#5344372) Homepage
      Liberals go the other way. Luck, circumstance, and opportunity play huge roles in where you are. Poor people are poor because of luck and circumstance. People get hit by trains because they might have just plain been unlucky. Your situation is a result of your environment, including dumb luck.

      So hard work does nothing, eh? It's all luck and circumstance. Pfff! Every time I've stopped worrking my situation got worse, and every time I started working again, it got better. What luck I must have had lately, since I've been doing better the whole 8 years I've been working where I am. I've even been lucky enough to have people pay me when I do side work for them on weekends!

      Are you on crack ?

      This is my favorite quote above:
      People get hit by trains because they might have just plain been unlucky

      Provably false. People get hit by trains because they're on the railroad tracks when the train goes by. This has nothing to do with luck, or circumstance. It has to do with bad decision making. Nobody's car ever "stalls out" on the tracks like in the movies. People try to "beat the train"... and fail.

      • So all people who work three jobs and live in cardboard boxes should just work harder?

        • Re:Conservative/Liberal take on it (Score:4, Insightful)

          by SquadBoy ( 167263 ) on Thursday February 20, 2003 @02:15PM (#5345278) Homepage Journal
          Yes yes they should. With a couple of qualifers.

          8 years ago I was barely making minimum wage had a wife a kid and due to bad decision making had a degree that was basically worthless. Working two jobs and for all intents and purposes living in a cardboard box.

          By making a hard choice, go into the Air Force, while in I worked hard and learned everything about anything anybody would teach me. I also looked around the world and came to realize that computers and networks were *very* big and only going to get bigger I started to insert myself into every situation where they needed someone to help out with any computer related. At the same time I started to devour every book on networking that I could get from any library that I had access to. As a result of that I got out 4 years later and worked at a crappy temp job for a few months while shopping out resumes. Since I had very little experince I got a crappy job doing tech support for a medimum sized ISP. While there I continued to work my ass off and learn everything I could and read everything I could get my hands on. As a result of doing that for the past few years I've managed to go from *very* poor to be rather well off. And it was all hard work. I have yet to meet a person, myself included, who does not waste time. Put even a small perctange of that wasted time to work and you can improve your situation. So yes they should work harder and study more.
          • Unfortunately, you missed the point about perception. Your situation is a minority. Many people *do* work just has hard, but arn't smart enough to learn networking (or hate computers) .. or for whatever other reason, hard work just doesn't cut it for them.

            You almost reinforced one of the major points the author had; the few bright spots outshine the many who don't succeed, but yet, their methods are held up as being the 'simple way' to escape a situation.

            Which leaves us with:

            1. Most people must be lazy, you were one of the few who could actually force yourself to do the work.

            OR

            2. You made it, with hard work and dumb luck. Most people don't get the dumb luck, regardless of how hard they work.

            I assume you vote 1. I vote 2.
            • No I think that it is more complex than that. Yes to some extant I was lucky in that I got into weather which was one of the fields that relied heavily on computers and networks. But of course many other people I worked with did not take advantage of the bit of luck.

              I did not mean to present my case as being "simple" far from it and yes there was luck involved. My point in answer to the parent post, and granted I could have explained more, was that working harder, doing something diffrent, and taking advantage of luck when it happens, another example from my case a Cisco gawd who also happened to like me, can and almost always will allow you to improve your situation.

              To me the parent seemed to be saying that working harder will not help people who are in very bad situations. I gave my example to show that working harder can help and in most cases will. So I would not call it dump luck because IMO chance favors the prepared.

              And I'm not calling them lazy. But you will notice that the event that set everything in motion involved a risk and was in the short term harder than staying put would have been. People need to have the courage to change and then take advantage of the "luck" those changes can produce.

              I think most people are taught that they can't improve themselves and therefore don't even try. By pointing out that in many cases you can make your luck I hope to change that perception and to make the point that no matter how bad off you are or how hard you are working at the moment you can improve.
              • > I think most people are taught that they can't improve themselves and therefore don't even try.

                I agree with most of what you say.

                I think my main beef was people always blaming the person for being taught that there was no use for trying to succeed. For me, thats something to empathize about, to try and help them out of. It's not a good reason in and of itself as for why we shouldn't care for their wellbeing. However, you seem to recognize this; I just suspect that many dont.
      • Provably false. People get hit by trains because they're on the railroad tracks when the train goes by. This has nothing to do with luck, or circumstance. It has to do with bad decision making. Nobody's car ever "stalls out" on the tracks like in the movies. People try to "beat the train"... and fail.

        In general, I agree: many train accidents are the result of people wagering their future in the hopes of saving 3 or 4 minutes. But don't turn a blind eye to how design and infrastructure can influence things...

        We used to have a very akward, high-traffic, T-shaped intersection where the train crossed over the secondary road very close to the intersection (e.g., imagine drawing train tracks parallel and just below the horizontal line of the "T"). The design was very poor, and there were several aggrevating factors with height, visibility, parking lots, etc.

        One night, 4 schoolteachers got hemmed in by traffic while crossing the tracks. They were killed by an oncoming train. The driver could have been making very reasonable decisions while negotating her turn onto the secondary road... bad design is the primary culprit for that accident. Fortunately, this intersection has been heavily redone to properly handle the traffic it must support. The road is flat, everything is visible, the signaling mechanisms are obvious, and there are no adjacent parking lots to tangle up traffic flow.

        The human mind is an operational hazard. Good designs take the inevitability for error into account and provide mechanisms to prevent or mitigate such errors. Designer and operator must both be serious about what they do.

      • > Provably false. People get hit by trains because they're on the railroad tracks when the train goes by. This has nothing to do with luck, or circumstance. It has to do with bad decision making. Nobody's car ever "stalls out" on the tracks like in the movies. People try to "beat the train"... and fail.

        Way to predictably react to my statement in a way that only serves to re-inforce my point: Your perception is your truth. Check the replies, and you'll note lots of cars stall on tracks. Or get stuck on tracks through no fault of the driver.

        You simply choose to err on the side of discrediting your fellow man .. do you really think you're going to see "Mans car stalls on tracks. Man gets out of car. Man survives!" in the paper? You only hear about the times when Man bites Dog, not Dog bites Man, even though Dog bites Man is way more common. Its a junk food news society, baby, and the last thing you want to read about in the paper is boring old reality. The benifit you get out of it is that you can skew your perception of reality any which old way you choose; but a wise and compassionate person always errs on the side of doubt rather than assumption.

      • Re:Conservative/Liberal take on it (Score:5, Insightful)

        by Drakonian ( 518722 ) on Thursday February 20, 2003 @03:15PM (#5345889) Homepage
        So hard work does nothing, eh? It's all luck and circumstance.

        Where did he say that? He actually said "Luck, circumstance, and opportunity play huge roles in where you are." Huge roles being the keywords. As someone else who replied to you said, how about being hit by a hijacked airplane while sitting in your office? Or being born as a woman or slave in Sudan [aol.com]? Keep working hard, maybe you won't get beaten as badly.

    • You need look no further than lottery winners to understand the situation. They say that lottery winners often end up having budget problems after they win. Since most people that play the lottery are poor to begin with.... You draw your own conclusion.
  • Anyone else think of the Slashdot lameness filter when reading this?

  • Complete egoism (Score:5, Insightful)

    by Anonymous Coward on Thursday February 20, 2003 @12:11PM (#5344110)
    I work at the crossroads between finance and technology so I eagerly read this book. I agree that many, many people in finance are particularly susceptible to making statistical errors. It is amazing how many people are heavily rewarded for dumb luck or what amounts to survivorship bias. There are some smart people in this industry, but there are more people who have had a lucky run.

    What ruined the book for me was Nassir's incessant and shameless self-promotion. He shows the same hubris that he finds reprehensible in others and he seems to be trying to settle a few old scores by maligning people.

    But the most ridiculous part of the book is when he starts drawing links between finance and neuroscience and trying to explain traders behavior based on our very preliminary understanding of brain physiology. Utter crap.

    The basic message is sound: Wall Street is full of people getting paid millions who haven't the slightest understanding of math, science or technology. But that message is clear in about 10 pages and the rest is self-serving, self-promoting tripe.
    • The basic message is sound: Wall Street is full of people getting paid millions who haven't the slightest understanding of math, science or technology. But that message is clear in about 10 pages and the rest is self-serving, self-promoting tripe.

      It seems like personal charisma and salesmanship can become main drivers once you get to the money management level these days. Not exclusively, of course - there are a number of highly qualified and dedicated professionals who view their trade more as science than art. But the rewards are so great that the Gordon Gecko's [amazon.com] of the world are drawn to it like moths to a flame...

    • That was my take too. Some good content, but he seems like a pretty angry guy. Can't imagine that he'd be a lot of fun to hang out with. Also, what's with him at the gym? He must have talked about himself working out a good half-dozen times.
    • "Malcolm Gladwell (author of The Tipping Point, an absolute must-read for anyone who owns a brain) has written an excellent article that shows how Taleb's reasoning runs counter to just about every bit of conventional Wall Street wisdom. If you're interested in the markets, especially derivatives, and how Taleb trounces most of Wall Street's voodoo doctors, this moderately technical interview from 1996 is worth reading too."
      I don't agree that his reasoning runs against conventional Wall Street wisdom. In my two years of studies at NYU's mathematics of finance program, not once have we learned anything that runs contrary to Taleb's claims. In fact, we have devoted many lectures and class projects to showing the exact points that are brought up in this review. The problem isn't convincing Wall Street of these ideas, the problem is trying to convince Joe Six-pack-investor of these ideas. I realized just how stubborn my parents are after I tried to explain some of these concepts to them with respect to their personal investments.

      Since we've recently (and hopefully) completed a big Boom-Bust cycle, many of the ideas in this book have a large effect on investing. We can't just throw money into anywhere and expect a return. Nor can we throw our money at the best performing investment strategies and expect it to outperform other strategies. Survivor bias is a big part of every type of investment strategy.

      Taleb's other book "Dynamic Hedging" is a must read for any quantitative finance specialist. Hopefully his self promotion doesn't ruin the book for me. This isn't a factor in "Dynamic Hedging" because of the more technical/analytical nature.

    • Re:Complete egoism (Score:5, Informative)

      by TheWizardOfCheese ( 256968 ) on Thursday February 20, 2003 @02:18PM (#5345300)
      The parent post is accurate. Many of Taleb's stories are highly amusing, but they are also highly self-flattering. An unreasonable proportion of the book is devoted to explaining that although Taleb is an idiot, he is really a genius because he knows that he's an idiot. These excursions are accompanied by descriptions of tricks he uses to fool himself into being smart. Not all of this is entertaining.

      The book has one other serious flaw which really merits mention in a review: it is very badly written. 'Meandering' does not describe the book as well as 'completely unstructured'. Also, there is too much repetition for such a short book.

      The overall impression is that Taleb has published the notes for a book, rather than the book itself. With proper writing and editing, these notes would, of course, make an extremely brief book; but certainly there is material here for an instructive essay.

  • Why are YOU alive? (Score:3, Funny)

    by azulza ( 651826 ) on Thursday February 20, 2003 @12:12PM (#5344125)

    1. Its my belief that some people are only alive because its illegal to kill them.

  • dumb luck and slashdot (Score:3, Funny)

    by dreamseason ( 307155 ) on Thursday February 20, 2003 @12:13PM (#5344129)
    One of my peeves is when people jump in with one of the first comments (usually drivel) on a slashdot article. You're not special, it's just dumb luck.

  • true but, (Score:4, Insightful)

    by Joe the Lesser ( 533425 ) on Thursday February 20, 2003 @12:13PM (#5344131) Homepage Journal
    I think people who are the best at what they do know this already, and take the 'most likely best' choices.

    In poker, I never expect to get the cards I want, but I do stay in the game when the odds are high mathematically. If I get my flush or full house, then it was my knowledge of probablity that succedeed. If I have to fold, then nothing is lost, because the result was unpredictable, and I made the best choice according to my opinion.

    So, while people often overread things (like the possiblity of terrorist attacks), we can still succeed in randomness if we have knowledge of all the variables. This knowledge, is of course, what leads to success in all fields that involve probability.

  • interesting book (Score:5, Interesting)

    by jbert ( 5149 ) on Thursday February 20, 2003 @12:13PM (#5344133)
    I found this book interesting as well. Taleb is clearly full of himself, but since he is pretty clever, you could argue that that is simply a clear-headed assessment of his actual worth/importance/ability.

    One thought - his big point with regard to the market is that people who tend to make a small/medium, consistent profit may be trading in a style which has a low-probability, high-damage outcome. This "black swan" event would/will wipe out those people when it occurs.

    His big strategy is to be hedged against the worst which can happen and also make big money on the unlikely events in his favour.

    Big question: does anyone know how he did when the markets crashed? (The book was written a couple of years back). If he has been practising what he preaches (and if it works!) then he should have made a killing...

    • Re:interesting book (Score:3, Informative)

      by skeedlelee ( 610319 )
      I recall reading a NewYorker article on him a while back, I think before 9/11 etc. but I'm not sure. The way that they stated his principle of (derivative?) trading was to make the observation that people often refer to events as once in a lifetime, or try to quantify them in a way which suggests that they should only happen every 10,000 years or something. He capitalizes on this notion because he assumes that applications of typical probabiliity distributions underestimate the frequency of unlikely events. Then he trades with the assumption that people are willing to give a bagain on risks that should happen only very, very rarely. Or better still, they accurately quantify one thing, but don't consider some other class of events that would have a similar impact on the stock market. He doesn't need to know or quantify everything, just estimate how likely it is that they have missed something. This means he's essentially, he's in the business of slowly loosing money until something really unexpected happens, in which case he cleans up. My guess is that the market tanking has made him pretty rich.
      • Yes, it was in the New Yorker here [gladwell.com].

        It's an interesting idea but it doesn't really get you anywhere. Yes, there will be a disaster but you have to balance how much it costs you to be wrong alot to how much you will win when you are right (which is by his own admission unknowable). It's like a casino -- as long as you can afford to double your bet every time you lose eventually you will win big but you need deep pockets for this to work.

  • Mistaking cynicism for theory (Score:3, Insightful)

    by s20451 ( 410424 ) on Thursday February 20, 2003 @12:13PM (#5344134) Journal
    Smug cynicism should not be mistaken for a viable theory on how the world works. Certainly, there are some people who appear to be good who are merely lucky. However, this guy is making the same mistake that he is purporting to avoid by generalizing from individuals. A better statistical argument would be: given a number of randomly selected traders, and a number of randomly selected individuals off the street, which group will tend to be more successful at trading, on average? If the performance of these two groups is the same on average, only then can we say that skill and training are useless.

  • sad (Score:4, Funny)

    by Anonymous Coward on Thursday February 20, 2003 @12:14PM (#5344138)
    Although written all the way back in 2001

    Obviously trained in the Classics...

  • longest lucky streak (Score:2, Interesting)

    by Alien54 ( 180860 )
    I recall the story of one man during the 1800's (?) who had the most amazing luck, and wound up being the most miserable arrogant person imaginable.

    Basically, whatever he did in business worked out, to the point that even when there was a disaster, like a ship going down at sea, etc., there was some lucky angle to it, and he still made money off it.

    This streak lasted for his entire long life. It got to the point he would invest in weird stuff, etc. lots of things at random. All turned to the good. Darned if I can find a link, though, on short notice.

  • Seriously, if not for blind luck, some Darwin awards candidates would have become prize-winners a long time ago. Stupid people do stupid things, sometimes only blind chance keeps the results from being disasterous.

    My favorite quote from this is: Another of Taleb's peeves is the human tendency to over-attribute every random event
    Not everything is related. Cause and effect are sometimes not part of the equation, but sheer randomness is. There are a lot of people out there that like to draw conclusions based on small fact... there are others who make chances based on the same.
    Is the fact that the price of gas went up drastically based on the forthcoming conflict in Iraq? Possibly, maybe it's just a random thing. Perhaps it's a little of both... those that control the prices of gas raise them, knowing that many people will blame it on the Iraq problems, and thus allowing them to get away with it.

    You can use probability and common-conclusion to make planned events seem random, and often - the other way - to make random events seem planned.

    I meant to do that - phorm.
    • There are a lot of people out there that like to draw conclusions based on small fact...

      It's a survival feature. Humans are excellent at pattern recognition. If you hear a rustling noise and catch a glimpse of something behind you, you don't think - it's probably not a tiger, I'll wait until I'm sure.

      There isn't a lot of survival related downside to seeing patterns where there aren't any. False positives are cheap.

  • Perceptions of coincidence (Score:5, Informative)

    by darth_flannel ( 651866 ) on Thursday February 20, 2003 @12:18PM (#5344190) Homepage Journal
    There was a highly interesting article in the NY Times Magazine about how we view random events and interpret them as fate, destiny, etc. It makes me wonder if a lot of the superstitions, mythos and miracles we believe in are just the result of trying to collate and organize these coincidences into a cogent whole.

    http://www.nytimes.com/2002/08/11/magazine/11COINC IDENCE.html [nytimes.com]

    • without reading your link, I can safely say Yes, because the human brain is the best coincidence detector on Earth, able to bridge great gaps in otherwise unlreated objects/events and perceive them as causal. Fun stuff, the brain.

  • denial of history (Score:5, Interesting)

    by pmineiro ( 556272 ) <paul AT mineiro DOT com> on Thursday February 20, 2003 @12:18PM (#5344199) Homepage
    Taleb also has some fun at the expense of economists and analysts, especially those whose predictions turned out wrong, but who claim that the theories were in fact right, and that the facts simply weren't supposed to be that way.

    well, i suppose i'm asking for it, but ...

    there are *alot* of cases in poker (and presumably, in investing) where one can do the "right thing" and lose big money. this is because short-term statistical fluctuations dominate in poker (investing?). the only edge one can gain is long-term, and long-term means several years of playing several days a week.

    The ability to seperate the correct decision from the outcome, while still being honest about analyzing one's play, is one of the keys to successful poker.

    It's like Millikan throwing away the oil drops that didn't have the right e/m ... sometimes it's good to ignore the data.

    -- p
    • I went to a talk once by Taleb when I was ay NYU. My impression of him was that he's a blowhard, who's a little but too full of himself for his own good. Having said that, I have a friend who's a derivatives trader, who says that Taleb's technical books on trading derivatives are quite good.

      The prime example of someone whose theory is right, but who the market goes against, is the guy who ran the Tiger funds for years and years. (Can't remember his name.) He produced stellar returns by using value investing for ~20-25 years, but then lost his shirt in the late 90's when noone cared about value anymore. Closed down his funds in 99. Since the Nasdaq went south, he's been advising some funds that have been doing quite well.

      Of course, the other example is LTCM, where they claimed their theory was right, but they were unprepared for a very unusual event. What was going on here is that their theory was actually incomplete. (Assumption of independence for markets that were actually dependent, etc.) Their stuff may have actually come out right if they could have met the margin calls.

  • Limited Scope (Score:5, Insightful)

    by Gyan ( 6853 ) on Thursday February 20, 2003 @12:19PM (#5344200)
    So it's all a game of numbers: out of 10,000 traders, a few are statistically bound to be successful, even if they are nothing more than lucky idiots. The fact that they succeeded does not mean anything. It doesn't mean that they are bad traders, but it doesn't mean that they are good traders either, because on average somebody had to succeed.

    This is true only in endeavours which are zero-sum for a community as a whole.

    Not true otherwise.

    For example, take the solving of some math problem. Like Reimann Hypothesis. It's not __necessary__ that someone __has__ to solve it. The one who does, is a good mathematician.

    • they do not have to zero-sum endeavours. the only requirement is that success is established using the participating community as the only benchmark. people routinely label brokers as "successful" when they lose the least in a downturn. in such situations, nobody is "winning", yet there are still some who better than average.

  • This site [datahighways.net] popped into my head while reading this review, especially the part mentioning the monkeys and typewriters parable.. give it a shot.. cool trick (will need basic to do this)

  • Theories (Score:3, Insightful)

    by Root Down ( 208740 ) on Thursday February 20, 2003 @12:20PM (#5344206) Homepage
    ...there are only two kinds of scientific theories: those that are demonstrably false, and those that are not yet demonstrably false.

    Well, yeah - that's why they are theories and not laws. The same sort of argument is made by fundamentalists against the "Theory" of Evolution. It can't be proven. It's only a theory (so let's go back to something infinitely less provable/disprovable such as the divine). Theories are meant to be correct in so much as there is overwhelming evidence toward their ideas.

    The book appears to make some good points, however. (Just from the synopsis provided.) The infinitude of random factors that may cause market fluctuations makes prediction completely (probably?) intractable. In CS lingo, it would appear to be NP-Complete. ;)

    • Re:Theories (Score:3, Informative)

      by pmineiro ( 556272 )
      In CS lingo, it would appear to be NP-Complete. ;)

      Don't want to troll too badly :), so please take in good sprit ... but everybody here seems to treat NP as a synonym for "difficult to solve."

      Easy mnemonic: an NP problem has a solution that can be verified in polynomial time. Clearly, lots of problems that people casually say are NP are actually far far harder.

      The open question P=NP question is essentially whether there's a way to quickly (polynomially) find the solution to verify.

      'nuff said.

      -- p
      • Taken in completely good spirits - your completely non-flamable response is greatly appreciated. NP-Complete is solvable in NP, but it cannot be proven whether the problem is verifiable in P or not. This was the allusion I was making - the fact that it cannot be proven one way or another, not just that it was difficult (or not) in the first place. I do agree that people tend to associate NP with extremely difficult problems, whether this is true or not. :)

    • Re:Theories (Score:5, Informative)

      by dracken ( 453199 ) on Thursday February 20, 2003 @01:06PM (#5344681) Homepage



      The infinitude of random factors that may cause market fluctuations makes prediction completely (probably?) intractable. In CS lingo, it would appear to be NP-Complete. ;)

      Okay I am a CS theory puritan and a troll. But here is the deal.

      Rant #1: Intractable problems are unsolvable problems. Even if you have infinitely powerful machines. Because our logic (the foundation of our math) has "holes" that prevent it from solving them. Halting problem (can you write a program that will verify if a program is correct)is an example. It simply cant be done.

      Rant #2: NP hard problems are hard to solve. You just need lots of time. Throw in a trillion years and a very powerful computer and heck - you have a solution. Quantum computing *may* solve these NP hard problems in polynomial time. Still Quantum computing cannot solve intractable problems.

      Rand #3: NP problems are not the most difficult to solve problems (among the solvable problems). In fact they are the easiest. There is something called polynomial hierachy of harder and harder problems and NP is at the very bottom.

      Rant #4: Only problems that have a one bit solution (yes or no, true or false) can be NP complete. Others are "hard".

      Further references to be directed at "computational complexity" by papadimitrou.

      Sorry but had to take it out on someone ;).

      • Rant #4: Only problems that have a one bit solution (yes or no, true or false) can be NP complete. Others are "hard".

        Don't forget the class of problems that can be transformed into a one-bit solution. Traveling Salesman doesn't initially have a one bit solution, but it's still NP-complete rather than NP-hard because it can be thus transformed.

  • Another Good Book on a Similar Topic (Score:5, Informative)

    by ian tichy ( 632710 ) on Thursday February 20, 2003 @12:23PM (#5344235)
    ... is Innumeracy: Mathematical Illiteracy and Its Consequences [amazon.com] by John Allen Paulos. I read it a couple of years ago, and thoroughly enjoyed it. I think it is an excellent commentary on how probability, large numbers, and basic mathematical principles are largely misunderstood by the general public, and the effects that this phenomenon has both on lives of individuals and society as a whole (e.g. the embrace of numerology, or public policy based on sleight-of-hand statistics). All in all, a short, entertaining, and insightful book.

  • Random walks (Score:5, Interesting)

    by watchful.babbler ( 621535 ) on Thursday February 20, 2003 @12:32PM (#5344339) Homepage Journal
    As provocative as the book's thesis seems to be -- and I must admit that my information on it comes entirely from this review -- it's not new. In the 1970s, Burton Malkiel's A Random Walk Down Wall Street posited that market fluctuations are mutually independent, though the market follows a general upwards trend, and thus it's impossible (ceteris paribus) to make any bets on short-term stock performance. The upshot is that the only way to beat benchmark indexes is to assume additional risk: trying to beat the market in most cases is nothing more than gambling on an upmarket roulette wheel.

    • Re:Random walks (Score:2, Informative)

      by mghiggins ( 61851 )
      As provocative as the book's thesis seems to be -- and I must admit that my information on it comes entirely from this review -- it's not new. In the 1970s, Burton Malkiel's A Random Walk Down Wall Street posited that market fluctuations are mutually independent, though the market follows a general upwards trend, and thus it's impossible (ceteris paribus) to make any bets on short-term stock performance.

      That's a bit inaccurate in two ways:

      1) Taleb doesn't claim the market is an efficient random walk - he thinks the market inefficiently prices events that have low probability because people are bad at estimating low-prob events. He capitalizes on that mispricing by buying low-prob events, mostly losing money but occasionally scoring big (and hopefully making money on average).
      2) Even if the market *is* a random walk, you can still expect to make money in the long term because the stock market pays a better return on average than, say, the bond market. That's because investors demand a higher return in exchange for the extra risk due to stock volatility. But that only applies to investing for the long term, not day trading. Over short terms the extra return is completely swamped by the noise from volatility.

    • Re:Random walks (Score:3, Interesting)

      by devonbowen ( 231626 )
      The problem is that markets are provably not random walks. A random walk would result in a gaussian distribution of price moves but it is well known that the distribution of financial markets have "fat tails" (heteroskedasticity) when compared to a gaussian. Meaning that extreme events like crashes happen more frequently than they are supposed to. One can question whether these deviations from random are sufficient to allow any prediction. But stating that the markets are a "random walk" is really just wrong.

      Oh, and the above assumes any general "upward trend" in, for example, a stock market, is taken out of the data. Some markets (like currency, for example) don't have an upward trend.

      Devon
      • Being a statistician I'd like to point out that you can define a random walk with any distribution that you want. The simple random walk is the sum of random variables that are either +1 or -1 (think flipping a coin, take a step to the left on a heads, and a step to the right on a tails). If each of your steps has a gaussian distribution, then you are observing a Brownian Motion on a lattice (i.e. at integer times). No reason why you can't use a heavy-tailed distribution to define your random walk.
    • It's simple actually. Invest on sunny days! [ohio-state.edu]

    • Re:Random walks (Score:2, Interesting)

      by richg74 ( 650636 )
      Actually, the idea is older than that. There is another very amusing book called, Where are the Customers' Yachts?, by Fred Schwed, first published ca. 1940. In an appendix, he describes a coin-tossing championship along the lines of Hitchcock's swindler, which someone else mentioned. At the end, "there are the winners, the coin-tossing experts who have flipped ten heads in a row. They cannot lose."

      You can see a reprinted edition at Amazon:

      http://www.amazon.com/exec/obidos/ASIN/0471119784

      You might also want to have a look at Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay.

  • Surfing on the Noise Floor (Score:4, Interesting)

    by Alien54 ( 180860 ) on Thursday February 20, 2003 @12:33PM (#5344344) Journal
    A lot of times you can see a legitimate trend in a noisy signal. The problem is to determine when you are looking at variations that are in fact noise produced, vs legit trends. And humans seem to be geared to picking out a signal from the noise in the first place, even if they often get it wrong.

    The stock market, day traders, etc are all dependant of this sort of thing. even though the possibily that their successes are often not distinguishable from random luck gives them all nightmares.

    kinda difficult to pick out signals where they are buried in the noise floor to begin with.

  • ... Murphy should be right. Is one of the more universal laws.
  • I'm not dead because I'm alive.

  • Another good book (Score:3, Informative)

    by wtarle ( 606915 ) <wtarleNO@SPAMengmail.uwaterloo.ca> on Thursday February 20, 2003 @12:52PM (#5344525) Journal
    A very interesting read that covers more ground and covers more social misconceptions and misinterpretations is Thomas Gilovich's How We Know What Isn't So [amazon.com].

    Very good read.

  • The main issue I have with what he says is comparing Time Series analysis (a topic that is near and dear to my heart), to the people that read the bible and then find prophetic phrases in there.
    Aside from that being a bad analogy (but it sounds good if you don't know anything of time series analysis), it is also misleading in that time series analysis can be proven if it will work or not.

    There is an equation (that is f'ing driving me nuts right now that I can't recall the name of it) that will tell you if your time series data is truly random or if it leads to predictability.
    It has been shown over and over again that the stock market, were it a perfect market would in fact be random - but since there is human intervention that drives it, it is no longer truly random and there are non-linear patterns that are within the data.

    The human brain is wired to pick up on linear patterns (to the point we see them where they are in fact not really there - it is advantageous to us to see a lion in the brush and run - when in fact there isn't a lion there, than the other way around and get mauled by a lion that we never saw).
    That is more to what he speaks of, humans seeing what isn't there (there are a crapload of great books written about this - How We Know What Isn't So: The Fallibility of Human Reason in Everyday Life by Thomas Gilovich immediately comes to mind) - but the way he speaks, he also includes computational analysis in there and is wrong in his generalization.

    Now it is going to bug me all day as to what that frickin' algorithm is called - the one that shows the strength of your time series data... I know it doesn't start with an A, or a Z... and I don't think there is a C there... other than that, I'm pretty much at a total blank.
    • The problem with market data is that, unlike, say, the weather, there is a feedback loop for the knowledge. So let's say you discover the Great Equation that in fact does predict the market. How long do you think it's going to work ? The answer is : not very long, because you're now going to affect the market by using this knowledge (plus it's most likely not going to remain a secret for very long). The markets are not random in the same way as rolls of dice are random, but they are chaotic and ultimately unpredictable. My contention (and Taleb's) is that anyone trying to derive meaning from the noise is fooling him/herself. The only way I will be convinced otherwise is by someone who is consistently (over a decade or more) making money using an algorithm/model/equation.

      Taleb mentions that the long-term winners like Soros tend to have a trait in common : they hold no pre-conceived ideas, and will swing with the market. In other words, they accept the facts as they are, instead of trying to fit them into theories.

  • Well, I've never been fooled by a random ness, but once I was drunk enough that this dude did manage to pull a Crying Game on me.

    To avoid embarrassment, always check first for an expectedly large seed value before wasting any of your time.

  • hitchcock stock scam (Score:5, Interesting)

    by louabill ( 652114 ) on Thursday February 20, 2003 @12:55PM (#5344559)
    Hmm... there was a Hitchcock episode about a scammer who chose 2^n folks (I think n=12 or 13), and
    1. mailed 1/2 the folks a prediction that stock X would rise, mailed the other 1/2 the opposite.
    2. threw away the 1/2 who ended up with the incorrect prediction
    3. repeated until there were a few folks left who had gotten 10 correct predictions (either 4 or 8 people, depending on n)
    4. asked the remaining folks for investments.
    5. split with the cash
    Now imagine stock analysts all making predictions. Eventually there will be a star.

  • Pretending the world is NOT random is most logical (Score:5, Insightful)

    by release7 ( 545012 ) on Thursday February 20, 2003 @01:11PM (#5344728) Homepage Journal
    It's quite easy to accept the fact that life is rather meaningless and random. Nihilism has been around for a long time, even before the philosophy of nothingness had a name. However, where does that get you? If you lived and breathed every moment thinking everything was meaningless and random and that you ultimately could make no sense of it all nor had no control over it, you wouldn't get much done. After all, everything you do is meaningless and random.

    The solution is to PICK something important that may not be meaningless and random. After all, the world just might not be meaningless and random. This is kind of like Pascal's wager. If you go around believing everything is meaningeless and random and act accordingly like it is, than you gain nothing. You'd sit home and drink beers and watch Jerry Springer all day because theoretically, you aren't any worse or better off than Mother Theresa, Bill Gates, or any other "successful" person. If, however, you pick a goal or ideal to work toward and give it meaning, your life does have meaning and value. At the very least, if others around you deem your efforts worthy, you will gain the love and affection of others (which MOST people are biologically wired to need and crave). Therefore, it is possible to gain something (the pleasure of being valued) out of the void of randomness by giving your life some purpose, even if that purpose is ultimately meaningless in the big scheme of things.

    So keep playing the game of life. You've got nothing to lose and only stand to gain.

    I read it on Slashdot!

  • ...something about seeing under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all?

    I guess it just goes to show that there is nothing new under the sun.

  • estimation (Score:3, Interesting)

    by Parsec ( 1702 ) on Thursday February 20, 2003 @01:48PM (#5345058) Homepage Journal

    Something else I've noticed people being bad at is estimating ratios. Example: back in high school an English teacher asked the class what the population ratio of blacks to whites in Michigan was. Some guessed as high as 50%, but I was the only one with the correct (lowest) answer of around 10%.

    I have always wondered what affected this the most. It could be that we were a suburb of Detroit, or that the local television stations' news programs may have featured more black people (scaring white viewers makes for good ratings), or that these kids hadn't travelled very far from the Detroit area, or that they were just really lousy at estimation of distances and population and had no concept of the size of the state.

    Certainly, some of the error may have come from cultural bias. I didn't notice any overt racism in the school, but the specter of the "dangerous negro" was/is probably still present.

    Is this still on-topic? Anyway, it seems that we need to do better in our educational system of teaching people how to get their heads around the concepts of chance and estimation. Letting any bias influence these will cause errors.

  • Quantifying the randomness (Score:3, Interesting)

    by Inflatable Hippo ( 202606 ) <inflatable_hippo AT yahoo DOT co DOT uk> on Thursday February 20, 2003 @01:54PM (#5345112) Journal
    Fantastic sounding book, I've ordered it.

    I've long since been a believer in the "largely random" nature of the world and this puts me in mind of a wonderful piece of "research" I came across in New Scientist a few years ago.

    It cut through a lot of bullshit to ask the question:

    "can you predict the longevity of a system or state if you know almost nothing about it"?

    i.e. life's pretty random and bothering to analyse the details will only get you so far :-)

    So how can we address, from a probabalistic standpoint, questions like:
    "How long will the pyramids stand"?
    "How long before my bank goes bust"?
    "How long before we're hit by an asteroid"?

    The reasoning went like this:

    Take any "thing"/"system" etc. with a finite existance and ask the question:

    "With a 95% certainty, how much time does it have left"?

    For the sake of argument lets say you plant a tree, and you know nothing about trees.

    Ten years later you come back and the tree is still alive and so you ask the above question about the tree.

    Well, the tree is clearly alive but you don't know where "now" is in it's lifespan.

    From a purely probabalistic point of view you've got a 50% chance that "now" is the middle half of it's life, i.e. you're not in the 25% of it's "youth" or the 25% of it's old age. So thats a 50% chance that it's had 75% of it's life already (middle age + youth).

    Turning this into an equation, if:
    x = current age
    y = total age
    p = probability

    then: (it helps with a diagram)
    x = py + (y-py)/2
    or, rearranging to solve for y:
    y = 2x/(p+1)

    Going back to our tree then, if it's 10 years old
    it's got:
    95% chance of making it to 10.26 years
    50% chance of making it to 13.33 years

    The magic figure I keep in my head is that if you know NOTHING about something, you've got a 95% chance that it will last 1/39th as long again.

    I find this little nugget invaluable when considering how much to spend on insurance or investments - cos I know/care NOTHING about them.

    After all, why bother with the details, life is random :-)

  • Proven with Experiments? (Score:3, Insightful)

    by mikosullivan ( 320993 ) <miko@idocs.cBALDWINom minus author> on Thursday February 20, 2003 @01:59PM (#5345155)
    Are the claims that successful traders better than average proven with any kind of experimentation? Did he, for example, take 20 successful traders ("successful" being objectively determined according to some plainly stated critera) and a control group of 20 random people, had them play the market for a year, then compare the results?

    I'm just as suspicious of claims that it's all luck as I am that it's all skill.

  • Or is it just that the "universe" and everything in it is defined by a massive Turing machine cellular automata that has been running for a very, very long time?

    I know I am going to be flamed for this, but this very topic is discussed at extreme length in Stephen Wolfram's book, "A New Kind of Science" [cerncourier.com]. He specifically goes on end about a particular one-dimensional cellular automata, "rule 110" (IIRC), which seems to produce randomness, but which is based off of a small handful of simple rules, and a base starting condition of a single black pixel. He demonstrates in excruciating detail how, no matter how complicated you make a system, that all such systems can be brought back to the set of simple one-dimensional CAs. He demostrates how Turing machines can be set up (via initial starting conditions - not just a single pixel) which use these same CA to perform Turing machine calculations - thus these same CA can, in theory, execute (albeit very slowly) and emulate any current computer or program in existance today. He names this "the principle of computational equivalence".

    He explores at great length how systems that are seemingly random can actually be simulated by these self-same CAs, which are based on simple sets of rules - blowing away the time-held notion that complexity arises from an underlying complex ruleset. It stands to reason that given the ruleset, and a result output from the CA, one can work back to the initial starting conditions - the problem arises in that we may only have the initial conditions, figuring out that ruleset is (probably) impossible.

    He explores our current methods of perception and analysis, and shows how while our current methods of analysis show that something is random, as humans using our senses we have an affinity for picking out what look to be like patterns - he seems to make the point (unless I have misinterpreted him - which is very likely) that it isn't our senses decieving us, it is our methods of analysis that are incomplete. He also presents ideas and thoughts on how we can overcome these limitations.

    The book is much more than that, however - I have read articles dismissing the work as everything from a form of plagerism (at worse) to restating others thoughts (at best). I do not believe this is the case. While it is true many others in the past have played with CAs, what Wolfram has done is go that extra step, building on these ideas and bringing them all together under one umbrella of thought. He acknowledges this throughout the book.

    Anyone interested in these topics and others tangent to them owes it to themselves to read Wolfram's book and come to their own conclusions. I honestly believe he is on to something, which could have profound effects in the future (perhaps far in the future, but much sooner if we read it and understand it now).

    Other related links:

    Collection of Reviews on ANKOS [usf.edu]
    Stephen Wolfram's Web Site [stephenwolfram.com]
    ANKOS Web Site [wolframscience.com]

  • Another Book to Check Out (Score:3, Insightful)

    by hondo77 ( 324058 ) on Thursday February 20, 2003 @02:54PM (#5345685) Homepage
    I read The Fortune Sellers [amazon.com] a few years back and it seems to be along the same lines. Basically, people who "predict" the future (be it the stock market, the weather, lifestyle trends, etc.) will highlight the year they got it right and not mention the times they got it wrong. Read it and you'll look at things differently (and never listen to long-range weather forecasts again).
  • For instance, if every single person in the world is bullish on the stock market then you can bet that the markets will start to decline immediately because everyone who can get into the market already has, and there are no buyers left. So there are factors that tend to ensure that most people will lose money.
  • Writing about Karl Popper, he points out that there are only two kinds of scientific theories: those that are demonstrably false, and those that are not yet demonstrably false.

    In fact the exact OPPOSITE is true. You can never prove an unrestricted negative.

    Some things are inherently impossible, like a married bachelor, or round square. Only contradictions are truly false.

    Anyway, here [secularhumanism.org] is a good discussion on the subject.

  • Based on random dice rolls. We can play as many times as you like. If you are one who believes in luck, lets see if you can beat me.

    People who aren't good at statistics will get creamed. Its this way in real life too. Success is not dumb luck, its playing the odds. Its just an excuse when the loser blames the dice.
  • One could of course argue that Popper's observation is but another kind of truth

    That it is me boyo, deduction (which Poper used to come to his conclusions about science and theories) is a whole different way of reasoning.

    As an example:
    2 + 2 = 4, can be arrived at by deduction completely apart from any external stimulus.
    My desk is made of wood, can only be arrived at by induction, or at least by some method relying on input to the senses.

    My personal thoughts are that yes, Poper's ideas are just another form of "truth" whatever that means, but that deduction is far more fundamental than induction...

  • Money (Score:3, Funny)

    by IanBevan ( 213109 ) on Thursday February 20, 2003 @04:37PM (#5346719) Homepage

    Taleb makes a living from unforeseen events...

    That's his job ? Doesn't that make a cashflow forecast a bit tricky ?

    Bank Manager: Mr Taleb, you're mortgage payment bounced this month

    Taleb: Oh. I never saw that coming...

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