Fooled By Randomness

What’s up my fellow lovers of randomness and mathematics. This are my public notes for Fooled By Randomness. One of my favorite books. As of 2020 I’ve read this book three times and plan on reading it a few more.

There are a lot of critics of Nassim’s books that compare him to an cantankerous critic of everything but I think a lot of people are missing the value of the probability-first model of thinking that Nassim teaches in his books/rants. Fooled by Randomness has allowed me to see the world with another perspective, yes it’s definitely made me more critical but at the same time I have a stronger appreciation for the beautiful role of randomness and luck in life.

The biggest thing is this book has given me a lesson in understanding myself away from the typical narrative centric based understanding of my life.

Thanks Nassim ❤️

General Summary of Fooled By Randomness

👇 Below you will find a collection of random notes categorized in various sections. 👇


Mental Limitations

  • One is not more resilient to being fooled by randomness by reading, learning or practicing any form of logical mindfulness. 
  • Most people don’t take into account unobserved 1st and 2nd order affects but these are extremely important when considering something.
  • The world is becoming increasingly filled with noise. As we wade through the overly noisy waters trying to find meaning we become trained for more and more simplifications over substance. Think Blinkest books….
  • What is common sense? Einstein once said that it’s nothing more than a collection of shared misconceptions acquired by age 18
  • Memory in humans is a large machine to make inductive inferences. Think of memories… What is easier to remember a collection of random facts or a story? Causality is easier to commit to memory. Our brains would have less work to do in order to retain the information. The size of the information itself is smaller and easier to hold. The effect of this compression is the reduction of randomness and informational noise.
  • The absence of a central processing or decision making system that is FULLY in charge makes us engage in decisions that may be in conflict with one another.  Three brains deciding, not just one
  • Most people never think about sample size when making decisions. 
  • 🌟The Simulation Heuristic – imagined possibilities and future events are easier to imagine and think of and therefore viewed as more possible. The easier it is for us to simulate a scenario in our mind the more likely we see it. 
  • We don’t actually think when making most choices, we just use our heuristics
  • How many brains? 3. Reptilian, Limic Center (emotions) and Neocortex (decisions)
  • One of my goals in life should be to take advantage of people’s bias and not fall victim to it
  • 🌟Wittgenstein’s Ruler – Unless you have confidence in the ruler’s reliability, if you are using a ruler to measure a table you may also be using the table to measure the ruler. The idea is that the review often tells more about the reviewer than the actual thing it’s reviewing. 
  • Another way to look at stoicism – it’s an attempt by man to get even with probability. 

Epistemological Stuff 

  • 🌟One of the most important assets to protect is deep seated intellectual insecurity about everything you feel and think you know. This insecurity should also extend itself to those around you that demonstrate that same perceived sense of intellectual knowledge. One should cultivate a mentality of poking fun of oneself as well as those who take their knowledge too seriously
  • Asymmetry lies at the foundations of knowledge. Even considering this asymmetry will bring you closer to better understanding.
  • A theory that does not present a set of conditions under which it could be considered wrong would be termed charlatanism – it would be impossible to reject
  • This is the point of demarcation between science and nonsense
  • Knowledge doesn’t always increase with incremental knowledge either. You can test something over and over again and still get incorrect data. 
  • The more info you have the more likely you are to drown in it. Ouch

Randomness

  • When considering randomness in life, don’t think in absolutes. It’s not ALL random, but rather more random than we think.
  • We often attribute mild success to skills and labor but one must look at wild success as highly dependent on variance and randomness. 

Casuality 

  • The arrow of causality is hard for us to understand. In a lot of cases it’s just impossible. We want narratives that explain how things work and make them up when they don’t exist.  For example – it may seem intuitive that every successful person is hardworking and intelligent that may not be the case. As is the other way around with unsuccessful people
  • When one looks at the past it will always be deterministic since only one observation took place… that of the person who recorded it. Much of history is lost. Our minds understand events not with the preceding future events but only with past events.
  • While history does flow forward we understand it only backwards and strive to find causality in everything.
  • We read too much into shallow history as our sample set is relatively small when compared to Earth’s history. Things that have never happened before happen all the time, we just aren’t aware of the totality of the amount of possible events. 
  • Sample size really fucks up our perceptions of what is possible and what isn’t… just saying…
  • We are trained to take advantage of the information that is in front of our eyes (tangible) vs the information that we do not see (intangible)
  • How to define hindsight bias ? the highest performing realization will be the most visible
  • Human being are not made to see things as independent from one another. We can create causality where there is none. 
  • 🌟 Conditional Probabilities – when we look at events we look at them objectively but many times the probability of some event or happening is also conditional on something else making the objective measure quite skewed. Basically, the world isn’t a level measuring ground
  • Absence of Evidence vs Evidence of Absence – No proof vs I have proof there is no proof.

Causality vs Nonlinearity

  • Our brains are not cut out for nonlinearity. People think that two variables causally can always support the same results
  • Our emotions are designed for linearity and it’s why we so often confuse what is going on in the real world. 
  • 🌟 IMPORTANT – Reality and progress rarely give you the privilege of a satisfying linear positive progression. This is best exemplified in the process of learning anything complicated. 
  • People have a hard time understanding numbers, think of this.. In financial news percentage moves are a huge focus but we lack understanding of significance. A 2% move is not just twice as significant as a 1% move but rather many times (maybe 4-10X) times more as the scale isn’t linear. 

Emotions

  • I’ve spent most of my adult life in a mental battle between my brain and my emotions with my emotions usually winning. The only differentiating factor in my life is that I’ve learned to go (somewhat) around my emotions rather than rationalizing them via narratives. 
  • Despite what you might think risk detection and avoidance are not part of the thinking neocortex. We don’t think to avoid risk… instead the emotional part of the brain is mostly in charge of risk assessment. So mixing risk analysis and logic don’t go together, this needs to be trained. We look at “risks like feelings”. So then what is the purpose of rational thinking? Namely to post hoc explain one’s actions by fitting some logic to them. Emotions first… logic second. 
  • We make decisions WITH emotions and then post rationalize. Research by Dmasio shows that a purely unemotional man was incapable of making the simplest of decisions. This is the part that is important ….. If one were to perform an optimizing operation across an extremely large set of variables even with a brain as large as ours, it would take an incredibly LONG time.. So we need a shortcut, emotions are there to prevent us from temporizing and stalling. Call them the lubricants of reason. Research by Joseph LeDoux shows that neural connections from the emotion system to the cognitive system are much stronger than from the cognitive to the emotional one. Emotions first baby

Investing

  • One may do well to look at the stock market or any market as some elaborate scam and not hold any emotional based belief in it. 
  • Risk is rarely considered in successful trading strategies or massive losses avoided. There is a myopic focus on the successes only. 
  • There is a strong tendency to give attention to vivid risk and forget abstract risk. 
  • The best way to make good long term investing decisions is to not have access to information. People who look too much at randomness get burned out by it. Their emotions get drained.
  • Non Binary – Nassim does not like to stay committed to one perspective. He can quickly change stance and move from one way of thinking to another. 
  • One must look at the magnitude as well as probability. Yes, one decision may be wrong or bad in most cases but if the magnitude of that one or two times when it’s right is extremely high then it may be worth it.
  • Markets aren’t simple win/lose situations. The cost in either direction can have 1-2nd order effects that make them difficult to understand. 
  • Regression to the mean – also known as the law of large numbers. The more samples you have the more then tend to default to having the results flatten out

Evolution

  • Animals (humans included) like to signal success physiologically or via symbols. This is related to evolutionary based mate selection. Signal vs Noise here
  • Our inability to deal with the complex randomness of life is manifested in our constant making and unmaking of prophets. Prophets are chosen based on the outputs of random processes in an incredibly complex world. They help us understand what is beneath the surface too complex for most people to understand.  
  • One must come to the conclusion that our minds aren’t designed to understand the world. They are designed to get out of trouble quickly and have children. 
  • Those who have had success predicting the past will think of themselves as good at predicting the future. 
  • Not all evolution is beneficial. Negative mutations are traits that survive in spite of being far worse than their alternatives. From a reproductive fitness standpoint they are more resilient. Randomness injected into a system may not always produce good consequences. Entire systems may become parasitic and unhealthy. 
  • We don’t live in a world where things continually trend towards being better. Even believing in continuity or progress is one that was instilled by the early twentieth century philosophers. 

History

  • The religion position and backdrop of the last several centuries blocked the growth of tools and insights that would hint at an absence of determinism (God deciding everything) and causes delays in probabilistic research. 

Thoughts and Ideas

  • Nassim states he was only able to develop a sense of respect for history by making himself aware he wasn’t programmed to learn from a textbook
  • We don’t learn from history. Weirdly enough all the respect we have for history doesn’t translate well into our treatment of the present moment. 
  • Ergodicity – Means roughly that under certain conditions very long sample paths would end up resembling each other. This is also like the law of large numbers, with enough sample sets the averages tend to flatten out.
  • It would take a lot of introspection to see that the many hours of financial or other news you got each week were mostly noise. 
  • Journalism is a thoughtless process of capturing the noise that will capture people’s attention
  • Nassim’s sole advantage in life is that he may know some of his weaknesses and know that he (like I) is incapable of taming his emotions. 
  • Modern life makes us extremely realistic and intellectual when it comes to matters such as politics or religion, but yet as irrational as possible by matters ruled by nonsense. Tangible > Intangible
  • If there are 23 people in the room the chances of one person having the same birthday is about 50%
  • Absence of Evidence – One of the problems with defining causality is a finding of absence and the absence of findings get mixed together. 

Two Categories of Information

Deductive – 2+2=4 (axiomatic)

Inductive – “it rains in Spain or New Yorker are rude” (verifiable based on experience)


General

I loved this chart, in the book Nassim provides an essential reframe for a lot of the common things that happen in life. Are skilled people really skilled or are they just lucky?

Look from the Left to the Right to determine the causality and assumptions we place in each situation.

Luck  – – – > Skills

Randomness – – –  > Determinism

Probability – – –  > Certainty

Belief – – –  > Knowledge

Theory – – –  > Reality

Anecdote – – –  > Causality/Law

Forecast – – –  > Prophecy

Noise – – –  > Signal

 

Market Performance

Lucky Idiot – – –  > Skilled Investor

Survivorship Bias – – –  > Market Outperformance