Fooled by Randomness (Nassim Nicholas Taleb, 2001)

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Epiphenomena

  • A mental state regarded as a by-product of brain activity.
  • By "watching " your risks, are you effectively reducing them or are you giving yourself the feeling that you are doing your duty?
Monte Carlo generator
  • One can generate thousands, perhaps millions, of random sample paths, and look at the prevalent characteristics of some of their features.
Randomness constants
  • An overestimation of the accuracy of their beliefs in some measure, either economic (Carlos) or statistical (John).
  • The U.S. dollar was overpriced (i.e., the foreign currencies were undervalued) in the early 1980s.
  • A tendency to get married to positions.
  • The tendency to change their story.
  • No precise game plan ahead of time as to what to do in the event of losses.
  • Absence of critical thinking expressed in absence of revision of their stance with "stop losses."
Bullish and Bearish are very subjective
  • The overall ratio should be applied to see its effectiveness
  • Market goes up (probability) 70%, (outcome) up 1%, (expectation) 0.7
  • Market goes down (probability) 30%, (outcome) down 10%, (expectation) -3.0
  • Total net is -2.3
Jim Rogers on Options
  • I don't buy options. Buying options is another way to go to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lost money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls.
Induction
  • Not all swan are white because someone surveyed 4,000 swan and never see a white one.
  • Car accidents happen nearer to home because people spent more time driving around their home.
Chances and probability
  • If you put infinite number of monkeys with a strong typewriter, will it produce a script?
  • The probability is super low but the primary principle is already impossible.
Coincidence
  • The Mysterious Letter
    • Predictions were sent to many people randomly and finally a few who believed it paid the price.
  • An Interrupted Tennis Game
    • You get more prone to believe in things coming to you than seeking it.
  • Reverse Survivors
    • They maximises their odds to stay in the game.
  • The birthday paradox
    • In a room of 23 person, there is a 50% chance 2 have the same birthday.
  • It's a Small World!
    • When a dataset is being tested against any correlation, it can even be connected to a woman's skirt length.
Trader and Scientific Approach
  • ''I'm as good as my last trade."
    • Prospect theory 
      • Looking at differences, not absolutes, and resetting to a specific reference point
  • "Sound-bite effect" or "Fade the fears"
    • Affect heuristic, risk-as-feeling theory
      • People react to concrete and visible risks, not abstract ones
  • It was so obvious" or "Monday morning quarterback"
    • Hindsight bias
      • Things appear to be more predictable after the fact
  • "You were wrong" 
    • Belief in the law of small numbers
      • Inductive fallacies; jumping to general conclusions too quickly
  • Brooklyn smarts/MIT intelligence
    • Two systems of reasoning
      • The working brain is not quite the reasoning one
  • "It will never go there"
    • Overconfidence 
      • Risk-taking out of an underestimation of the odds

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