Fooled By Randomness - Nassim Nicholas Taleb
In this video, we will talk about 7 of the
most important ideas from the book Fooled by Randomness. So let us get started with the first one. We were playing poker the other night and
I continuously won 3 rounds. Look at me I proudly exclaimed to myself! I, now know how to play big and win big.
Well Or so I thought?!! Because by the end of the game I had lost
more than half of what I had started with. The same thing happened to me when I started
trading stocks. After initial rallies, I thought I'm a capable
investor but in the long run, I ended up losing a large amount of money. So the first lesson is - Don't be fooled by
luck and know the difference between knowing something and "just being lucky"
The 2nd idea is that "Theories are meant to be proven wrong" - Some of you will be going
like whaaaat!? What are you saying? Well, Let me explain.
The empirical science relies on a process
called induction - i.E. We infer things about the world based on our
observations. Thus, from seeing 100's of white swans we
may infer (incorrectly) that all swans are white. But no amount of observations of white swans
can allow the inference that all swans are white, However, the observation of a single
black swan is sufficient to refute the conclusion.
This is how the scientific community grows,
the existing theories evolve into a new one. How does this apply to your regular life? Your financial advisor may ignore an advice
saying. Well, this has never happened before, but
he may wake up to an unpleasant surprise and so can your funds. The next idea is that Survival of the fittest
is a lie, at least for non-living things - The best example for this is the QWERTY keyboard
that we use.
This was designed just to avoid old typewriters
from jamming and is definitely not the best we can come up with. Then why don't we have the best possible version? Laziness. We are satisfied with a sub-optimal solution. A lot of people have adopted it and now no
one wants to get into the whole keyboard business again unless it's absolutely necessary.
Having said that, let me introduce you to
an interesting behavior that we all unknowingly, unconsciously exhibit. Let us say that you are building a sand castle
and you are about to add an additional grain of sand to it. What do you expect will happen, the castle
will grow incrementally, right? But in reality, an incremental addition can
have a huge impact. A single grain of sand can cause the entire
castle to tumble.
And this tipping point is hard for us to predict. Similarly, even inadequate products may come
to dominate the market because they pass the so-called tipping point. Microsoft is a classic example where people
are using this just because there are other people who are using this or in other words
it has crossed its tipping point. This is how overnight success happens right.
You put hours and hours of effort to see no
result and one day you wake up and you see the fruits of your hard work all of a sudden. Life is unfair and non-linear. The best do not always win
The fourth idea is something we all love to do, take shortcuts - And this is not our fault. Evolution has programmed our brain in such
a way.
Today, if you were in a jungle in front of
a lion you wouldn't stop to think if the lion is really hungry or if he maybe is in a generous
mood before you ultimately take a decision on whether you want to stay there or run. Evolution has programmed us to run the hell
out of there. Your brain, at times, cuts through complicated
arguments which involves considering all points rationally, and it dives into a conclusion. If it were not for this, you'll most likely
be dead in the above case.
And this nature of the brain remains the same
even if you are not in a do or die situation. But we must understand when these shortcuts
need to be avoided. We must not let our brain prevent us from
making calculated decisions when rational thinking is the need of the hour. The next idea connects emotional and rational
thinking.
The author suggests, Emotions overwhelm our
rational thinking, but they help us make decisions - This is one of my favorites. Consider a donkey who is equally hungry and
thirsty standing equidistant from both food and water. If he is purely rational about what to do,
in theory, it would die of both hunger and thirst, unable to decide which one to pursue
first. So emotions at times act as our impulses and
they help us make decisions.
But there are times when we need to keep our
emotions aside and use our rational thinking. For example, an investor who is prone to act
irrationally when while incurring losses should try and avoid looking at the performance of
his portfolio until it raises a predefined alarm. Just how a teacher should keep her emotions
aside while correcting the paper The next idea that many of you will know about
is Hindsight bias - In retrospect, past events always seem more predictable than they were
at the time. Especially true with stock market analysis.
With enough data, you can find a pattern with
anything. Even when it doesn't exist. How many times have you found yourself saying
- "Well I almost say that one coming" or "I'm not going to fall for such trick again". Probably a lot of time.
Gambler's tricks are manifestations of this
effect. For example if a trader wins on a day he wore
glasses and a green shirt, he will probably start wearing the same outfit, perhaps unconsciously. We are poor at understanding the impact of
a rare event - Say you are playing a game where you have 999/1000 chances of winning
1$ and 1/1000 chances of losing 10000 dollars. It is a basic human tendency to base decisions
on what is likely to happen, but in this case it would be a costly mistake.
Though it is highly likely to win 1$ but a
disproportionately larger loss that you may incur every 1000th time means that the expected
outcome of each round is a loss of 9000$. Even an experienced investor will fall into
this trap where they win small and lose big. Same with taking an appropriate health insurance,
many people don't take this thinking why pay a premium every year. What they fail to realize is that the gain
in terms of security outweighs the intermittent loss Let me know what you think about the video
in the comments below and If you found this video helpful give it a thumbs up, share it
with your friends, and subscribe to the channel to feed your hungry brain.
most important ideas from the book Fooled by Randomness. So let us get started with the first one. We were playing poker the other night and
I continuously won 3 rounds. Look at me I proudly exclaimed to myself! I, now know how to play big and win big.
Well Or so I thought?!! Because by the end of the game I had lost
more than half of what I had started with. The same thing happened to me when I started
trading stocks. After initial rallies, I thought I'm a capable
investor but in the long run, I ended up losing a large amount of money. So the first lesson is - Don't be fooled by
luck and know the difference between knowing something and "just being lucky"
The 2nd idea is that "Theories are meant to be proven wrong" - Some of you will be going
like whaaaat!? What are you saying? Well, Let me explain.
The empirical science relies on a process
called induction - i.E. We infer things about the world based on our
observations. Thus, from seeing 100's of white swans we
may infer (incorrectly) that all swans are white. But no amount of observations of white swans
can allow the inference that all swans are white, However, the observation of a single
black swan is sufficient to refute the conclusion.
This is how the scientific community grows,
the existing theories evolve into a new one. How does this apply to your regular life? Your financial advisor may ignore an advice
saying. Well, this has never happened before, but
he may wake up to an unpleasant surprise and so can your funds. The next idea is that Survival of the fittest
is a lie, at least for non-living things - The best example for this is the QWERTY keyboard
that we use.
This was designed just to avoid old typewriters
from jamming and is definitely not the best we can come up with. Then why don't we have the best possible version? Laziness. We are satisfied with a sub-optimal solution. A lot of people have adopted it and now no
one wants to get into the whole keyboard business again unless it's absolutely necessary.
Having said that, let me introduce you to
an interesting behavior that we all unknowingly, unconsciously exhibit. Let us say that you are building a sand castle
and you are about to add an additional grain of sand to it. What do you expect will happen, the castle
will grow incrementally, right? But in reality, an incremental addition can
have a huge impact. A single grain of sand can cause the entire
castle to tumble.
And this tipping point is hard for us to predict. Similarly, even inadequate products may come
to dominate the market because they pass the so-called tipping point. Microsoft is a classic example where people
are using this just because there are other people who are using this or in other words
it has crossed its tipping point. This is how overnight success happens right.
You put hours and hours of effort to see no
result and one day you wake up and you see the fruits of your hard work all of a sudden. Life is unfair and non-linear. The best do not always win
The fourth idea is something we all love to do, take shortcuts - And this is not our fault. Evolution has programmed our brain in such
a way.
Today, if you were in a jungle in front of
a lion you wouldn't stop to think if the lion is really hungry or if he maybe is in a generous
mood before you ultimately take a decision on whether you want to stay there or run. Evolution has programmed us to run the hell
out of there. Your brain, at times, cuts through complicated
arguments which involves considering all points rationally, and it dives into a conclusion. If it were not for this, you'll most likely
be dead in the above case.
And this nature of the brain remains the same
even if you are not in a do or die situation. But we must understand when these shortcuts
need to be avoided. We must not let our brain prevent us from
making calculated decisions when rational thinking is the need of the hour. The next idea connects emotional and rational
thinking.
The author suggests, Emotions overwhelm our
rational thinking, but they help us make decisions - This is one of my favorites. Consider a donkey who is equally hungry and
thirsty standing equidistant from both food and water. If he is purely rational about what to do,
in theory, it would die of both hunger and thirst, unable to decide which one to pursue
first. So emotions at times act as our impulses and
they help us make decisions.
But there are times when we need to keep our
emotions aside and use our rational thinking. For example, an investor who is prone to act
irrationally when while incurring losses should try and avoid looking at the performance of
his portfolio until it raises a predefined alarm. Just how a teacher should keep her emotions
aside while correcting the paper The next idea that many of you will know about
is Hindsight bias - In retrospect, past events always seem more predictable than they were
at the time. Especially true with stock market analysis.
With enough data, you can find a pattern with
anything. Even when it doesn't exist. How many times have you found yourself saying
- "Well I almost say that one coming" or "I'm not going to fall for such trick again". Probably a lot of time.
Gambler's tricks are manifestations of this
effect. For example if a trader wins on a day he wore
glasses and a green shirt, he will probably start wearing the same outfit, perhaps unconsciously. We are poor at understanding the impact of
a rare event - Say you are playing a game where you have 999/1000 chances of winning
1$ and 1/1000 chances of losing 10000 dollars. It is a basic human tendency to base decisions
on what is likely to happen, but in this case it would be a costly mistake.
Though it is highly likely to win 1$ but a
disproportionately larger loss that you may incur every 1000th time means that the expected
outcome of each round is a loss of 9000$. Even an experienced investor will fall into
this trap where they win small and lose big. Same with taking an appropriate health insurance,
many people don't take this thinking why pay a premium every year. What they fail to realize is that the gain
in terms of security outweighs the intermittent loss Let me know what you think about the video
in the comments below and If you found this video helpful give it a thumbs up, share it
with your friends, and subscribe to the channel to feed your hungry brain.
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