(Source #1) (Source #2)

Part I: Solon’s Warning

Solon’s Warning: what comes with luck, can be taken away by luck. Black Swan problem: it does not matter how often you succeed if one failure makes you lose it all.

1. If You’re So Rich, Why Aren’t You So Smart?: An illustration of the effect of randomness on social pecking order and jealousy, through two characters of opposite attitudes. On the concealed rare event. How things in modern life may change rather rapidly, except, perhaps, in dentistry.

2. A Bizarre Accounting Method: On alternative histories, a probabilistic view of the world, intellectual fraud, and the randomness wisdom of a Frenchman with steady bathing habits. How journalists are bred to not understand random series of events. Beware borrowed wisdom: How almost all great ideas concerning random outcomes are against conventional sapience. On the difference between correctness and intelligibility.

   $10 million earned from Russian roulette ≠ $10 million earned being a dentist. certainty is events that are likely to reproduce across different alternative histories. uncertainty is the opposite.

3. A Mathematical Meditation on History: On Monte Carlo simulation as a metaphor for understanding a sequence of random historical events. On randomness and artificial history. Age is beauty, almost always, and the new and the young are generally toxic. Send your history professor to an introductory class on sampling theory.

   Alternative sample path = The invisible histories that could have happened, but didn’t. Random sample path = A succession of virtual historical events, starting at a given date and ending at another, except that they are subjected to some varying level of uncertainty. Monte Carlo simulation = Generates thousands, perhaps millions, of random sample paths, and look at the prevalent characteristics of some of their features. Hindsight Bias: looking at the event with the information we learned after the event happened. Noise vs information: over a short time, you only observe the variability/variance of the portfolio, not the returns. -> daily news is full of noise.

4. Randomness, Nonsense, and the Scientific Intellectual: On extending the Monte Carlo generator to produce artificial thinking and compare it with rigorous nonrandom constructs. The science wars enter the business world. Why the aesthete in me loves to be fooled by randomness.

5. Survival of the Least Fit—Can Evolution Be Fooled By Randomness?: A case study on two rare events. On rare events and evolution. How “Darwinism” and evolution are concepts that are misunderstood in the nonbiological world. Life is not continuous. How evolution will be fooled by randomness. A prolegomenon for the problem of induction.

   Fools of randomness: tendency to 1) overestimate the accuracy of their beliefs in some measure, either economic or statistical 2) get married to positions 3) change their story (going from short-term trader to “long-term” investor) 4) no precise game plan ahead of time as to what to do in the event of losses (they never even imagined they would lose) 5) absence of critical thinking expressed in absence of revision of their stance with “stop losses” (they refused to use stop losses) 6) denial. Cross-sectional problem: best traders often seen as the worst ones in the short and medium-term, but are revealed to be the best ones in the long term.

6. Skewness and Asymmetry: We introduce the concept of skewness: Why the terms “bull” and “bear” have limited meaning outside of zoology. A vicious child wrecks the structure of randomness. An introduction to the problem of epistemic opacity. The penultimate step before the problem of induction.

   Probability ≠ expectation (i.e. probability x payoff). author made money on “rare events”. do not predict the future based on the past because in history, events “that never happened before” but that will happen in the future. Rare-Event Fallacy: misunderstanding of the risks derived from a narrow interpretation of past time series (a rare event exists precisely because it is unexpected). Asymmetry in knowledge is extremely important.

7. The Problem of Induction: On the chromodynamics of swans. Taking Solon’s warning into some philosophical territory. How Victor Niederhoffer taught me empiricism; I added deduction. Why it is not scientific to take science seriously. Soros promotes Popper. That bookstore on Eighteenth Street and Fifth Avenue. Pascal’s wager.

   Problem of Induction: No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion. Empiricism (observing events and making assumptions about them) is dangerous. science should not be taken as seriously as we think. Karl Popper: knowledge and discovery are not so much about what we know, but about what we don’t know -> a theory cannot be verified, only dismissed

Part II: Monkeys on Typewriters

the greater the number of business people, the more likely one will do particularly well

1. Too Many Millionaires Next Door: Three illustrations of the survivorship bias. Why very few people should live on Park Avenue. The millionaire next door has very flimsy clothes. An overcrowding of experts.

   Survivorship bias: implies that the highest performing realization will be the most visible. But it’s wrong. It’s wrong because the losers do not show up.

2. It Is Easier to Buy and Sell Than Fry an Egg: Some technical extensions of the survivorship bias. On the distribution of “coincidences” in life. It is preferable to be lucky than competent (but you can be caught). The birthday paradox. More charlatans (and more journalists). How the researcher with work ethics can find just about anything in data. On dogs not barking.

   a huge population of bad managers will produce a small number of great track records. the number of managers that survive depends on the number of managers that started. Regression to the mean: the larger the deviation from the mean, the more likely it is coming from luck rather than skills.

3. Loser Takes All—On the Nonlinearities of Life: The nonlinear viciousness of life. Moving to Bel Air and acquiring the vices of the rich and famous. Why Microsoft’s Bill Gates may not be the best in his business (but please do not inform him of such a fact). Depriving donkeys of food.

   Chaos theory: concerns itself primarily with functions in which a small input can lead to a disproportionate response. Progression isn’t linear.

4. Randomness and Our Mind: We Are Probability Blind: On the difficulty of thinking of your vacation as a linear combination of Paris and the Bahamas. Nero Tulip may never ski in the Alps again. Do not ask bureaucrats too many questions. A Brain Made in Brooklyn. We need Napoleon. Scientists bowing to the King of Sweden. A little more on journalistic pollution. Why you may be dead by now.

   Heuristics in decision making: described in Daniel Kahneman’s book “Thinking fast and slow”: 1) anchoring (comparing effect to a given reference) 2) availability (estimating the frequency of an event according to the ease with which instances of the event can be recalled) 3) representativeness (estimating probability of person belonging to a group by comparing characteristics to “typical” group member’s) 4) simulation (ease of mentally undoing an event—playing the alternative scenario) 5) affect (emotions elicited by events determine their probability in your mind)s to the practice of estimating the frequency of an event according to the ease with which instances of the event can be recalled.

Part III: Wax in my Ears

Wittgenstein’s Ruler: Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.

1. Gamblers’ Ticks and Pigeons In A Box: On gamblers’ ticks crowding up my life. Why bad taxi-cab English can help you make money. How I am the fool of all fools, except that I am aware of it. Dealing with my genetic unfitness. No boxes of chocolate under my trading desk.

   both humans and animals constantly look for logical patterns in randomness to help them get what they want.

2. Carneades Comes to Rome: On Probability and Skepticism: Cato the censor sends Carneades packing. Monsieur de Norpois does not remember his old opinions. Beware the scientist. Marrying ideas. The same Robert Merton putting the author on the map. Science evolves from funeral to funeral.

   Attribution bias: You attribute your successes to skills, but your failures to randomness.

3. Bacchus Abandons Antony: Montherlant’s death. Stoicism is not the stiff upper lip, but the illusion of victory of man against randomness It is so easy to be heroic. Randomness and personal elegance.

   We cannot avoid either randomness or emotions but we can make right decisions in the light of them.

Postscript - Three Afterthoughts in The Shower: 1) The Inverse Skills Problem (The higher up the corporate ladder, the higher the compensation to the individual but in general, the lower the evidence of such contribution.) 2) On Some Additional Benefits of Randomness (it gives you a buffer, a tolerance threshold for the unexpected) 3) Standing On One Leg (We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract.)