Fooled by Randomness, Nassim Nicholas Taleb

Added on Monday, December 20, 2021

Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently,
like a revolver that would have hundreds, even thousands, of chambers instead of six. After a few
dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security.

Second, unlike a well-defined, precise game like Russian roulette, where the risks are visible to
anyone capable of multiplying and dividing by six, one does not observe the barrel of reality.

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For example, people fail to learn that their emotional reactions to past experiences (positive or
negative) were short-lived—yet they continuously retain the bias of thinking that the purchase of an
object will bring long-lasting, possibly permanent, happiness or that a setback will cause severe and
prolonged distress (when in the past similar setbacks did not affect them for very long and the joy of
the purchase was short-lived).

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I will repeat this point until I get hoarse: A mistake is not something to be determined after the fact,
but in the light of the information until that point.

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Now the exact same argument applies to information. The problem with information is not that it is
diverting and generally useless, but that it is toxic.

Finally, I reckon that I am not immune to such an emotional defect. But I deal with it by having no
access to information, except in rare circumstances. Again, I prefer to read poetry. If an event is
important enough, it will find its way to my ears.

The same methodology can explain why the news (the high scale) is full of noise and why history (the
low scale) is largely stripped of it (though fraught with interpretation problems). This explains why I
prefer not to read the newspaper (outside of the obituary), why I never chitchat about markets, and,
when in a trading room, I frequent the mathematicians and the secretaries, not the traders. It
explains why it is better to read The New Yorker on Mondays than The Wall Street Journal every
morning (from the standpoint of frequency, aside from the massive gap in intellectual class between
the two publications).

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We do not need to be rational and scientific when it comes to the details of our daily life—only in
those that can harm us and threaten our survival. Modern life seems to invite us to do the exact
opposite; become extremely realistic and intellectual when it comes to such matters as religion and
personal behavior, yet as irrational as possible when it comes to matters ruled by randomness (say,
portfolio or real estate investments). I have encountered colleagues, “rational,” no-nonsense people,
who do not understand why I cherish the poetry of Baudelaire and Saint-John Perse or obscure (and
often impenetrable) writers like Elias Canetti, J. L. Borges, or Walter Benjamin. Yet they get sucked
into listening to the “analyses” of a television “guru,” or into buying the stock of a company they
know absolutely nothing about, based on tips by neighbors who drive expensive cars.
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There is a Yiddish saying: “If I am going to be forced to eat pork, it better be of the best kind.” If I am
going to be fooled by randomness, it better be of the beautiful (and harmless) kind. This point will be
made again in Part III.

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Carlos supposedly comes from a patrician Latin-American family that was heavily impoverished by
the economic troubles of the 1980s, but, again, I have rarely run into anyone from a ravaged country
whose family did not at some juncture own an entire province or, say, supply the Russian czar with
sets of dominoes.

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By some viciousness of the structure of randomness, a profitable person like John, someone who is a
pure loser in the long run and correspondingly unfit for survival, presents a high degree of eligibility
in the short run and has the propensity to multiply his genes. Recall the hormonal effect on posture
and its signaling effect to other potential mates. His success (or pseudosuccess owing to its fragility)
will show in his features as a beacon. An innocent potential mate will be fooled into thinking
(unconditionally) that he has a superior genetic makeup, until the following rare event. Solon seems
to have gotten the point; but try to explain the problem to a naive business Darwinist—or your rich
neighbor across the street.

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He also figured out the uselessness of the news, as he showed that reading the newspaper did not
confer a predictive advantage to its readers.
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If the past, by bringing surprises, did not resemble the past previous to it (what I call the past’s past),
then why should our future resemble our current past?

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rare event. The business of Part II is more pedestrian;

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I will probably lecture him that Machiavelli ascribed to luck at least a 50% role in life (the rest was
cunning and bravura), and that was before the creation of modern markets.

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The Monte Carlo generator will toss a coin; heads and the manager will make $10,000 over the year,
tails and he will lose $10,000. We run it for the first year. At the end of the year, we expect 5,000
managers to be up $10,000 each, and 5,000 to be down $10,000. Now we run the game a second
year. Again, we can expect 2,500 managers to be up two years in a row; another year, 1,250; a fourth
one, 625; a fifth, 313. We have now, simply in a fair game, 313 managers who made money for five
years in a row. Out of pure luck. Meanwhile if we throw one of these successful traders into the real
world we would get very interesting and helpful comments on his remarkable style, his incisive mind,
and the influences that helped him achieve such success. Some analysts may attribute his
achievement to precise elements among his childhood experiences. His biographer will dwell on the
wonderful role models provided by his parents; we would be supplied with black-and-white pictures
in the middle of the book of a great mind in the making. And the following year, should he stop
outperforming (recall that his odds of having a good year have stayed at 50%) they would start laying
 blame, finding fault with the relaxation in his work ethics, or his dissipated lifestyle. They will find
something he did before when he was successful that he has subsequently stopped doing, and
attribute his failure to that. The truth will be, however, that he simply ran out of luck.

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“Satisficing” was his idea (the melding together of satisfy and suffice): You stop when you get a near-
satisfactory solution. Otherwise it may take you an eternity to reach the smallest conclusion or
perform the smallest act. We are therefore rational, but in a limited way: “boundedly rational.” He
believed that our brains were a large optimizing machine that had built-in rules to stop somewhere.

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itself. This mechanism I also call 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.

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Recall that the accomplishment from which I derive the most pride is my weaning myself from
television and the news media. I am currently so weaned that it actually costs me more energy to
watch television than to perform any other activity, like, say, writing this book. But this did not come
without tricks.

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Chapter 10 showed, with the illustration of Buridan’s donkey, that randomness is not always
unwelcome. This discussion aims to show how some degree of unpredictability (or lack of
knowledge) can be beneficial to our defective species. A slightly random schedule prevents us from
optimizing and being exceedingly efficient, particularly in the wrong things.
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Chapter 10 showed, with the illustration of Buridan’s donkey, that randomness is not always
unwelcome. This discussion aims to show how some degree of unpredictability (or lack of
knowledge) can be beneficial to our defective species. A slightly random schedule prevents us from
optimizing and being exceedingly efficient, particularly in the wrong things. This little bit of
uncertainty might make the diner relax and forget the time pressures. He would be forced to act as a
satisficer instead of a maximizer (Chapter 11 discussed Simon’s satisficing as a blend of satisfying and
maximizing)—research

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I am convinced that we are not made for clear-cut, well-delineated schedules. We are made to live
like firemen, with downtime for lounging and meditating between calls, under the protection of
protective uncertainty. Regrettably, some people might be involuntarily turned into optimizers, like a
suburban child having his weekend minutes squeezed between karate, guitar lessons, and religious
education. As I am writing these lines I am on a slow train in the Alps, comfortably shielded from
traveling businesspersons. People around me are either students or retired persons, or those who do
not have “important appointments,” hence not afraid of what they call wasted time. To go from
Munich to Milan, I picked the seven-and-a-half-hour train instead of the plane, which no self-
respecting businessperson would do on a weekday, and am enjoying an air unpolluted by persons
squeezed by life.

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Indeed, in some domains—such as scientific discovery and venture capital investments—there is a

disproportionate payoff from the unknown, since you typically have little to lose and plenty to gain
from a rare event. We will see that, contrary to social-science wisdom, almost no discovery, no
technologies of note, came from design and planning—they were just Black Swans.

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So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is
because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or
“incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many
Black Swan opportunities as you can.

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The first leg of the triplet is the pathology of thinking that the world in which we live is more
understandable, more explainable, and therefore more predictable than it actually is. I was
constantly told by adults that the war, which ended up lasting close to seventeen years, was going to
end in “only a matter of days.” They seemed quite confident in their forecasts of duration, as can be
evidenced by the number of people who sat waiting in hotel rooms and other temporary quarters in
Cyprus, Greece, France, and elsewhere for the war to finish. One uncle kept telling me how, some
thirty years earlier, when the rich Palestinians fled to Lebanon, they considered it a very temporary
solution (most of those still alive are still there, six decades later). Yet when I asked him if it was going
to be the same with our conflict, he replied, “No, of course not. This place is different; it has always
been different.” Somehow what he detected in others did not seem to apply to him.

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Later, upon replaying the wartime events in my memory as I formulated my ideas on the perception
of random events, I developed the governing impression that our minds are wonderful explanation
machines, capable of making sense out of almost anything, capable of mounting explanations for all
manner of phenomena, and generally incapable of accepting the idea of unpredictability. These
events were unexplainable, but intelligent people thought they were capable of providing convincing
explanations for them—after the fact. Furthermore, the more intelligent the person, the better
sounding the explanation. What’s more worrisome is that all these beliefs and accounts appeared to
be logically coherent and devoid of inconsistencies.

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 While we have a highly unstable memory, a diary provides indelible facts recorded more or less
immediately; it thus allows the fixation of an unrevised perception and enables us to later study
events in their own context.

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Still, encountering Shirer’s book provided me with an intuition about the workings of history. One
would suppose that people living through the beginning of WWII had an inkling that something
momentous was taking place. Not at all.

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If you want to see what I mean by the arbitrariness of categories, check the situation of polarized
politics. The next time a Martian visits earth, try to explain to him why those who favor allowing the
elimination of a fetus in the mother’s womb also oppose capital punishment. Or try to explain to him
why those who accept abortion are supposed to be favorable to high taxation but against a strong
military. Why do those who prefer sexual freedom need to be against individual economic liberty?

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Categorizing always produces reduction in true complexity. It is a manifestation of the Black Swan
generator, that unshakable Platonicity that I defined in the Prologue. Any reduction of the world
around us can have explosive consequences since it rules out some sources of uncertainty; it drives
us to a misunderstanding of the fabric of the world. For instance, you may think that radical Islam
(and its values) are your allies against the threat of Communism, and so you may help them develop,
until they send two planes into downtown Manhattan.

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Public information can therefore be useless, particularly to a businessman, since prices can already
“include” all such information, and news shared with millions gives you no real advantage. Odds are
that one or more of the hundreds of millions of other readers of such information will already have
bought the security, thus pushing up the price. I then completely gave up reading newspapers and
 watching television, which freed up a considerable amount of time (say one hour or more a day,
enough time to read more than a hundred additional books per year, which, after a couple of
decades, starts mounting).

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This is sometimes called “f*** you money,” which, in spite of its coarseness, means that it allows you
to act like a Victorian gentleman, free from slavery. It is a psychological buffer: the capital is not so
large as to make you spoiled-rich, but large enough to give you the freedom to choose a new
occupation without excessive consideration of the financial rewards. It shields you from prostituting
your mind and frees you from outside authority—any outside authority.

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So I stayed in the quant and trading businesses (I’m still there), but organized myself to do minimal
but intense (and entertaining) work, focus only on the most technical aspects, never attend business
“meetings,” avoid the company of “achievers” and people in suits who don’t read books, and take a
sabbatical year for every three on average to fill up gaps in my scientific and philosophical culture. To
slowly distill my single idea, I wanted to become a flâneur, a professional meditator, sit in cafés,
lounge, unglued to desks and organization structures, sleep as long as I needed, read voraciously, and
not owe any explanation to anybody.

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Similarly, a writer expends the same effort to attract one single reader as she would to capture
several hundred million. J. K. Rowling, the author of the Harry Potter books, does not have to write
each book again every time someone wants to read it. But this is not so for a baker: he needs to bake
every single piece of bread in order to satisfy each additional customer.

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If the advice was helpful, and it was, in creating a classification for ranking uncertainty and
knowledge, it was a mistake as far as choices of profession went. It might have paid off for me, but
only because I was lucky and happened to be “in the right place at the right time,” as the saying goes.
If I myself had to give advice, I would recommend someone pick a profession that is not scalable! A
scalable profession is good only if you are successful; they are more competitive, produce monstrous
inequalities, and are far more random, with huge disparities between efforts and rewards—a