Fooled by randomness: the hidden role of chance in life and in the markets

Mosques in the clouds 1

Part I Solon's warning

Skewness, asymmetry, induction

9

1 If you're so rich why aren't you so smart? 13

Nero Tulip 13

Hit by lightning 13

Temporary sanity 14

Modus operandi 16

No work ethics 18

There are always secrets 19

John the high-yield trader 20

An overpaid hick 21

The red-hot summer 23

Serotonin and randomness 24

Your dentist is rich, very rich 26

2 A bizarre accounting method 28

Alternative history 28

Russian roulette 29

Possible worlds 30

An even more vicious roulette 31

Smooth peer relations 32

Salvation via Aeroflot 34

Solon visits Regine's night club 36

George Will is no Solon: On counterintuitive truths 38

Humiliated in debates 40

A different kind of earthquake 41

Proverbs galore 43

Risk managers 44

Epiphenomena 45

3 A mathematical meditation on history 46

Europlayboy mathematics 46

The tools 47

Monte Carlo mathematics 49

Fun in my attic 51

Making history 51

Zorglubs crowding the attic 52

Denigration of history 53

The stove is hot 54

Skills in predicting past history 56

My Solon 58

Distilled thinking on your PalmPilot 59

Breaking news 59

Shiller redux 62

Gerontocracy 63

Philostratus in Monte Carlo: On the difference between noise and information 64

4 Randomness, nonsense, and the scientific intellectual 69

Randomness and the verb 69

Reverse Turing test 71

The father of all pseudothinkers 73

Monte Carlo poetry 73

5 Survival of the least fit

Can evolution be fooled by randomness?

77

Carlos the emerging markets wizard 77

The good years 80

Averaging down 81

Lines in the sand 81

John the high-yield trader 83

The Quant who knew computers and equations 84

The traits they shared 87

A review of market fools of randomness constants 88

Naive evolutionary theories 90

Can evolution be fooled by randomness? 92

6 Skewness and asymmetry 93

The median is not the message 93

bull and bear zoology 95

An arrogant 29-year-old son 97

Rare events 98

Symmetry and science 99

Almost everybody is above average 100

The rare event fallacy 103

The mother of all deceptions 103

Why don't statisticians detect rare events? 106

A mischievous child replaces the black balls 107

7 The problem of induction 109

From Bacon to Hume 109

Cygnus Atratus 110

Niederhoffer, Victorian gentleman 110

Sir Karl's promoting agent 113

Location, location 116

Popper's answer 117

Open society 119

Nobody is perfect 119

Induction and memory 120

Pascal's wager 121

Thank you Solon 121

Part II Monkeys on typewriters

Survivorship and other survivorship and other biases

123

It depends on the number of monkeys 126

Vicious real life 127

This section 127

8 Too many millionaires next door 129

How to stop the sting of failure 129

Somewhat happy 129

Too much work 130

You're a failure 131

Double survivorship biases 133

More experts 133

Visibility winners 134

It's a bull market 134

A guru's opinion 136

9 It is easier to buy and sell than fry an egg 138

Fooled by numbers 140

Placebo investors 140

Nobody has to be competent 142

Regression to the mean 143

Ergodicity 144

Life is coincidental 145

The mysterious letter 145

An interrupted tennis game 146

Reverse survivors 146

The birthday paradox 147

It's a small world! 147

Data mining, statistics, and charlatanism 148

The best book I have ever read! 149

The backtester 149

A more unsettling extension 151

The earnings season: Fooled by the results 151

Comparative luck 153

Cancer cures 153

Professor Pearson goes to Monte Carlo (literally): Randomness does not look random! 155

The dog that did not bark: On biases in scientific knowledge 156

I have no conclusion 157

10 Loser takes all

On the nonlinearities of life

159

The sandpile effect 159

Enter randomness 161

Learning to type 161

Mathematics inside and outside the real world 163

The science of networks 164

Our brain 165

Buridan's donkey or the good side of randomness 166

When it rains, it pours 167

11 Randomness and our brain: we are probability blind 168

Paris or the Bahamas? 168

Some architectural considerations 169

Beware the philosopher bureaucrat 171

Satisficing 172

Flawed, not Just imperfect 173

Kahneman and Tversky 173

Where is Napoleon when we need him? 175

"I'm as good as my last trade" and other Heuristics 176

degree in a fortune cookie 179

Two systems of reasoning 181

Why we don't marry the first date 181

Our natural habitat 182

Fast and frugal 184

Neurobiologists too 185

Kafka in a courtroom 187

An absurd world 189

Examples of biases in understanding probability 190

We are option blind 191

Probabilities and the media (more journalists) 193

CNBC at lunch time 194

You should be dead by now 195

The Bloomberg explanations 195

Filtering methods 198

We do not understand confidence levels 199

An admission 200

Part III Wax in my ears

Living with randomitis

201

I am not so intelligent 204

Wittgenstein's ruler 205

The Odyssean mute command 206

12 Gamblers' ticks and pigeons in a box 209

Taxi-cab English and causality 209

The Skinner pigeon experiment 212

Philostratus redux 213

13 Carneades comes to Rome: On probability and skepticism 216

Carneades comes to Rome 216

Probability the child of skepticism 218

Monsieur de Norpois's opinions 219

Path dependence of beliefs 221

Computing instead of thinking 222

From funeral to funeral 225

14 Bacchus abandons Antony 226

Notes on Jackie O.'s funeral 227

Randomness and personal elegance 229

Epilogue: Solon told you so 231

Beware the London traffic Jams 231

A trip to the library: Notes and reading recommendations 232

Acknowledgments for the first edition 265.