Nassim Taleb writes in Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
The argument in favor of “new things” and even more “new new things” goes as follows: Look at the dramatic changes that have been brought about by the arrival of new technologies, such as the automobile, the airplane, the telephone, and the personal computer. Middlebrow inference (inference stripped of probabilistic thinking) would lead one to believe that all new technologies and inventions would likewise revolutionize our lives. But the answer is not so obvious: Here we only see and count the winners, to the exclusion of the losers (it is like saying that actors and writers are rich, ignoring the fact that actors are largely waiters — and lucky to be ones, for the less comely writers usually serve French fries at McDonald’s). Losers? The Saturday newspaper lists dozens of new patents of such items that can revolutionize our lives. People tend to infer that because some inventions have revolutionized our lives that inventions are good to endorse and we should favor the new over the old. I hold the opposite view. The opportunity cost of missing a “new new thing” like the airplane and the automobile is minuscule compared to the toxicity of all the garbage one has to go through to get to these jewels (assuming these have brought some improvement to our lives, which I frequently doubt).
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. We will examine the dubious value of the highly frequent news with a more technical discussion of signal filtering and observation frequency farther down. I will say here that such respect for the time-honored provides arguments to rule out any commerce with the babbling modern journalist and implies a minimal exposure to the media as a guiding principle for someone involved in decision making under uncertainty. If there is anything better than noise in the mass of “urgent” news pounding us, it would be like a needle in a haystack. People do not realize that the media is paid to get your attention. For a journalist, silence rarely surpassed any word.
On the rare occasions when I boarded the 6:42 train to New York I observed with amazement the hordes of depressed business commuters (who seemed to prefer to be elsewhere) studiously buried in The Wall Street Journal, apprised of the minutiae of companies that, at the time of writing now, are probably out of business. Indeed it is difficult to ascertain whether they seem depressed because they are reading the newspaper, or if depressive people tend to read the newspaper, or if people who are living outside their genetic habitat both read the newspaper and look sleepy and depressed. But while early on in my career such focus on noise would have offended me intellectually, as I would have deemed such information as too statistically insignificant for the derivation of any meaningful conclusion, I currently look at it with delight. I am happy to see such mass-scale idiotic decision making, prone to overreaction in their post-perusal investment orders – in other words I currently see in the fact that people read such material an insurance for my continuing in the entertaining business of option trading against the fools of randomness. (It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world. This problem is similar to the weaknesses in our ability to correct for past errors: like a health club membership taken out to satisfy a New Year’s resolution, people often think that it will surely be the next match of news that will really make a difference to their understanding of things.)
A counterargument to Taleb’s position is that by being exposed to the media, one can sample the views of other market participants. When too many market all have the same opinion, asset prices tend to become overbought or oversold which lead to excellent investment opportunities.
While I thoroughly enjoyed reading Fooled By Randomness, one of my chief criticisms is that Taleb is thoroughly convinced that his way of approaching financial markets is superior and remains unwilling to consider other opinions. His arrogance is apparent throughout the book as he manages to insult or offend several groups of people. Still, I found his writing to be extremely thought-provoking.
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Having read both Fooled by randomness and Black Swan, let me tell you that Nassim’s arrogance balloons.
I read Black Swan first and despite finishing it and finding it a thoroughly good and thought provoking book, every page is just full of reference to papers or studies that agree with him (I am unsure whether his view were formed from these studies or simply succumbed to confirmation bias – a bias he criticises earlier in the book- ) making the book very difficult to read. Every chapter feels like :
1. This is what I think.
2. Here is a list of people that agree with me.
3. These people disagree with me and are therefore stupid.
4. More studies showing that Nassim is right.
The first book, fooled by randomness is a lot easier (shorter) and more enjoyable: Nassim shares more anecdotes rather than academic papers, and despite being very arrogant is sometimes likeable.
On a side note: I always found it funny that Nassim mocks academic (in particular those holding MBAs or PhDs- but uses them extensively throughout his book) but then uses them to defend his arguments.
Stefan, I recently bought The Black Swan and am looking forward to reading it. I prefer the academic to writing designed for selling books, so perhaps I will enjoy The Black Swan more.
I’m glad I’m not the only one who picked up on Taleb’s arrogance. Still, I found his writing to be excellent.
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Stefan, I completely agree. While his writing is quite thought provoking, even as I read through I noticed considerable inconsistencies in his argument(s). No doubt if I sat down to thoroughly dissect the book there may be more.
He makes a number of valid points, and I feel that his ideas have probably influenced my perception of simulation and predictions, but equally I do not see him as a grandiose master of a probability, and his combative and dismissive style is, at times, both frustrating and grating given his own shortcomings as an author.
Blood good read though!
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