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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Summary of the Blinkist summary :
(my thoughts are in italic)

Randomness dominates the world because …

1. We often mistake luck and randomness for skill and determinism.

2. The problem of induction states no theory can ever be proved right, only wrong cos things constantly change and the next observation may prove us wrong (by a single “black swan”). Hence theories are constantly being proved wrong and replaced by better ones.

3. Life is unfair and non-linear: the best do not always win. For example, the QWERTY keyboard is a path-dependent outcome. If we were to start from scratch, we would not wind up with the same keyboard. Non-linear events like the tipping point are hard for us to predict. Our nature is to assume that an incremental input will create a similarly small result. In real life tho, an incremental change can have a huge impact.

We constantly fail to appreciate the impact of randomness because …

1. Our reasoning is context-dependent and mostly based on simple heuristics.

2. Emotions can help us make decisions, but also overwhelm our capacity for rational reasoning. Example: Buridan’s donkey that is equally hungry and thirsty stands equidistant between food and water. If it were purely rationally optimising what to do, theoretically it would die of both hunger and third, unable to decide which to pursue first. A little randomness helps it make up its mind. Emotions are fundamentally irrational precisely to stop us from temporising. Similarly, in some cases, we can choose to avoid emotional input to protect our reasoning.

3. In retrospect, We always find patterns, causes and explanations in past events, but they’re mostly useless for predicting the future.

4. We’re inherently poor at understanding the impact of rare events. Things that have never happened before actually happen all the time and are always unexpected. A perhaps less gratifying but more enduring trading strategy is better on rare, unlikely events with a big payoff should they occur.

Like how Michael Burry shorted the mortgage bond market.

Random noise is not worth listening to

Stock market price movements are mostly random, unimportant noise with only very little real change in the value of the stocks. Tho Bloomberg journalist may try to interpret and explain every minuscule movement, stock prices actually fluctuate quite disconnectedly from the fundamentals they’re supposed to reflect.

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