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

Preface

problems related to the calculus of probability rarely merit to transcend the footnote).
Outside of textbooks and casinos, probability almost never presents itself as a mathematical problem or a brain teaser.
In this book, considering that alternative outcomes could have taken place, that the world could have been different, is the core of probabilistic thinking.
It is a mistake to use, as journalists and some economists do, statistics without logic, but the reverse does not hold: It is not a mistake to use logic without statistics).

Chapter One

proprietary trading.
Trading forces someone to think hard; those who merely work hard generally lose their focus and intellectual energy.
Nero believes that risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.
Psychologists have shown that most people prefer to make $70,000 when others around them are making $60,000 than to make $80,000 when others around them are making $90,000.
For one cannot consider a profession without taking into account the average of the people who enter it, not the sample of those who have succeeded in it.

Chapter Two

Philosophers also have a branch of logic that specializes in the matter: whether some property holds across all possible worlds or if it holds across a single world—with ramifications into the philosophy of language called possible worlds semantics with such authors as Saul Kripke.
Very rarely is the generator visible to the naked eye. One is thus capable of unwittingly playing Russian roulette—and calling it by some alternative “low risk” name. We see the wealth being generated, never the processor, a matter that makes people lose sight of their risks, and never consider the losers.
But the world is not that homogeneous: There are some (though very few) who will call you to express their gratitude and thank you for having protected them from the events that did not take place.
Much of what rational thinking seems to do is rationalize one’s actions by fitting some logic to them.

Chapter Three

Mathematics is principally a tool to meditate, rather than to compute.
First, consider the sample path. The invisible histories have a scientific name, alternative sample paths, a name borrowed from the field of mathematics of probability called stochastic processes.
I have two ways of learning from history: from the past, by reading the elders; and from the future, thanks to my Monte Carlo toy.
In a well-known psychology case the Swiss doctor Claparède had an amnesic patient completely crippled with her ailment.
The scientific name of the distinction between the two memories, the conscious and the nonconscious, is declarative and nondeclarative.
Psychologists call this overestimation of what one knew at the time of the event due to subsequent information the hindsight bias, the “I knew it all along” effect.
A mistake is not something to be determined after the fact, but in the light of the information until that point.
Bad trades catch up with you, it is frequently said in the markets. Mathematicians of probability give that a fancy name: ergodicity. It means, roughly, that (under certain conditions) very long sample paths would end up resembling each other.
The janitor in Chapter 1 who won the lottery, if he lived one thousand years, cannot be expected to win more lotteries. Those who were unlucky in life in spite of their skills would eventually rise.
For an idea to have survived so long across so many cycles is indicative of its relative fitness. Noise, at least some noise, was filtered out.
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).
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
Like a health club membership taken out to satisfy a New Year’s resolution, people often think that it will surely be the next batch of news that will really make a difference to their understanding of things.)
The ratio of undistilled information to distilled is rising, saturating markets. The elder’s messages need not be delivered to you as imminent news.
There are hordes of thoughtful journalists in the business (I would suggest London’s Anatole Kaletsky and New York’s Jim Grant and Alan Abelson as the underrated representatives of such a class among financial journalists; Gary Stix among scientific journalists);
women prefer (on balance) to mate with healthy older men over healthy younger ones, everything else being equal, as the former provide some evidence of better genes. Gray hair signals an enhanced ability to survive—conditional on having reached the gray hair stage, a man is likely to be more resistant to the vagaries of life.
“For the gods perceive things in the future, ordinary people things in the present, but the wise perceive things about to happen.”
This scaling property of randomness is generally misundderstood, even by professionals.
(If you think that you can control your emotions, think that some people also believe that they can control their heartbeat or hair growth.)
3. When I see an investor monitoring his portfolio with live prices on his cellular telephone or his handheld, I smile and smile.
If an event is important enough, it will find its way to my ears. I will return to this point in time.
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).
It explains why it is better to read The New Yorker on Mondays than The Wall Street Journal every morning

Chapter Four

deductive, like “2 +2 =4,” i.e., incontrovertibly flowing from a precisely defined axiomatic framework (here the rules of arithmetic), or inductive, i.e., verifiable in some manner (experience, statistics, etc.), like “it rains in Spain” or “New Yorkers are generally rude.”
I suggest reading the hilarious Fashionable Nonsense by Alan Sokal for an illustration of such practice
A human can be said to be unintelligent if we can replicate his speech by a computer, which we know is unintelligent, and fool a human into believing that it was written by a human.
Fed with “postmodernist” texts, they can randomize phrases under a method called recursive grammar, and produce grammatically sound but entirely meaningless sentences that sound like Jacques Derrida, Camille Paglia, and such a crowd.
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).
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.

Chapter Five

A trader’s mental construction should direct him to do precisely what other people do not do.
Veteran trader Marty O’Connell calls this the firehouse effect. He had observed that firemen with much downtime who talk to each other for too long come to agree on many things that an outside, impartial observer would find ludicrous (they develop political ideas that are very similar).
And, at any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists—because these professions are more immune to randomness.
There is a saying that bad traders divorce their spouse sooner than abandon their positions. Loyalty to ideas is not a good thing for traders, scientists—or anyone.
many people become long-term investors after they lose money, postponing their decision to sell as part of their denial.
nature—Darwinian ideas are about reproductive fitness, not about survival.

Chapter Six

I try to make money infrequently, as infrequently as possible, simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price.
the dentist does not like volatility as it causes a high incidence of negative pangs. The closer he observes his performance, the more pain he will experience owing to the greater variability at a higher resolution.
Someone observing the time series of his occupation would see absolutely no gain, while every day would bring him closer in probability to the end result.
The same with publishers; they can publish dog after dog without their business model being the least questionable, if once every decade they hit on a Harry Potter string of super-bestsellers—provided of course that they publish quality work that has a small probability of being of very high appeal.
An interesting economist, Art De Vany, manages to apply these ideas to two fields: the movie business and his own health and lifestyle.
That is, for an n times increase in the sample size, we increase our knowledge by the square root of n.
For a sum of zeros, even repeated a billion times, remains zero; likewise an accumulation of research and gains in complexity will lead to naught if there is no firm ground beneath it.
There is no point searching for patterns that are available to everyone with a brokerage account; once detected, they would be self-canceling.

Chapter Seven

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.
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. He derived his knowledge of the world from past data stripped of preconceptions, commentaries, and stories. Since then, an entire industry of such operators, called statistical arbitrageurs, flourished; some of the successful ones were initially his trainees.
The following inductive statement illustrates the problem of interpreting past data literally, without methodology or logic: I have just completed a thorough statistical examination of the life of President Bush. For fifty-eight years, close to 21,000 observations, he did not die once. I can hence pronounce him as immortal, with a high degree of statistical significance.
He relied on the statement “The market has never done this before,” so he sold puts that made a small income if the statement was true and lost hugely in the event of it turning out to be wrong. When he blew up, close to a couple of decades of performance were overshadowed by a single event that only lasted a few minutes.
To conclude, extreme empiricism, competitiveness, and an absence of logical structure to one’s inference can be a quite explosive combination.
suddenly felt financially insecure and feared becoming an employee of some firm that would turn me into a corporate slave with “work ethics” (whenever I hear work ethics I interpret inefficient mediocrity).
Popper turned out to be exactly the opposite of what I initially thought about “philosophers”; he was the epitome of no nonsense. By
Why is a theory never right? Because we will never know if all the swans are white
Science is mere speculation, mere formulation of conjecture.
we like to emit logical and rational ideas but we do not necessarily enjoy this execution.
we are merely fit for the maximum probability of transmitting our genes in some given unsophisticated environment).
The philosopher Pascal proclaimed that the optimal strategy for humans is to believe in the existence of God. For if God exists, then the believer would be rewarded. If he does not exist, the believer would have nothing to lose.
Accordingly, I will use statistics and inductive methods to make aggressive bets, but I will not use them to manage my risks and exposure. Surprisingly, all the surviving traders I know seem to have done the same. They trade on ideas based on some observation (that includes past history) but, like the Popperian scientists, they make sure that the costs of being wrong are limited (and their probability is not derived from past data).

PART II

The more data we have, the more likely we are to drown in it.
There are other aspects to the monkeys problem; in real life the other monkeys are not countable, let alone visible. They are hidden away, as one sees only the winners—it is natural for those who failed to vanish completely.

Chapter Eight

Chekhovian
As compared to the general U.S. population, Marc has done very well, better than 99.5% of his compatriots.
As compared to the other people at Harvard, he did better than 90% of them (financially, of course). As compared to his law school comrades at Yale, he did better than 60% of them. But as compared to his co-op neighbors, he is at the bottom! Why? Because he chose to live among the people who have been successful, in an area that excludes failure. In other words, those who have failed do not show up in the sample, thus making him look as if he were not doing well at all.
Aside from the misperception of one’s performance, there is a social treadmill effect: You get rich, move to rich neighborhoods, then become poor again.

Chapter Nine

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.
In other words, the number of managers with great track records in a given market depends far more on the number of people who started in the investment business (in place of going to dental school),
The episode taught me a lot. Remember that nobody accepts randomness in his own success, only his failure.
I am convinced that there exists a tradable security in the Western world that would be 100% correlated with the changes in temperature in Ulan Bator, Mongolia.
While we are certainly fooled by randomness when it comes to a single times series, the foolishness is compounded when it comes to the comparison between, say, two people, or a person and a benchmark. Why? Because both are random.

Chapter Ten

Popular wisdom has integrated many such phenomena, as witnessed by such expressions as “the straw that broke the camel’s back” or “the drop that caused the water to spill.”
Note another advantage of Monte Carlo simulations is that we can get results where mathematics fails us and can be of no help. In freeing us from equations it frees us from the traps of inferior mathematics.
My partner Mark Spitznagel summarizes it as follows: Imagine yourself practicing the piano every day for a long time, barely being able to perform “Chopsticks,” then suddenly finding yourself capable of playing Rachmaninov. Owing to this nonlinearity, people cannot comprehend the nature of the rare event. This summarizes why there are routes to success that are nonrandom, but few, very few, people have the mental stamina to follow them. Those who go the extra mile are rewarded.
In my profession one may own a security that benefits from lower market prices, but may not react at all until some critical point. Most people give up before the rewards.
Either one succeeds wildly, by attracting all the cash, or fails to draw a single penny. Likewise with books. Either everyone wants to publish it, or nobody is interested in returning telephone calls

Chapter Eleven

“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.
A motivated reader can get concentrated in four volumes the collection of the major heuristics and biases papers.
When you take a gamble, do you say: “My net worth will end up at $99,000 or $101,500 after the gamble” or do you say “I lose $1,000 or make $1,500?” Your attitude toward the risks and rewards of the gamble will vary according to whether you look at your net worth or changes in it.
The fact that the losses hurt more than the gains, and differently, makes your accumulated performance, that is, your total wealth, less relevant than the last change in it.
This dependence on the local rather than the global status (coupled with the effect of the losses hitting harder than the gains) has an impact on your perception of well-being. Say you get a windfall profit of $1 million. The next month you lose $300,000. You adjust to a given wealth (unless of course you are very poor) so the following loss would hurt you emotionally, something that would not have taken place if you received the net amount of $700,000 in one block, or, better, two sums of $350,000 each.
rich or poor will be (above the minimum level) in relation to something else (remember Marc and Janet).
Now, when something is in relation to something else, that something else can be manipulated. Psychologists call this effect of comparing to a given reference anchoring.
This anchoring to a number is the reason people do not react to their total accumulated wealth, but to differences of wealth from whatever number they are currently anchored to.
System 1 is effortless, automatic, associative, rapid, parallel process, opaque (i.e., we are not aware of using it), emotional, concrete, specific, social, and personalized. System 2 is effortful, controlled, deductive, slow, serial, self-aware, neutral, abstract, sets, asocial, and depersonalized.
System 1 can be impacted by experience and integrate elements from System 2. For instance, when you learn to play chess, you use System 2. After a while things become intuitive and you are able to gauge the relative strength of an opponent by glancing at the board.
By genetic standards, these Homeric heroes of thirty centuries ago in all likelihood have the exact identical makeup as the pudgy middle-aged man you see schlepping groceries in the parking lot.
Much of our problem comes from the fact that we have evolved out of such a habitat faster, much faster, than our genes. Even worse, our genes have not changed at all.
Neurobiologists also have their side of the story. They believe (roughly) that we have three brains: The very old one, the reptilian brain that dictates heartbeat and that we share with all animals; the limbic brain center of emotions that we share with mammals; and the neocortex, or cognitive brain, that distinguishes primates and humans
I will present the theses of two watershed works presented in readable books, Damasio’s Descartes’ Error and LeDoux’s Emotional Brain.
Joseph LeDoux’s theory about the role of emotions in behavior is even more potent: Emotions affect one’s thinking.
The implication is that we feel emotions (limbic brain) then find an explanation (neocortex).
We are capable of sending a spacecraft to Mars, but we are incapable of having criminal trials managed by the basic laws of probability—yet evidence is clearly a probabilistic notion.
I am glad to be a trader taking advantage of people’s biases but I am scared of living in such a society.
The answer is the conditional probability that the patient is sick and the test shows it—close to 2%. Less than one in five professionals got it right.
Think of the number of times you will be given a medication that carries damaging side effects for a given disease you were told you had, when you may only have a 2% probability of being afflicted with it!
They confuse the expected value and the most likely scenario (here the expected value is $1 and the most likely scenario is for the option to be worth 0).
Option sellers, it is said, eat like chickens and go to the bathroom like elephants.
What is less unpleasant: to lose 100 times $1 or lose once $100? Clearly the second: Our sensitivity to losses decreases. So a trading policy that makes $1 a day for a long time then loses them all is actually pleasant from a hedonic standpoint, although it does not make sense economically.
People overvalue their knowledge and underestimate the probability of their being wrong.
By a law of probability called distribution of the maximum of random variables, the maximum of an average is necessarily less volatile than the average maximum.
At birth, your unconditional life expectancy may be seventy-three years. But as you advance in age and do not die, your life expectancy increases along with your life. Why? Because other people, by dying, have taken your spot in the statistics, for expectation means average. So if you are seventy-three and are in good health, you may still have, say, nine years in expectation. But the expectation would change, and at eighty-two, you will have another five years, provided of course you are still alive.
I can understand why Hume was extremely obsessed with causality and could not accept such inference anywhere.
People might ask me: Why do I want everybody to learn some statistics? The answer is that too many people read explanations. We cannot instinctively understand the nonlinear aspect of probability.

PART III

The best I can do is just not read them. Likewise with journalists. Not reading their discussions of markets spares me plenty of emotional expenditure. I will do the same with unsolicited comments on this book. Wax in my ears.
The mechanism is a probabilistic method called conditional information: Unless the source of the statement has extremely high qualifications, the statement will be more revealing of the author than the information intended by him.
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.
epistemology,
The point carries practical implications: The information from an anonymous reader on Amazon.com is all about the person, while that of a qualified person, is going to be all about the book.
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.

Chapter Twelve

That day, my trading portfolio made considerable profits, owing to considerable turmoil in currencies; it was then the best day of my young career.
My profession is to act like an insurance company, stringently computing the odds based on well-defined methods, taking advantage of other people when they are less rigorous, get blinded by some “analysis,” or act with the belief that they are chosen by destiny.
This problem has a more worrying extension; we are not made to view things as independent from each other. When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other. Our bias is immediately to establish a causal link.
scientists know that it is emotionally harder to reject a hypothesis than to accept it (what are called type I and type II errors)—quite a difficult matter when we have such sayings as felix qui po¨tuit cognoscere causas (happy is he who understands what is behind things).
I use elementary (but robust) methods that allow me to calculate the expected noise and signal composition of any fluctuation in my trading performance. For example, after registering a profit of $100,000 on a given strategy, I may assign a 2% probability to the hypothesis of the strategy being profitable and 98% probability to the hypothesis that the performance may be the result of mere noise. A gain of $1 million on the other hand, certifies that the strategy is a profitable one, with a 99% probability.

Chapter Thirteen

probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive.
There are reasons to believe that, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time. Think about the consequences of being a good trader outside of the market activity, and deciding every morning at 8 a.m. whether to keep the spouse or part with him or her for a better emotional investment elsewhere. Or think of a politician who is so rational that, during a campaign, he changes his mind on a given matter because of fresh evidence and abruptly switches political parties.
Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath. Could Soros have a genetic flaw that makes him rational as a decision maker?
charlatanism
They made absolutely no allowance in the LTCM episode for the possibility of their not understanding markets and their methods being wrong.
The fact that these “scientists” pronounced the catastrophic losses a “ten sigma” event reveals a Wittgenstein’s ruler problem:
In a few decades will we look upon the Nobel economics committee with the same smirk as when we look at the respected “scientific” establishments of the Middle Ages that promoted (against all observational evidence) the idea that the heart was a center of heat?
My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.
The scientist’s behavior while facing the refutation of his ideas has been studied in depth as part of the so-called attribution bias. You attribute your successes to skills, but your failures to randomness.
The attribution bias has another effect: It gives people the illusion of being better at what they do, which explains the findings that 80 to 90% of people think that they are above the average (and the median) in many things.
People confuse science and scientists. Science is great, but individual scientists are dangerous. They are human; they are marred by the biases humans have.
But science is better than scientists. It was said that science evolves from funeral to funeral. After the LTCM collapse, a new financial economist will emerge, who will integrate such knowledge into his science. He will be resisted by the older ones, but, again, they will be much closer to their funeral date than he.

Chapter Fourteen

No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word.
Grace under pressure, for example.
toady
To many (sophisticated) lovers of poetry, one of the greatest poets who ever breathed is C. P. Cavafy.
it was the epitome of such dignified aestheticism—and because of the gentle but edifying tone of the voice of the narrator advising a man who had just received a crushing reversal of fortune.
The stoic is a person who combines the qualities of wisdom, upright dealing, and courage. The stoic will thus be immune from life’s gyrations as he will be superior to the wounds from some of life’s dirty tricks.
A more human version can be read in Seneca’s Letters from a Stoic, a soothing and surprisingly readable book that I distribute to my trader friends (Seneca also took his own life when cornered by destiny).
The interesting thing about stoicism is that it plays on dignity and personal aesthetics, which are part of our genes. Start stressing personal elegance at your next misfortune. Exhibit sapere vivere (“know how to live”) in all circumstances.
Dress at your best on your execution day (shave carefully); try to leave a good impression on the death squad by standing erect and proud. Try not to play victim when diagnosed with cancer (hide it from others and only share the information with the doctor—it will avert the platitudes and nobody will treat you like a victim worthy of their pity; in addition, the dignified attitude will make both defeat and victory feel equally heroic). Be extremely courteous to your assistant when you lose money (instead of taking it out on him as many of the traders whom I scorn routinely do). Try not to blame others for your fate, even if they deserve blame. Never exhibit any self-pity, even if your significant other bolts with the handsome ski instructor or the younger aspiring model. Do not complain. If you suffer from a benign version of the “attitude problem,” like one of my childhood friends, do not start playing nice guy if your business dries up (he sent a heroic e-mail to his colleagues informing them “less business, but same attitude”).
The only article Lady Fortuna has no control over is your behavior. Good luck.
Beware the London Traffic Jams
Nero’s excessive probability-consciousness in his profession somehow did not register fully into his treatment of physical risk. For Nero’s helicopter crashed as he was landing it near Battersea Park on a windy day. He was alone in it. In the end the black swan got its man.

Postscript

However, and in general (provided we exclude risk-bearing entrepreneurs), the higher up the corporate ladder, the lower the evidence of such contribution. I call this the inverse rule.
Repetitiveness is key for the revelation of skills because of what I called ergodicity in Chapter 8—the detection of long-term properties, particularly when these exist.
There is an asymmetry, as these executives have almost nothing to lose.
They flip coins in secret and randomly take completely opposite actions, leading to great failure for one and great success for the other. We end up with a mildly wealthy, but fired, executive and his extremely wealthy, and still operating, twin brother. The shareholder bore the risk; the executives got the reward.
Shareholders, in the end, are the ones who are fooled by randomness.
Subway riders are freer of their schedule, and not just because of the higher frequency of trains. Uncertainty protects them from themselves.
An optimizer, by comparison, is the kind of person who will uproot himself and change his official residence just to reduce his tax bill by a few percentage points.
(You would think that the entire point of a higher income is to be free to choose where to live; in fact it seems, for these people, wealth causes them to increase their dependence!)
Causality is not clear: The question remains whether optimizers are unhappy because they are constantly seeking a better deal or if unhappy people tend to optimize out of their misery. In any case, randomness seems to operate either as a cure or as Novocain!
I stopped using an alarm clock. I still woke up around the same time, but I followed my own personal clock. A dozen minutes of fuzziness and variability in my schedule made a considerable difference. True, there are some activities that require such dependability that an alarm clock is necessary, but I am free to choose a profession where I am not a slave to external pressure. Living like this, one can also go to bed early and not optimize one’s schedule by squeezing every minute out of one’s evening. At the limit, you can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave.S
Unpredictability is a strong deterrent.
We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.
Acknowledgments for the First Edition
David saw me the way I view myself: someone who has a passion for probability and randomness, who is obsessed with literature but happens to be a trader, rather than a generic “expert.”
Odeon in Tribeca.
Empirica,
A Trip to the Library: Notes and Reading Recommendations
Hindsight bias:
Affirming the consequent: The logical fallacy is generally presented as follows.
The millionaire mind: Stanley (2000). He also figured out (correctly) that the rich were “risk takers” and inferred (incorrectly) that risk taking made one rich.
Courage or foolishness: For an examination of that notion of “courage” and “guts,” see Kahneman and Lovallo
Cognitive errors in forecasting:
Relative compared to absolute position: See Kahneman, Knetsch and Thaler (1986). Robert
Serotonin and pecking order: Frank (1999) includes a discussion.
On the social role of the psychopath: See Horrobin (2002).
Possible worlds: Kripke (1980).
Many worlds: See the excellently written Deutsch (1997).
The dentist and prospect theory: Kahneman and Tversky (1979).
The Selfish Gene: Dawkins (1989, 1976). Hegel: In Popper (1994).
The generator: www.monash.edu.au.
The firehouse effect and the convergence of opinions: There are plenty of discussions in the psychology literature of such convergence of opinions, particularly in the area of mate selection or what Keynes calls “the beauty contest,” as people tend to choose what other people choose, causing positive-feedback loops.
Evolution and small probabilities: Evolution is principally a probabilistic concept. Can it be fooled by randomness? Can the least skilled survive? There is a
Fooled by negative skewness: The first hint of an explanation for the popularity of negatively skewed payoffs comes from the early literature on behavior under uncertainty, with the “small number problem.” Tversky and Kahneman (1971)
Philosopher sometimes playing scientist: Nozik (1993).
Hollywood economics: De Vany (2003).
People are sensitive to sign rather than magnitude: Hsee and Rottenstreich (2004).
Niederhoffer’s book: Niederhoffer (1997).
Goodman’s riddle of induction: One can take the issue of induction into a more difficult territory with the following riddle.
Writings by Soros: Soros (1988).
Equity premium puzzle: There is an active academic discussion of the “equity
Hot-hand effect: Gilovich, Vallone and Tversky (1985).
Stock analysts fooled by themselves: For a comparison between analysts and weather forecasters, see Taszka and Zielonka (2002).
things do not get much better. Value of the seat: Even then, by some attribution bias, traders tend to believe that their income is due to their skills, not the “seat,” or the “franchise”
See Hilton (2003). See also Taleb (1997) for a discussion of the time and place advantage.
Data mining: Sullivan, Timmermann and
remains the most concise statement of the fundamental nonlinearity of everyday life: ‘Tomato ketchup in a bottle—None will come and then the lot’ll.’
Probability “blindness”: I borrow the expression from Piattelli-Palmarini (1994).
Discussion of “rationality”: The concept is not so easy to handle.
Compilation of the heuristics and biases papers in four volumes: Kahneman, Slovic and Tversky (1982), Kahneman and Tversky (2000), Gilovich, Griffin and Kahneman (2002), and Kahneman, Diener and Schwarz (1999).
Evolutionary psychology/sociobiology: The most readable is Burnham and Phelan (2000).
Modularity: For the seminal work, see Fodor (1983) in philosophy and cognitive science, Cosmides and Tooby (1992) in evolutionary psychology.
Sensitivity to losses: Note that losses matter more than gains, but you become rapidly desensitized to them (a loss of $10,000 is better than ten losses of $1,000).
Hedonic treadmill: My late friend Jimmy Powers used to go out of his way to show me very wealthy investment bankers acting miserably after a bad day.