Tuesday, August 24, 2010

Fooled By Randomness

Fooled by Randomness - Nissim Nicholas Taleb

       Once during my college days we had a brain storming session [
படிக்காம வெட்டி கதை அடிச்சதா தான் இப்படி managerial language la சொல்றேன் :) ]  on what could be the reason behind Dhirubhai Ambani's rags to richness history. One section attributed it to his enterprenerual skills and this is the widely accepted version.But few radical elements (including me) didnt like the argument that his business skills ( including unethical ones) where the only the factor and they claimed that apart from it , there was strong current of luck on his side.I dont remember what we concluded on this discussion. 

       This book provides a more scientific answer for above discussion topic.Its one of a refreshing read which stand alone from the heap of books trying to teach you How to win , How to be success in Business etc. It introduces a factor called Randomness. There is a bit of randomness in every aspect of life. Some of us view it as luck , some as s God's Grace , karma from previous birth , fate etc. Taleb proposes that hard work and skills bring in average success .But wild success can be attributed only to Randomness. His view is that anything can happen & we can only estimate the probability of such events."Nothing is impossible". Insurance is classical example .We hope to live(for ever) ,but we insure to make sure family is not destabilized by our sudden death.

       Human brains are not trained to understand this random behaviour and we try to infer some rules from the observation we see. Even Einstein was not spared from this . At an age of 27 amazed the world with the General Theory of General Relativity , which grew into Quantum Mechanics. But Einestein was not ready to accept the random nature of Quantum mechanics , he quoted "God does not throw dies". He tried unsuccesful till his death , to develop a unified theory which encompassees both General Relativity & Newton's Gravitational theory. Might be he was trying to find order in a place where there was complete randomness.[Disclaimer : This example is not provided in the book .Its based on my understanding on physics and Einstein .Comments are welcome  ]
     Being a option trader most of his illustration revolve around the stock market where this theory has more relevance than anywhere else.During my initial days of investing in stocks ,i used to feel the adrenalin rush when the stocks which i have bought soar to new heights and gets nervous when they fall down.I used to attribute success & failure to my stock selection ,but later understood that its more random than i believed it to be. Later i got solace when i saw many( or most) people (who are especially new to market) behave the same way . 

      Taleb claims that people who have made striking success such as Bill Gates , Warren Buffet need not to be THE BEST ONES in their field rather technically sounds ones in their own areas and its the survivourship bias which makes them great ones.

      Paul the octopus is another example. Many of us by now should have forgotten who won the golden boot , but we invariably remember paul .Its a classical example of survivourship bias .Paul became internationally famous for correctly "predicting" the winner of Germany's seven matches at the 2010 worldcup, as well as the final.

           Lets see what is the probability of this event . Each match  has 2 possible outcomes - win/loss [ he didnt guess draw].Probability of successfully guessing  is 1/2 . Probability of guessing in 8 continuous matches is  1/2 * 1/2 ... 8 times = 1/256 . Say if the same guessing game is played with 2560 street dogs of Bangalore ,at least 10 of them will end up guessing all matches correctly. Similarly there would 100s of people guessing the results all over the world and finally few end up guessing everything correct and we are surprised by their 7th sense ,failing to use our common sense.

Following lines written thousands of years back depict this

வானம் தண்துளி தலைஇ, ஆனாது
கல்பொருது இரங்கும் மல்லற் பேர்யாற்று
நீர்வழிப் படூஉம் புணைபோல, ஆருயிர்
முறைவழிப் படூஉம்' என்பது திறவோர்
காட்சியின் தெளிந்தனம் ஆகலின், மாட்சியின்
பெரியோரை வியத்தலும் இலமே;
சிறியோரை இகழ்தல் அதனினும் இலமே.

எட்டுத்தொகை நூல்களில் ஒன்றாகிய
புறநானூறு. 192 - பாடியவர்: கணியன் பூங்குன்றன்

Full poem and its translation can be read here

Since life goes like a wooden log in a water stream ,dont be surprised by people who have succeed . More importantly dont criticize people have who failed in their endeavors .

Classical words in a classical Language 


  1. Nice Article!! Nice quote from Puranaanooru!!

  2. Awesome Article Prem... Really Liked it very very much..