In the last week, I’ve managed to finish two books and I am proud of myself to say the least. They’re the first two books I’ve read since some time last spring when I cruised through Howard’s book. Now I’m going to subject you to my thoughts on the both one of them.
Fooled by Randomness was a quick read for me. That means I found it sufficiently entertaining to cruise through ~260 pages in three days. The book was written by a guy who studied uncertainty and randomness in grad school and went on to become a very successful Wall Street type. The book is meant to be a light read, so it is lacking in rigorous proofs underlying the concept. But the concept is simple: we are often fooled by short-term patterns in a world that is more random than we care to admit — or may even be able to realize.
As the author says a few times, you have to learn to separate the signal from the noise.
To him, history is the signal while news and current events are the noise. This actually fits in with my elasticity of truth hypothesis. The idea is to then mostly neglect the news since it is probably inaccurate enough as to not be useful.
This also plays out in the simple task of watching your investments. He proposes a situation where an investor is setup for 15% annual returns with 10% volatility (noise). The probability of seeing gains is highly related to how often the investor checks for them. If he checked every minute, there’s only a slight better than 50% chance of seeing progress. Whereas yearly checks are about 95% likely to provide progress. And if you let “bad” results affect you disproportionately more than “good” results, as humans are wont to do, then too much sampling of noise can trick people into abandoning good strategies.
But in the grand scheme, one should always be wary that one’s success is due mostly to luck — or being uniquely fit to take advantage of a unique, time-limited situation — which is bound to run out.
Overall, I thought it was a pretty good read.
