3-Sentence Summary:
We often see events as being predictable, informative of future events, and a result of skill or good judgement, even when they may have been a result of luck and chance, or the data set being skewed by random outliers or survivorship bias.
This is due to our need for stories, heuristics, and shortcuts, which allow us to make decisions in the world.
We must be on guard against these in situations where random negative events can wipe us out, but be open to potential huge positive events.
Notes:
Be careful not to mistake luck for skills, random outcomes for predetermined outcomes, probability for certainty, noise for signal, survivorship bias for outperformance.
It’s more costly to do so than the opposite way around.
Situations with high potential outcomes usually involved high potential negative outcomes.
Protect yourself against complete wipeouts, regardless of potential. (Don’t play Russian roulette, regardless of the prize money).
Don’t be jealous of outrageous success. You haven’t seen the full story play out yet.
Small losses are fine as long as the wins are massive (even though we emotionally prefer smaller, more frequent wins).
Beware more aware of taking lessons from $1,000,000 acquired through high-risk activities as it is less likely to replicate compared to $1,000,000 acquired through low-risk activities.
If the scenario was played out an infinite amount of times (Monte-Carlo Simulator), what would be the aggregate of the outcomes?
Ergodicity - The fluctuations/noise gets evened out over time. Things that have lasted a long time are less likely to be a result of luck/chance/randomness. History books are better than newspapers. Investing is better than day-trading.
Our emotions aren’t suited to this logical thinking. This is ok for things that don’t harm us (Art etc.) but not for things that are harmful.
Survival of the fittest is long-term. Someone currently “winning” could simply be the random mutation that eventually gets wiped out.
Fools tend to put too much faith in the accuracy of their beliefs, get married to positions, change their story after the fact, and not plan for losses.
We often only recognise the frequency of wins/losses, rather than the magnitude, even if the magnitude of one massively outweighs the other.
Beware of predictions based on past events, since they may not include large random events that skew everything.
Theories cannot be confirmed but only falsified. If it can’t be falsified (proven wrong), it’s not a legitimate theory.
It’s easier to remember a story, which is why we infer causality in past events.
Use statistics when it helps, but not if it leaves you open to wipe-out.
Out of an infinite amount of monkeys typing, one will eventually type one of Shakespeare’s plays, but you wouldn’t expect him to write another one on his next try.
Survivorship bias: Looking only at the winners (as is the case in many situations where the losers fall off) leads to an overly optimistic view of the sample.
It is unlikely that there will not be a part of a random pattern that looks non-random. If you were to flip a coin 1000 times, it likely that you’ll flip heads 5 times in a row at some stage. The same is true of patterns in life. Some can guess right 5 times in a row a look like a winner, when he may actually be the equivalent of the 5 heads in a row.
Regression to the mean: Outliers are likely to return closer to average. The biggest dog of the litter will likely end up to have pups that grow up to be smaller than them.
Not everything is due to luck, but it’s safer to assume so.
Spontaneous cancer remission happens sometimes out of the blue. This can explain some ‘miracles’ experienced by people who go to holy places, or use alternative medicine. Spontaneous cancer remission was actually shown to be slightly less frequent in those who visited Lourdes.
Certain events have a huge cascading effect (getting a part in a Hollywood movie, penny dropping when trying to learn something, landing a big contract). Keep going until you get these breaks.
Better to have a dozen raving fans than 100s who ‘like’ you.
Satisficing: We couldn’t make decisions if we had to be sure it was the best one. We accept near-satisfactory solutions, using our emotions, heuristics and other shortcuts. These are not completely logical, but we couldn’t make decisions without them. But be on guard.
If the variance of outcomes is great, the variance becomes a more important fact than the mean.
We must be willing to contradict ourselves, rather than defending wrong decisions.
Your actions are the only thing you can control from randomness. Use them heroically (do the right thing) and stoically (accept the outcomes, positive or negative) when randomness comes your way.
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