Reddit reviews Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto)
We found 41 Reddit comments about Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto). Here are the top ones, ranked by their Reddit score.
PROBLEMS WITH HEDGE FUNDS
One thing you have to hand to hedge funds is that in 2008 and 2009, when investment and commercial banks were all begging for bailouts from the federal government because they were all "to big to fail", thousands of hedge funds died fast and anonymous deaths. Many of them lack the wealth, political connections, and systematic importance to influence the government. If people want to gamble with their money in financial markets, that isn't problematic as long as they are willing to suffer the losses they incur. (It is worth noting that money of them benefited indirectly from the various bank bailouts, and especially the bailout of AIG. Much of the bailout of AIG was to pay off credit default swaps (CDS) on mortgage backed securities, and the proceeds of those CDSs went to certain hedge funds.)
There has been some concern that some of the larger hedge funds could be systematically important, and could cause problems in the future if they place unmitigated bets in financial markets. The Dodd Frank Act made some effort to control them by having them register with the SEC and provide information on their bets to regulators, but as usual the regulation is watered down and many will comply with the letter but not the spirit of the law.
Also, in reviewing the results of most hedge funds, the investors don't seem to be getting a very good deal. First, it's incredibly expensive to pay someone 2% of your money up front and give them 20% of all returns that they earn on the remaining 98% of your money. Many investors would have been better off investing in more conventional vehicles, but the allure of investing in a hedge fund combined with the possibility of outsized returns lures in a lot of people.
The other risk of hedge funds is that they are frauds. Bernie Madoff was running a long short hedge fund, but it was actually a Ponzi scheme. A number of fund of funds were supposed to be diversifying their investor's assets, but were actually just giving it all to Madoff. (It's pretty insulting to pay someone to invest money for you, and give them 2% plus 20%, only to have them dump it all in a Ponzi scheme after performing no due diligence.) Another form of fraud might just be taking on asymmetrical risk. For example if, like AIG, you sell tons of insurance on the housing market, you can pocket a lot of money in the hopes that you never have to pay up on this insurance, and if you do, you just make vague statements about "once in a lifetime" financial calamities.
Further Reading and Sources:
The Economist Guide to Hedge Funds
More Money Than God: Hedge Funds and the Making of a New Elite
When Genius Failed: The Rise and Fall of Long-Term Capital Management
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Big Short: Inside the Doomsday Machine
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
TL;DR: They are investment vehicles for rich people and institutions that invest in whatever they think will make money. They're supposed to make their investors a lot of money, but they definitely make themselves a lot of money.
>$250 into $5k
Setting goals isn't a terrible idea, however I will say that a 2000% (non compounding) increase is something the best traders would give their arms and legs for lol.
For reference, this is something I was able to do after lots of learning and experience.
These were more done algorithmic than manually trading BUT point still stands.
With that said, you could hit 180% gain in one day with options.
The problem you'll find is that being consistently good is really really hard. What you're essentially setting out to do is consistently win an near random "coin toss".
That's going to take a psychological toll, its going to be grueling but not impossible.
>But I would like to learn the market. Any tips on how to start? What should I start researching? Can I even start trading with that little amount?
$250 is fine starting out. In fact its perfect as starting out there's a possibility you could lose it all, so starting with a small amount is fine.
Don't look at $, look at %. If you can make 1% you can make $100 or $1000. Once you consistently hit %'s, you can increase your position sizes. Keep risk in mind while doing this though.
I would start with paper trading first. Since you're 17 you're not legally allowed to trade. Also, with $250 you can't day trade (PDT rules). So paper trading would definitely be your best bet.
You could also give crypto a try, many exchanges don't really have KYC. A lot of the basics can carry over into any markets.
As far as stuff to learn, these are some of the best books I've read on the subject. You may notice they aren't technical or any "strategies" so to speak. I find those books never help, the mindset and thinking is going to be your biggest challenge.
Trading in the Zone, By Mark Douglas - https://www.amazon.com/Trading-Zone-Confidence-Discipline-Attitude/dp/0735201447
Fooled by Randomness, by Nassim Taleb - https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219/ref=sr_1_1?crid=13LH3VBFX62OH
Skin in the Game, by Nassim Taleb - https://www.amazon.com/Skin-Game-Hidden-Asymmetries-Daily/dp/042528462X/
Algos to Live By, by Brian Christian - https://www.amazon.com/Algorithms-Live-Computer-Science-Decisions/dp/1250118360/
A Short History of Financial Euphoria, by John Galbraith - https://www.amazon.com/History-Financial-Euphoria-Penguin-Business/dp/0140238565/
Also, if you're interested in algo or strategy creation at all, I have a youtube channel dedicated to helping beginners make their strategies and learn more. Its on a bit of a hiatus but I'll definitely be getting back to it soon.
DM me here or on twitter if you have any questions! Love to help, questions also keep me on my toes and make sure I'm learning too!
further reading: on basically all 4 bullets https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219/ref=pd_sim_14_2/133-0444399-0427912?_encoding=UTF8&amp;pd_rd_i=0812975219&amp;pd_rd_r=20G8KZ7HRQTB9EV8KRMF&amp;pd_rd_w=QI4pT&amp;pd_rd_wg=y8262&amp;psc=1&amp;refRID=20G8KZ7HRQTB9EV8KRMF
further further reading on the last bullet, and the actual explanation of "black swan" that is starting to show up in crypto but totally incorrectly used https://www.amazon.com/Black-Swan-Improbable-Robustness-Fragility/dp/081297381X
you could also dig into efficient market hypothesis.
also, if you're into technical analysis/charts, this could shake your views a little but it's good to be challenged
Check out 'Fooled by Randomness' by Taleb
I am not saying technical analysis doesn't work, but pointing to individuals for whom is has worked outstandingly for is flawed.
Could argue the same for old Warren.
For further reading, I recommend Fooled By Randomness by Nassim Nicholas Taleb. It's primarily a critique of economic theories, and it can be snarky in some parts, but the concepts are mind-opening. By book's end, you'll wonder why more people don't acknowledge that their past, present, and future is entirely circumstantial.
Index funds. Buy and hold them. Don't move money around, don't try to time your entry and exit. Take money you wont need for the next 5 years, put it in an index fund, and forget about it.
This is a great book on the subject
You completely missed the point.
I suggest reading this book. The guy who wrote it is very likely a better trader than you.
Please stop everything you are doing (in life) and read this book. https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219
>Also just to be fair, look at where this hero-based FPS style got Quake into, there is a reason why Blizzard made the most successful game in the genre, while others suffer from lack of development and direction.
Overwatch and Quake are NOT in the same genre. AT ALL. Overwatch is just as much an arena shooter as, say, Counter-Strike or Call of Duty are; which is to say not at all. You're making the same mistake everyone else is making in starting with incredibly superficial aspects of each game, namely that they have classes, and creating "genres" based on that rather than the actually significant gameplay differences between them (And they must be based on gameplay, since none of these games have any significant story elements in their actual runtime).
Overwatch is so far removed from traditional objective shooters, namely in how efficient use of abilities plays a much larger role in success than raw shooting skill than in virtually any other first person objective game that comes to mind. A large number of the classes don't even require any "FPS" skills, and instead have analogues in asymmetric strategy games and the like.
Quake Champions may be small, yes, but it IS attracting more people than just the quake crowd. On a technical level, it's an excellent blend between an archetypal arena shooter, the sort of game design Quake invented, while reducing complexity and convolution to make it much more approachable for those with more modern shooter habits. Lawbreakers, too, hardly suffers from any "lack of direction" in the design department. It's packed to the brim with great ideas and unique takes on the "high-skill FPS" concept, and had my jaw hitting the floor with respect for its elegant gameplay several times when I started playing it.
Success has far more to do with randomness and luck than most people in this thread seem willing to admit. Quake, Overwatch, and Lawbreakers AREN'T significantly better or worse than each other. No hypothetical backfit narrative properly explains why one would have hypothetically failed or succeeded without luck. We just live in a works where the big take the whole pie and the small get nothing; in a world of bandwagoning and herd mentality caused by popularity coming from whatever just happens to gain traction early on in its lifetime.
I bought in relatively early to all of these games because I'm a shooter fan and a nut for unique game design ideas. I will admit that I like Quake the most, Lawberakers second, and Ovwerwatch third, so I do have a little voice in the back of my head that gets irritated whenever others disagree with that assessment, but we all need to learn to come away form making simple judgements between them and other games in the same boat. All of them break the mould in different and unique ways, all of them have good ideas, and all of them could have been popular, in a world where luck happened to favor someone else.
The book Fooled By Randomness by Nassim Taleb describes the illusion of random events appearing to be meaningful in retrospect. He focusses on stock trading and shows how in periods of growth people with minimal trading skills appear to be experts in investment.
I suspect Jess Phillips is the sort of person he would be talking about. Having achieved a modicum of success through chance and female privilege, she thinks she knows far more than she actually does. A change in the wind will bring the her whole bandwagon down like a market crash.
It's by Nassim Nicholas Taleb, and it refers to the mistakes made by the designers of financial derivative with respect to the probabilty distribution function of certain components within the equations that govern the liability and pay-out. (Yes, really).
The book itself "Fooled By Randomness" is superb and very highly regarded within the financial community. It helps that he (while coming across as a bit pompous sometimes) is a good writer and explains a lot of pretty specialist knowledge that plays a key part in the financial world; and -by extension- the real world.
> prove me wrong.
Well, how about A Non-Random Walk Down Wall St, by Andrew Lo & A. Craig MacKinlay?
However, I think the form of TA that you are complaining about is several tiers of effort below that, to which my response is, of course people are Fooled by Randomness. We're hard-wired to consider skill in our successes, luck in our failures and only research winners, never the losers, to see what they have in common as fuel for our aspirational emulation.
Hey now, you're 18 years old. There's no shame in not knowing what an ETF is, and you're probably getting a head-start on 90% of your peers by investing this young.
ETFs are Exchange Traded Funds. ETFs are bundles of securities (stocks if you'd like) and they trade like regular stocks. Vanguard's VOO follows the S&P 500 index step for step. So, when you see on the news that the S&P 500 closed 1.25% higher, you can rest assured that your VOO investments gained 1.25% -ish also. The S&P 500 index is based on market caps from 500 of the largest companies. So (for simplicity's sake) when you buy one share of VOO... you're actually buying fractional pieces 500 companies. This allows for instant diversification! Woo! Let's say you invested $1000 33% in Cisco, 33% in Nike, and 33% in Coke. Then we find out that Coke has been draining clean water from 3rd world countries in order to sell their product ~~~ Huge PR issue and legal problems! Coke drops 15% over the course of a week. Now your entire $1000 portfolio is down 5%. That sucks. If you had VOO, your portfolio would barely be affected by Coke's bad news.
Since you have a few years before you can start investing, I recommend reading these two books: Winning the Losers Game by Charles Ellis and Fooled by Randomness by Nassim Taleb. I read one of these while getting my Undergrad in Business, and I read the other while getting my MBA.
You might find this book interesting: https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219
I suggest this book
There are over 9,000 mutual funds. Some are going to get lucky. View that luck with the benefit of hindsight and they look brilliant.
Hard to know the level of knowledge or interest. A good book, video series can be life changing.
Might be a bit much:
Maybe something a bit more about the "new economy"
What do we do now? Now we realize that we need to think probabilistically, forgo our results orientation, and accept the enormous role chance plays in our lives.
Also, we get over our smooth brain obsession with using team achievements to evaluate individual players.
Here's a primer.
Here is a must read by N N Taleb
There is a great book called "Fooled by Randomness" by Nassim Nicholas Taleb that you might be interested in reading.
As humans we have a horrible sense of what is random and what events might be extremely unlikely. Something that has a 1 in 1 million chance of happening usually occurs once a month. When we experience this, we usually think, "Wow, what are the odds?" Confirmation bias and pattern recognition focuses our attention to put more significance into these events than they should have.
For something to occur that is very unlikely it just takes time. As a weather process, it will snow in the Sahara, it will not snow on the moon.
There are several good books.
http://www.amazon.com/dp/1439164991/ <- the best. also
Fooled by Randomness has helped me to more often see the fallacies of inductive reasoning that are at work everywhere around us.
> What do we mean by "complex systems"? As in complex-systems theory?
Yes, complex systems theory (the study of ecosystems, economies, chaotic systems, etc).
> Got a book you can recommend?
If you read one book by him, read Antifragile. The Black Swan and Fooled by Randomness are also good.
> You can suggest it in an open thread.
On /r/slatestarcodex or on the actual Slate Star Codex website?
> You can just tag him and see if he responds.
I tried this last time, but he didn't reply. Here it goes again: /u/EliezerYudkowsky
Standard Shipping was only $3.99 for me (to HI no less), might be worth not buying something else.
But here are a few suggestions anyway:
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb (Paperback - Aug 23, 2005)
The Black Swan: The Impact of the Highly Improbable (Hardcover) by Nassim Nicholas Taleb (Author)
I ordered these recently too, but haven't received them yet. The idea of shifting the entire tax burden from production, saving, and investment to consumption intrigues me:
The FairTax Book by Neal Boortz and John Linder (Hardcover - Aug 2, 2005)
FairTax: The Truth: Answering the Critics by Neal Boortz and John Linder (Paperback - Feb 12, 2008)
There are two kinds of people that use these TA (Technical analysis) tools in my experience, those that get lucky and think they know what they are doing and those who lose on the trade/s and then say something like "Oh, but if I had used a 10 period moving average instead it would have worked" and keep trying.
Might as well read the entrails of a dead animal, even then you will still get lucky sometimes.
Others will have a different opinion.
Humans are hardwired to be fooled into seeing patterns in randomness - Nicolas Taleb wrote a very good book about it "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets"
The better question to ask is why do you need this in the first place? If you were playing good and running good your mental game would be fine. The only thing that affecting poker player results are playing bad or running bad. Playing bad can be fixed by analyzing hands, reading good poker books and training. The effects of running bad can be lessened by understanding probability and randomness better. Running bad shouldn't really be an issue if you are bank rolled properly because if it is, then you are playing bad.
Most poker players that I know that are always frustrated or constantly tilting are almost always playing at stakes their bankroll doesn't support.
If you are using the 100 times big blind and 25 buyins recommendation, you shouldn't really have a mental game issue because you should be able to absorb the variance.
Mental Game Books
More understanding about probability, randomness and focusing on the present can be helpful. If you understand those more it should help your mental game. I would recommend these books and at least understand their central points:
"clearly not random"
Further to your quality comment...
> Basically, active management sometimes wins, sometimes loses.
People who flip coins sometimes win multiple times in a row, to hold them up as oracles is to be fooled by randomness.
Life can be strange
Monte Carlo can take your historical data and then use the distribution to pick out values which could have had happened in the past. Say, if the distribution shows that there was an equal chance of the price increasing 1 dollar during a minute as there was a chance of the price decreasing 1 dollar a minute, then MC can flip a coin in the past and thus create a different kind of market history. You can thus play out events which were probably going to happen, but for some reason, such as randomness, never did. You may thus find that your strategy was either over- or underperforming in the timeline which is considered the real market history -- if you let out the price history play out more enough times, you will find variations in which you had astronomical gains and ones in which you were margin called every day. The idea is to find where exactly are you sitting with it currently.
Markov Chains then improve on the Monte Carlo by creating the possibility of occurrence of values which never were in the original distribution. In other words, this lets you play out timelines which are considered impossible by the historical data. This may further help you solidify your strategy even for the unlikely.
A book which introduces you to the importance of MC using an exhaustive amount of anecdotes is for example: https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219
Recommended reading for you.
The author of this book would argue otherwise.
In it he basically says the only difference between the "unsophisticated investor" and the hedge fund manager is that the market simply hasn't caught up to the hedge fund manager yet.
> So far, past performance has perfectly predicted future results
No, it hasn't. This is the precise error that the original quote is intended to challenge. You've basically been fooled by a correlation into thinking you have a useful indicator.
The claim you're making relies on hindsight to adjust for errors in the prediction, and to select which features of past performance should be extrapolated.
For example, looking at the Bitcoin price chart right now, there are two obvious major trends: one is a steady and consistent downtrend that began on Dec 4 and predicts that the price will hit $200 by October; the other is the uptrend that claims that the recent trend is part of a correction that will reverse and continue its upward climb.
If past performance were really a predictor, you should be able to predict when the current downtrend will end. Want to take a stab at that, so we can check how well this really works?
There are also other trends that can be drawn, depending on where you start from and how you fit your predictive curve to the data. With enough parameters, it's possible to fit any curve to a given dataset, and make it look like you've found a predictive formula. But it's only predictive for the past. But exactly the same is true for the simplest curve-fits.
A good introduction to thinking properly about such things is Taleb's book Fooled by Randomness, which among other things, "examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill."
> this is subject to change in the future.
Then it's not a predictor. It's as simple as that.
Yeah, he's wrong.
There is no way to get the prices of goods except to sell them.
And there is no way to predict the future of markets with prices, either.
What a free market does is make bankrupt over time those people who aren't selling things that other people want. No one has the slightest idea what's going on, prices tell you absolutely nothing, if they did then no one would make any mistakes and we could predict the future.
It just looks like prices give accurate information, which gets people out of bed in the morning trying to earn a crust. But markets are essentially random, yo.
In a market based system, unless steps are taken to avoid it, a handful of people will wind up with all the rewards, and they will get them based on what amounts to raw luck. 80/20 rule, mathew effect etc Nassim Taleb has some excellent writing on why in the markets luck is mistaken for skill, fwiw.
If you want an actual non-prax answer, Picketty's C21 is where to go. If you want to be spared 700 pages of pain, here is a toy model to explain it:
We can simplify this and say that social mobility depends on one's "rank" in an ordered list of all individuals in a given society. Of course, social rank doesn't just depend on wealth (there are other measures of influence) but wealth is a decent proxy to start.
How much income does one make in his own lifetime? That depends really on what you do to earn wealth. If you work for a wage, then you won't have much income variance, and you can expect to make anywhere between half and ~3.5x the US median income (~55k/household). If you make income from capital revenue or entrepreneurship (investing, startup) then your revenue is a function of your investment decision and your luck.
Sidebar: Luck is by far and away the bigger factor here, without question. If you need to conceive this, think about the biggest startup successes in the last few years and think where success in picture messaging or social networking apps' successes are created (the answer is luck, because of network effects). There is varying amounts of variance in investment or entrepreneurship decisions (of course a bond is going to be lower variance than a tech startup), but luck by far is the bigger factor nonetheless in any of these. Recommendations if you need additional convincing 1 2 3.
Now Picketty's whole point about r>g is that if capital revenue is greater than economic growth (which should roughly index wages as per gdp/pop) then there will be social immobility, because returns to capital will far outpace wages (and you have the conundrum of acquiring capital in the first place if you aren't born with some eg. by inheritance).
But even if r~g you would get significant immobility at the upper echelons, because getting to that place requires a significant amount of luck. You can see this in income distribution graphs which follow roughly exponential distributions. So if you let people inherit hundreds of millions or billions, then you have created an impenetrable, self sustaining, static class at the top of your income ranking for all intents and purposes, because getting to this class from below is only attainable by effectively winning the lottery regardless of your skill.
Having to win the lottery to move up is not what we would consider "social mobility". Note that I'm not making policy proposals here, just stating that if you let people inherit wealth you're going to create social immobility, and increasingly so as you move up the ordered list. Make of that what you will.
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto) https://www.amazon.com/dp/0812975219/ref=cm_sw_r_cp_api_i_qdkUCbXF3AG2F
> Unfortunately for you, you are among the 90% of people who talk shit about finance and have no idea what they are talking about. You can't predict extreme results in the future, good or bad.
I recommend reading Taleb. E.g. http://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219
> Why do you think no one or no fund has/is ever able to beat the market consistently, these guys spend every working hour studying this stuff and I'm sure they'd be in a better position than you to predict future movements.
You're very good at not getting what I'm trying to say.
> But it still goes on at 8%.