Tag Archives: Nassim Taleb

The Bed of Procrustes by Nassim Taleb

Summary

  1. Every aphorism here is about a Procrustean bed of sorts – we humans, facing limited knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas, reductive categories, specific vocabularies, and prepackaged narratives, which, on the occasion, has explosive consequences. Further,w e seem unaware of this backward fitting, much like tailors who take great pride in delivering the perfectly fitting suit – but do so by surgically altering the limbs of their customers. For instance, few realize that we are changing the brains of schoolchildren through medication in order to make them adjust to the curriculum, rather than the reverse. (My use of the metaphor of the Procrustes bed isn’t just about something in the wrong box; it’s mostly that inverse operation of changing the wrong variable, here the person rather than the bed. Note that every failure of what we call “wisdom” (couple with technical proficiency) can be reduced to Procrustean bed situation.)

Key Takeaways

  1. Bed of Procrustes – fit person/model to the situation rather than the other way around. 
  2. Work destroys your soul by stealthily invading your brain during the hours not officially spent working; be selective about professions
  3. Using, as an excuse, others’ failure of common sense is in itself a failure of common sense
  4. Life is about execution rather than purpose
  5. The ultimate freedom lies in not having to explain why you did something
  6. You exist if and only if you are free to do things without a visible objective, with no justification and, above all, outside the dictatorship of someone else’s narrative
  7. The source of the tragic in history is in mistaking someone else’s unconditional for conditional – and the reverse
  8. What fools call “wasting time is most often the best investment
  9. You want to avoid being disliked without being envied or admired
  10. The fastest way to become rich is to socialize with the poor; the fastest way to become poor is to socialize with the rich
  11. You will be civilized on the day you can spend a long period doing nothing, learning nothing, and improving nothing, without feeling the slightest amount of guilt
  12. There are 2 types of people: those who try to win and those who try to win arguments. They are never the same
  13. Social networks present information about what people like; more informative if, instead, they described what they don’t like
  14. My only measure of success is how much time you have to kill
  15. Only in recent history has “working hard” signaled pride rather than shame for lack of talent, finesse, and, mostly, sprezzatura
  16. Life is about early detection of the reversal point beyond which your own belongings (say, a house, country house, car, or business) start owning you
  17. In any subject, if you don’t feel that you don’t know enough, you don’t know enough
  18. Regular minds find similarities in stories (and situations); finer minds detect differences
  19. The more complex the system, the weaker the notion of Universal
  20. Just as dyed hair makes older men less attractive, it is what you do to hide your weaknesses that makes them repugnant
  21. Robustness is progress without impatience
  22. Failure-resistant is achievable; failure-free is not
  23. For a free person, the optimal – most opportunistic – route between two points should never be the shortest one
  24. Knowledge is subtractive, not additive – what we subtract (reduction by what does not work, what not to do), not what we add (what to do). The best way to spot a charlatan: someone (like a consultant or stockbroker) who tells you what to do instead of what not to do)
  25. They think that intelligence is about noticing things that are relevant (detecting patterns); in a complex world, intelligence consists in ignoring things that are irrelevant (avoiding false patterns).
  26. They would take forecasting more seriously if it were pointed out to them that in Semitic languages the word for “forecast” and “prophecy” are the same
  27. Economics is about making simple things more complicated, mathematics about making complicated things simpler
  28. It is easier to macrobullshit than microbullshit
  29. It is a sign of weakness to avoid showing signs of weakness
  30. The only definition of an alpha male: if you try to be an alpha male, you will never be one
  31. The weak shows his strength and hides his weaknesses; the magnificent exhibits his weaknesses like ornaments
  32. Contra the prevailing belief, “success” isn’t being on top of a hierarchy, it is standing outside all hierarchies
  33. It is very easy to be stoic, in failure
  34. A verbal threat is the most authentic certificate of impotence 
  35. Wisdom that is hard to execute isn’t really wisdom
  36. If something looks irrational – and has been so for a long time – odds are you have a wrong definition of rationality
  37. Knowing stuff others don’t know is most effective when others don’t know you know stuff they don’t know
  38. Humans need to complain just as they need to breathe. Never stop them; just manipulate them by controlling what they complain about and supply them with reasons to complain. They will complain but be thankful 
  39. Injuries done to us by others tend to be acute; the self-inflicted ones tend to be chronic
  40. We often benefit from harm done to us by others, almost never from self-inflicted injuries 
  41. By setting oneself totally free of constraints, free of thoughts, free of this debilitating activity called work, free of efforts, elements hidden in the texture of reality start staring at you; then mysteries that you never thought existed emerge in front of your eyes. 

What I got out of it

  1. A lot of wisdom to meditate on and absorb – best read a couple lines per day to let these ideas sink in.

On Bullshit by Harry Frankfurt

Summary

  1. Frankfurt on the essence of bullshit

Key Takeaways

  1. One of the most salient features of our culture is that there is so much bullshit. Everyone knows this. Each of us contributes his share.
  2. It does seem fitting to construe carelessly made, shoddy goods as in some way analogues of bullshit. But in what way? Is the resemblance that bullshit itself is invariably produced in a careless or self-indulgent manner, that it is never finely crafted, that in the making of it there is never the meticulously attentive concern with detail to which Longfellow alludes? Is the bullshitter by his very nature a mindless slob? Is his product necessarily messy or unrefined? The word shit does, to be sure, suggest this.
  3. However studiously and conscientiously the bullshitter proceeds, it remains true that he is also trying to get away with something. There is surely in his work, as in the work of the slovenly craftsman, some kind of laxity that resists or eludes the demands of a disinterested and austere discipline. The pertinent mode of laxity cannot be equated, evidently, with simple carelessness or inattention to detail.
  4. Wittgenstein devoted his philosophical energies largely to identifying and combating what he regarded as insidiously disruptive forms of “nonsense.” He was apparently like that in his personal life as well.
  5. Now assuming that Wittgenstein does indeed regard Pascal’s characterization of how she feels as an instance of bullshit, why does it strike him that way? It does so, I believe, because he perceives what Pascal says as being—roughly speaking, for now—unconnected to a concern with the truth. Her statement is not germane to the enterprise of describing reality.
  6. Her fault is not that she fails to get things right, but that she is not even trying.
  7. It is just this lack of connection to a concern with truth—this indifference to how things really are—that I regard as of the essence of bullshit.
  8. It does seem that bullshitting involves a kind of bluff. It is closer to bluffing, surely, than to telling a lie. But what is implied concerning its nature by the fact that it is more like the former than it is like the latter? Just what is the relevant difference here between a bluff and a lie? Lying and bluffing are both modes of misrepresentation or deception. Now the concept most central to the distinctive nature of a lie is that of falsity: the liar is essentially someone who deliberately promulgates a falsehood. Bluffing, too, is typically devoted to conveying something false. Unlike plain lying, however, it is more especially a matter not of falsity but of fakery. This is what accounts for its nearness to bullshit. For the essence of bullshit is not that it is false but that it is phony.
  9. This points to a similar and fundamental aspect of the essential nature of bullshit: although it is produced without concern with the truth, it need not be false. The bullshitter is faking things. But this does not mean that he necessarily gets them wrong.
  10. It is impossible for someone to lie unless he thinks he knows the truth. Producing bullshit requires no such conviction.
  11. For the bullshitter, however, all these bets are off: he is neither on the side of the true nor on the side of the false. His eye is not on the facts at all, as the eyes of the honest man and of the liar are, except insofar as they may be pertinent to his interest in getting away with what he says. He does not care whether the things he says describe reality correctly. He just picks them out, or makes them up, to suit his purpose.
  12. The bullshitter ignores these demands altogether. He does not reject the authority of the truth, as the liar does, and oppose himself to it. He pays no attention to it at all. By virtue of this, bullshit is a greater enemy of the truth than lies are.
  13. Bullshit is unavoidable whenever circumstances require someone to talk without knowing what he is talking about. 

What I got out of it

  1. Really relevant book given today’s context. It is just this lack of connection to a concern with truth—this indifference to how things really are—that I regard as of the essence of bullshit. The essence of bullshit is not that it is false but that it is phony. It is produced without the concern for truth, but need not be false

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Taleb

Summary

  1. Taleb discusses why skin in the game is so important and drives much of human behavior. “Skin in the Game is about four topics in one: a) uncertainty and the reliability of knowledge (both practical and scientific, assuming there is a difference), or in less polite words bull***t detection, b) symmetry in human affairs, that is, fairness, justice, responsibility, and reciprocity, c) information sharing in transactions, and d) rationality in complex systems and in the real world. That these four cannot be disentangled is something that is obvious when one has…skin in the game.* It is not just that skin in the game is necessary for fairness, commercial efficiency, and risk management: skin in the game is necessary to understand the world.”

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Key Takeaways

  1. Skin in the Game
    1. Do not mistake skin in the game as defined here and used in this book for just an incentive problem, just having a share of the benefits (as it is commonly understood in finance). No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong. The very same idea ties together notions of incentives, used car buying, ethics, contract theory, learning (real life vs. academia), Kantian imperative, municipal power, risk science, contact between intellectuals and reality, the accountability of bureaucrats, probabilistic social justice, option theory, upright behavior, bull***t vendors, theology…I stop for now.
    2. definition, what works cannot be irrational; about every single person I know who has chronically failed in business shares that mental block, the failure to realize that if something stupid works (and makes money), it cannot be stupid.
    3. Now skin in the game brings simplicity—the disarming simplicity of things properly done. People who see complicated solutions do not have an incentive to implement simplified ones.
    4. System that doesn’t have a mechanism of skin in the game, with a buildup of imbalances, will eventually blow up and self-repair that way. If it survives.
    5. We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning. More practically, You will never fully convince someone that he is wrong; only reality can.
    6. Evolution can only happen if risk of extinction is present. Further, There is no evolution without skin in the game. This last point is quite obvious, but I keep seeing academics with no skin in the game defend evolution while at the same time rejecting skin in the game and risk sharing.
    7. It is much more immoral to claim virtue without fully living with its direct consequences. This will be the main topic of this chapter: exploiting virtue for image, personal gain, careers, social status, these kinds of things—and by personal gain I mean anything that does not share the downside of a negative action.
    8. No muscles without strength, friendship without trust, opinion without consequence, change without aesthetics, age without values, life without effort, water without thirst, food without nourishment, love without sacrifice, power without fairness, facts without rigor, statistics without logic, mathematics without proof, teaching without experience, politeness without warmth, values without embodiment, degrees without erudition, militarism without fortitude, progress without civilization, friendship without investment, virtue without risk, probability without ergodicity, wealth without exposure, complication without depth, fluency without content, decision without asymmetry, science without skepticism, religion without tolerance, and, most of all: nothing without skin in the game.
  2. Invert
    1. Systems learn by removing parts, via negativa.
    2. Via negativa: the principle that we know what is wrong with more clarity than what is right, and that knowledge grows by subtraction. Also, it is easier to know that something is wrong than to find the fix. Actions that remove are more robust than those that add because addition may have unseen, complicated feedback loops.
    3. The more robust Silver Rule says Do not treat others the way you would not like them to treat you. More robust? How? Why is the Silver Rule more robust? First, it tells you to mind your own business and not decide what is “good” for others. We know with much more clarity what is bad than what is good.
    4. The idea is fractal, in the sense that it works at all scales: humans, tribes, societies, groups of societies, countries, etc., assuming each one is a separate standalone unit and can deal with other counterparts as such. Just as individuals should treat others the way they would like to be treated (or avoid being mistreated), families as units should treat other families in the same way.
    5. Immanuel Kant’s categorical imperative, which I summarize as: Behave as if your action can be generalized to the behavior of everyone in all places, under all conditions.
    6. The principle of intervention, like that of healers, is first do no harm (primum non nocere); even more, we will argue, those who don’t take risks should never be involved in making decisions.
    7. Via Negativa: in theology and philosophy, the focus on what something is not, an indirect definition, deemed less prone to fallacies than via positiva. In action, it is a recipe for what to avoid, what not to do—subtraction, not addition, works better in domains with multiplicative and unpredictable side effects. In medicine, stopping someone from smoking has fewer adverse effects than giving pills and treatments.
  3. Artisans
    1. Anything you do to optimize your work, cut some corners, or squeeze more “efficiency” out of it (and out of your life) will eventually make you dislike it. Artisans have their soul in the game.
    2. Primo, artisans do things for existential reasons first, financial and commercial ones later. Their decision making is never fully financial, but it remains financial. Secundo, they have some type of “art” in their profession; they stay away from most aspects of industrialization; they combine art and business. Tertio, they put some soul in their work: they would not sell something defective or even of compromised quality because it hurts their pride. Finally, they have sacred taboos, things they would not do even if it markedly increased profitability. Compendiaria res improbitas, virtusque tarda—the villainous takes the short road, virtue the longer one. In other words, cutting corners is dishonest.
    3. Now, something very practical. One of the best pieces of advice I have ever received was the recommendation by a very successful (and happy) older entrepreneur, Yossi Vardi, to have no assistant. The mere presence of an assistant suspends your natural filtering—and its absence forces you to do only things you enjoy, and progressively steer your life that way. (By assistant here I exclude someone hired for a specific task, such as grading papers, helping with accounting, or watering plants; just some guardian angel overseeing all your activities). This is a via negativa approach: you want maximal free time, not maximal activity, and you can assess your own “success” according to such metric. Otherwise, you end up assisting your assistants, or being forced to “explain” how to do things, which requires more mental effort than doing the thing itself. In fact, beyond my writing and research life, this has proved to be great financial advice as I am freer, more nimble, and have a very high benchmark for doing something, while my peers have their days filled with unnecessary “meetings” and unnecessary correspondence. Having an assistant (except for the strictly necessary) removes your soul from the game.
    4. The skills at making things diverge from those at selling things.
    5. “What is hateful to you, do not do to your fellow: this is the whole Torah; the rest is the explanation; go and learn.” Rabbi Hillel the Elder drawing on Leviticus 19:18.
    6. Simply: if you can’t put your soul into something, give it up and leave that stuff to someone else.
  4. Principal-Agent
    1. I have learned a lesson from my own naive experiences: Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him. Of course such advice is usually unsolicited. The asymmetry is when said advice applies to you but not to him
    2. So, “giving advice” as a sales pitch is fundamentally unethical—selling cannot be deemed advice. We can safely settle on that. You can give advice, or you can sell (by advertising the quality of the product), and the two need to be kept separate.
    3. Diogenes held that the seller ought to disclose as much as civil law requires. As for Antipater, he believed that everything ought to be disclosed—beyond the law—so that there was nothing that the seller knew that the buyer didn’t know. Clearly Antipater’s position is more robust—robust being invariant to time, place, situation, and color of the eyes of the participants. Take for now that The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse. Hence: Laws come and go; ethics stay.
    4. Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.
    5. Things designed by people without skin in the game tend to grow in complication (before their final collapse).
    6. There is absolutely no benefit for someone in such a position to propose something simple: when you are rewarded for perception, not results, you need to show sophistication.
  5. Scaling & Complexity
    1. Things don’t “scale” and generalize, which is why I have trouble with intellectuals talking about abstract notions. A country is not a large city, a city is not a large family, and, sorry, the world is not a large village.
    2. Today’s Roma people (aka Gypsies) have tons of strict rules of behavior toward Gypsies, and others toward the unclean non-Gypsies called payos. And, as the anthropologist David Graeber has observed, even the investment bank Goldman Sachs, known for its aggressive cupidity, acts like a communist community from within, thanks to the partnership system of governance. So we exercise our ethical rules, but there is a limit—from scaling—beyond which the rules cease to apply. It is unfortunate, but the general kills the particular.
    3. Scaling matters, I will keep repeating until I get hoarse. Putting Shiites, Christians, and Sunnis in one pot and asking them to sing “Kumbaya” around the campfire while holding hands in the name of unity and fraternity of mankind has failed.
    4. And that is what plagues socialism: people’s individual interests do not quite work well under collectivism.
    5. Groups behave differently at a different scale. This explains why the municipal is different from the national. It also explains how tribes operate: you are part of a specific group that is larger than the narrow you, but narrower than humanity in general. Critically, people share some things but not others within a specified group. And there is a protocol for dealing with the outside.
    6. A saying by the brothers Geoff and Vince Graham summarizes the ludicrousness of scale-free political universalism. I am, at the Fed level, libertarian; at the state level, Republican; at the local level, Democrat; and at the family and friends level, a socialist.
    7. The main idea behind complex systems is that the ensemble behaves in ways not predicted by its components. The interactions matter more than the nature of the units. Studying individual ants will almost never give us a clear indication of how the ant colony operates. For that, one needs to understand an ant colony as an ant colony, no less, no more, not a collection of ants. This is called an “emergent” property of the whole, by which parts and whole differ because what matters are the interactions between such parts. And interactions can obey very simple rules.
    8. Human nature is not defined outside of transactions involving other humans. Remember that we do not live alone, but in packs, and almost nothing of relevance concerns a person in isolation—which is what is typically done in laboratory-style works.
    9. Groups are units on their own. There are qualitative differences between a group of ten and a group of, say, 395,435. Each is a different animal, in the literal sense, as different as a book is from an office building. When we focus on commonalities, we get confused, but, at a certain scale, things become different. Mathematically different. The higher the dimension, in other words, the higher the number of possible interactions, and the more disproportionally difficult it is to understand the macro from the micro, the general from the simple units. This disproportionate increase of computational demands is called the curse of dimensionality.
    10. Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works.
    11. The underlying structure of reality matters much more than the participants,
    12. Volatile things are not necessarily risky, and the reverse is also true. Jumping from a bench would be good for you and your bones, while falling from the twenty-second floor will never be so.
  6. Antifragile
    1. Antifragile has been about the failure of the average to represent anything in the presence of nonlinearities and asymmetries similar to the minority rule. So let us go beyond: The average behavior of the market participant will not allow us to understand the general behavior of the market.
    2. What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing. The more you have to lose, the more fragile you are.
    3. Statistics isn’t about data but distillation, rigor, and avoiding being fooled by randomness
    4. Now, crucially, time is equivalent to disorder, and resistance to the ravages of time, that is, what we gloriously call survival, is the ability to handle disorder. That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it. In probability, volatility and time are the same. The idea of fragility helped put some rigor around the notion that the only effective judge of things is time—by things we mean ideas, people, intellectual productions, car models, scientific theories, books, etc. You can’t fool Lindy: For time operates through skin in the game. Things that have survived are hinting to us ex post that they have some robustness—conditional on their being exposed to harm. For without skin in the game, via exposure to reality, the mechanism of fragility is disrupted: things may survive for no reason for a while, at some scale, then ultimately collapse, causing a lot of collateral harm.
    5. Alfonso X of Spain, nicknamed El Sabio, “the wise,” had as a maxim: Burn old logs. Drink old wine. Read old books. Keep old friends. The insightful and luckily nonacademic historian Tom Holland once commented: “The thing I most admire about the Romans was the utter contempt they were capable of showing the cult of youth.” He also wrote: “The Romans judged their political system by asking not whether it made sense but whether it worked,” which is why, while dedicating this book, I called Ron Paul a Roman among Greeks.
    6. Macroeconomics, for instance, can be nonsense since it is easier to macrobull***t than microbull***t—nobody can tell if a theory really works.
  7. Theory vs. Practice
    1. People can detect the difference between front- and back-office operators.
    2. We are much better at doing than understanding.
    3. Before we end, take some Fat Tony wisdom: always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.
    4. If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life. And a solution to the vapid universalism we discussed in the Prologue: If your private actions do not generalize, then you cannot have general ideas.
    5. Rationality resides in what you do, not in what you think or in what you “believe” (skin in the game), and b) rationality is about survival.
    6. Your eyes are not sensors designed to capture the electromagnetic spectrum. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival.
    7. Survival comes first, truth, understanding, and science later.
    8. Or as per the expression attributed to Hobbes: Primum vivere, deinde philosophari (First, live; then philosophize). This logical precedence is well understood by traders and people in the real world, as per the Warren Buffett truism “to make money you must first survive”—skin in the game again; those of us who take risks have their priorities firmer than vague textbook pseudo-rationalism.
    9. The axiom of revelation of preferences (originating with Paul Samuelson, or possibly the Semitic gods), as you recall, states the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them—they themselves don’t necessarily know. What matters, in the end, is what they pay for goods, not what they say they “think” about them, or the various possible reasons they give you or themselves for that. If you think about it, you will see that this is a reformulation of skin in the game.
    10. It is therefore my opinion that religion exists to enforce tail risk management across generations, as its binary and unconditional rules are easy to teach and enforce. We have survived in spite of tail risks; our survival cannot be that random.
    11. How much you truly “believe” in something can be manifested only through what you are willing to risk for it.
    12. Risk and ruin are different tings. In a strategy that entails ruin, benefits never offset risks of ruin.
  8. Ergodicity
    1. Ergodicity holds when a collection of players have the same statistical properties (particularly expectation) as a single player over time. Ensemble probabilities are similar to time probabilities. Absence of ergodicity makes the risk properties not directly transferable from observed probability to the payoff of a strategy subjected to ruin (or any absorbing barrier or “uncle point”)—in other words, not probabilistically sustainable. Mediocristan:
    2. The fat tails argument: The more a system is capable of delivering large deviations, the worse under the axiom of sustainability, i.e., that “one should take risks as if you were going to do it forever,” only a logarithmic (or similar) transformation
    3. Even if their forecasts were true (they aren’t), no individual can get the same returns as the market unless he has infinite pockets and no uncle points. This is conflating ensemble probability and time probability. If the investor has to eventually reduce his exposure because of losses, or because of retirement, or because he got divorced to marry his neighbor’s wife, or because he suddenly developed a heroin addiction after his hospitalization for appendicitis, or because he changed his mind about life, his returns will be divorced from those of the market, period. Anyone who has survived in the risk-taking business more than a few years has some version of our by now familiar principle that “in order to succeed, you must first survive.” My own has been: “never cross a river if it is on average four feet deep.” I effectively organized all my life around the point that sequence matters and the presence of ruin disqualifies cost-benefit analyses; but it never hit me that the flaw in decision theory was so deep. Until out of nowhere came a paper by the physicist Ole Peters, working with the great Murray Gell-Mann. They presented a version of the difference between ensemble and time probabilities with a thought experiment similar to mine above, and showed that just about everything in social science having to do with probability is flawed. Deeply flawed. Very deeply flawed. Largely, terminally flawed. For, in the quarter millennia since an initial formulation of decision making under uncertainty by the mathematician Jacob Bernoulli, one that has since become standard, almost all people involved in the field have made the severe mistake of missing the effect of the difference between ensemble and time.*1 Everyone? Not quite: every economist maybe, but not everyone: the applied mathematicians Claude Shannon and Ed Thorp, and the physicist J. L. Kelly of the Kelly Criterion got it right. They also got it in a very simple way. The father of insurance mathematics, the Swedish applied mathematician Harald Cramér, also got the point. And, more than two decades ago, practitioners such as Mark Spitznagel and myself built our entire business careers around it. (I mysteriously got it right in my writings and when I traded and made decisions, and detect deep inside when ergodicity is violated, but I never explicitly got Peters and Gell-Mann’s mathematical structure—ergodicity is even discussed in Fooled by Randomness, two decades ago). Spitznagel and I even started an entire business to help investors eliminate uncle points so they could get the returns of the market. While I retired to do some flaneuring, Mark continued relentlessly (and successfully) at his Universa. Mark and I have been frustrated by economists who, not getting ergodicity, keep saying that worrying about the tails is “irrational.”
    4. A situation is deemed non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it—and to which the system will invariably tend. Let us call these situations “ruin,” as there is no reversibility away from the condition. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.
    5. If you incur a tiny probability of ruin as a “one-off” risk, survive it, then do it again (another “one-off” deal), you will eventually go bust with a probability of one hundred percent. Confusion arises because it may seem that if the “one-off” risk is reasonable, then an additional one is also reasonable. This can be quantified by recognizing that the probability of ruin approaches 1 as the number of exposures to individually small risks, say one in ten thousand, increases.
    6. Another common error in the psychology literature concerns what is called “mental accounting.” The Thorp, Kelly, and Shannon school of information theory requires that, for an investment strategy to be ergodic and eventually capture the return of the market, agents increase their risks as they are winning, but contract after losses, a technique called “playing with the house money.” In practice, it is done by threshold,
    7. Let us return to the notion of “tribe.” One of the defects modern education and thinking introduces is the illusion that each one of us is a single unit. Thus, we see the point that individual ruin is not as big a deal as collective ruin. To use the ergodic framework: my death at Russian roulette is not ergodic for me but it is ergodic for the system.
    8. Every single risk you take adds up to reduce your life expectancy. Finally: Rationality is avoidance of systemic ruin.
  9. Other
    1. One debases a principle by endlessly justifying it.
    2. We retain from this first vignette that, just like Antaeus, you cannot separate knowledge from contact with the ground. Actually, you cannot separate anything from contact with the ground. And the contact with the real world is done via skin in the game—having an exposure to the real world, and paying a price for its consequences, good or bad. The abrasions of your skin guide your learning and discovery, a mechanism of organic signaling, what the Greeks called pathemata mathemata (“guide your learning through pain,” something mothers of young children know rather well).
    3. The knowledge we get by tinkering, via trial and error, experience, and the workings of time, in other words, contact with the earth, is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us.
    4. Rent-seeking is trying to use protective regulations or “rights” to derive income without adding anything to economic activity, not increasing the wealth of others.
    5. It is a filtering, nonsense-expurgating mechanism. I have no sympathy for moaning professional researchers. I for my part spent twenty-three years in a full-time, highly demanding, extremely stressful profession while studying, researching, and writing my first three books at night; it lowered (in fact, eliminated) my tolerance for career-building research.
    6. Same with real estate: most people, I am convinced, are happier in close quarters, in a real barrio-style neighborhood, where they can feel human warmth and company. But when they have big bucks they end up pressured to move into outsized, impersonal, and silent mansions, far away from neighbors. On late afternoons, the silence of these large galleries has a funereal feel to it, but without the soothing music. This is something historically rare: in the past, large mansions were teeming with servants, head-servants, butlers, cooks, assistants, maids, private tutors, impoverished cousins, horse grooms, even personal musicians. And nobody today will come to console you for having a mansion—few will realize that it is quite sad to be there on Sunday evening.
    7. If anything, being rich you need to hide your money if you want to have what I call friends. This may be known; what is less obvious is that you may also need to hide your erudition and learning. People can only be social friends if they don’t try to upstage or outsmart one another. Indeed, the classical art of conversation is to avoid any imbalance, as in Baldassare Castiglione’s Book of the Courtier: people need to be equal, at least for the purpose of the conversation, otherwise it fails.
    8. This reasoning shows that sophistication can, at some level, cause degradation, what economists call “negative utility.” This tells us something about wealth and the growth of gross domestic product in society; it shows the presence of an inverted U curve with a level beyond which you get incremental harm. It is detectable only if you get rid of constructed preferences.
    9. We used to live in small communities; our reputations were directly determined by what we did—we were watched. Today, anonymity brings out the a**hole in people. So I accidentally discovered a way to change the behavior of unethical and abusive persons without verbal threat. Take their pictures. Just the act of taking their pictures is similar to holding their lives in your hands and controlling their future behavior thanks to your silence. They don’t know what you can do with it, and will live in a state of uncertainty.
    10. As far as I know, we only have one planet. So the burden is on those who pollute—or who introduce new substances in larger than usual quantities—to show a lack of tail risk. In fact, the more uncertainty about the models, the more conservative one should be. The same newspapers had lauded
    11. So true virtue lies mostly in also being nice to those who are neglected by others, the less obvious cases, those people the grand charity business tends to miss. Or people who have no friends and would like someone once in while to just call them for a chat or a cup of fresh roasted Italian-style coffee.
    12. Courage is the only virtue you cannot fake.
    13. Finally, when young people who “want to help mankind” come to me asking, “What should I do? I want to reduce poverty, save the world,” and similar noble aspirations at the macro-level, my suggestion is: 1) Never engage in virtue signaling; 2) Never engage in rent-seeking; 3) You must start a business. Put yourself on the line, start a business. Yes, take risk, and if you get rich (which is optional), spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move the descendants of Homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that brings tail risks to society. Doing business will always help (because it brings about economic activity without large-scale risky changes in the economy); institutions (like the aid industry) may help, but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming). Courage (risk taking) is the highest virtue. We need entrepreneurs.
    14. History is largely peace punctuated by wars, rather than wars punctuated by peace. The problem is that we humans are prone to the availability heuristic, by which the salient is mistaken for the statistical, and the conspicuous and emotional effect of an event makes us think it is occurring more regularly than in reality. This helps us to be prudent and careful in daily life, forcing us to add an extra layer of protection, but it does not help with scholarship.
    15. My lifetime motto is that mathematicians think in (well, precisely defined and mapped) objects and relations, jurists and legal thinkers in constructs, logicians in maximally abstract operators, and…fools in words.
    16. As Gibbon wrote: The various modes of worship, which prevailed in the Roman world, were all considered by the people, as equally true; by the philosopher, as equally false; and by the magistrate, as equally useful. And thus toleration produced not only mutual indulgence, but even religious concord.
    17. The main theological flaw in Pascal’s wager is that belief cannot be a free option. It entails a symmetry between what you pay and what you receive.
    18. Love without sacrifice is theft (Procrustes). This applies to any form of love, particularly the love of God.
    19. Simon formulated the notion now known as bounded rationality: we cannot possibly measure and assess everything as if we were a computer; we therefore produce, under evolutionary pressures, some shortcuts and distortions. Our knowledge of the world is fundamentally incomplete, so we need to avoid getting into unanticipated trouble. And even if our knowledge of the world were complete, it would still be computationally near-impossible to produce a precise, unbiased understanding of reality.
    20. The only definition of rationality that I’ve found that is practically, empirically, and mathematically rigorous is the following: what is rational is that which allows for survival. Unlike modern theories by psychosophasters, it maps to the classical way of thinking. Anything that hinders one’s survival at an individual, collective, tribal, or general level is, to me, irrational. Hence the precautionary principle and sound risk understanding.
    21. Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours. Selfish courage is not courage. A foolish gambler is not committing an act of courage, especially if he is risking other people’s funds or has a family to feed.
    22. Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.
    23. Even economics is based on the notion of “revealed preferences.” What people “think” is not relevant—you want to avoid entering the mushy-soft and self-looping discipline of psychology. People’s “explanations” for what they do are just words, stories they tell themselves, not the business of proper science. What they do, on the other hand, is tangible and measurable and that’s what we should focus on.

What I got out of it

  1. Skin in the game is sharing in the outcomes and helps align behavior and incentives, mitigate principal/agent problems, and more. One of my favorite books of the year

Fooled by Randomness by Nassim Taleb

Summary
  1. Often mistake luck and randomness for skill and determinism
Key Takeaways
  1. In the long run, acute successful randomness fools will run out of luck and after years of success will have one devastating quarter where they lose everything in one huge blow up
  2. Induction – infer things about the nature of the world based on our observations. This approach leads to problems as one disconfirming piece of evidence (one black swan) makes the long held belief that all swans are white incorrect
  3. Can never be sure any theory is correct. Always consider the possibility that your theories and assumptions may be proved wrong and examine how such a development would affect your portfolio
  4. The past blowups were always surprises, as all future ones will be as well. Just because it hasn’t happened before, doesn’t mean that it won’t
  5. Path dependent outcome – things sometimes end up as is because of luck or randomness (QWERTY), not because it is optimal
  6. Going the extra mile is disproportionately rewarded but without visible progress, most people give up before they succeed
  7. Human brain not built to accurately forecast or think about probabilities
  8. People get attached to things they already own but we should be able to accept change in our minds when presented with enough evidence
  9. Capability for rational reason can easily be overwhelmed by emotions
  10. We are inherently poor at understanding the impact of rare events
  11. The opposite but more enduring trading strategy is betting on rare, unlikely events with a big payoff should they occur. Although a market crash might be unlikely, it can still be worth betting on it if the possible reward in such an event is large enough
  12. If we are to be fooled by randomness, make it the best kind and work to your advantage
  13. In the face of randomness, act as stoics would – no self-pity, show personal elegance, don’t blame others and don’t complain
  14. Reduce exposure to noise – newspapers, daily stock market price movements,
What I got out of it
  1. Can’t predict the big blow ups, can have years of success but all be wiped out in one catastrophic year

The Black Swan by Nassim Taleb

Summary
  1. Black Swan is an event which is an a rarity, has an extreme impact and is retrospectively (though no prospectively) predictable. This book concerns itself with our blindness with respect to randomness, particularly the large deviations. Must use the extreme event as the starting point and not treat it as an exception to be pushed under the rug. The future will be increasingly less predictable the more we try to control it and “know” it through vast amounts of data

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Key Takeaways

  1. Human nature makes us concoct explanations for black swans after he fact, making it explainable and predictable
  2. Literally, just about everything of significance might quality as a black swan
  3. Black Swan logic makes what you don’t know far more relevant than what you do know
  4. It is much easier to deal with the Black Swan problem if we focus on robustness to errors rather than improving predictions
  5. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it
  6. Certain professionals, while believing they are experts, are in fact not
  7. You can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximizing your exposure to them. Tinker as much as you possibly can to collect as many Black Swan opportunities as possible
  8. People often get into trouble as they tend to learn the precise, not the general. Also, people tend to only learn facts and not rules
  9. To the author, the rare event = uncertainty
  10. Platonicity – mistaking the map for the territory, forcing categorizations and forms when it is inappropriate (almost always)
  11. Read books are far less valuable than unread ones (antilibrary)
  12. History is opaque. You see what comes out, not the script that produces events, the generator of history
  13. Triplet of opacity – the illusion of understanding (world is more complicated than we realize); retrospective distortion (can only assess matters after the fact); overvaluation of “factual” information
  14. Our minds are incredible explanation machines – often creating stories to fit the facts
  15. History and society does not crawl. It jumps
  16. Categories are necessary to survive but people get in trouble when they don’t realize the fuzziness of boundaries
  17. The problem lies not in the nature of the events, but in the way we perceive them
  18. Extremistan (real world) where Black Swans exist and have a huge impact (notion of Bill Gates distorting average wealth in a group) vs. Mediocristan (average) where there is no person tall/heavy enough to distort group averages
  19. Be suspicious of knowledge you derive from data
  20.  Don’t simplify anything beyond what is necessary
  21. Black Swans differ per person – it occurs relative to the person’s expectations and they don’t have to be instantaneous surprises
  22. Positive Black Swans tend to take time to show their effects whereas negative ones happen very quickly
  23. Blindness to black swans can come from: error of confirmation, narrative fallacy, human nature is not programmed for Black Swans, distortion of silent evidence and we “tunnel” (focus on a few well-defined sources of uncertainty)
  24. Domain specificity – our reactions, mode of thinking, intuitions, depend on the context
  25. Naive empiricism – finding evidence of what suits your beliefs (NED – no evidence of disease vs. END – evidence of no disease)
  26. People build stories in order to help tie events, facts together but can hurt us when it increases our impression of understanding
  27. It takes considerable effort to see facts while withholding judgment and resisting explanations
  28. The Black Swans we imagine, discuss and worry about do not resemble those likely to be Black Swans. We worry about the wrong “improbable” events
  29. Favor experimentation over storytelling, experience over history and clinical knowledge over theories. Another approach is to predict and keep a tall of the predictions
  30. The relevant is often boring, nonsensational and we tend to favor the sensational and the extremely visible
  31. Your happiness depends far more on the number of instances of positive feelings than on their intensity when they hit
  32. Silent evidence – you only see survivors and hear their stories, you don’t hear of the “drowned sailors who also prayed to God”
  33. The gravest of all manifestations of silent evidence is the illusion of stability
  34. Has been shown that people often take risks not because of bravado but because of ignorance and blindness to probability
  35. Reference point argument – don’t compute odds from the vantage point of the winning gambler but from all those who started in the group
  36. Be very careful of the “because,” especially in situations where you suspect silent evidence. People harbor a natural scorn for the abstract
  37. Ludic fallacy – the attributes of the uncertainty we face in real life have little connection the sterilized ones we encounter in exams and games
  38. Knightian risks you can compute whereas Knightian uncertainty is incomputable
  39. Prediction, not narration, is the real test of our understanding of the world
  40. The larger the role of the Black Swan the harder it will be for us to predict
  41. People are arrogant about what we think we know. Increasing knowledge helps but it can hurt as even more by increasing our confidence, ignorance and conceit
  42. Ideas are sticky – once we produce a theory, we are not likely to change our minds – those who delay forming theories are better off
  43. Certain fields like astronomers and physicists tend to have experts whereas stockbrokers, court judges, etc. tend not to be experts
  44. You cannot ignore self-delusion
  45. What matters is not how often you are right, but how large your cumulative errors are
  46. We cannot truly plan because we do not understand the future but we can plan while bearing in mind such limitations
  47. People cannot work without a point of reference (anchoring)
  48. The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number
  49. When new technology emerges, we either grossly underestimate or severely overestimate its importance
  50. Choose to follow evidence over theory as we cannot explain everything and often underestimate the complexity of nature and biology
  51. We fail to learn about the difference between our past predictions and the subsequent outcomes (when we think of tomorrow we just project it as another yesterday)
  52. We don’t learn much from our past experiences and we also don’t know what to epect from the future
  53. Randomness is incomplete information (opacity)
  54. Doesn’t advise always withholding judgment, opinions, predicting, being a fool – but be a fool in the right places. Avoid unnecessary dependence on large-scale harmful predictions. Avoid the big subjects that may hurt you in the future. Do not listen to economic forecasters or to predictors in social science but do make your own forecasts. Know how to rank beliefs not according to their plausibility but by the harm they may cause
  55. Make many small bets with asymmetric payoffs and where the harm is minimal
  56. Maximize the serendipity around you
  57. Trial and error means trying a lot
  58. You need to love to lose – series of small failures are necessary in life
  59. Barbell strategy – be hyperconservative and hyperaggressive instead of being mildly aggressive or conservative (90% in extremely safe instruments and 10% in extremely speculative bets)
  60. Do not try to predict precise black swans. Invest in preparedness, not in prediction
  61. Seize anything that looks likeopportunity – free options
  62. Beware of precise plans by governments
  63. Nobody in particular is a good predictor of anything
  64. Pascal’s wager – eliminates the need for us to understand the probabilities of a rare event and focus on the payoff and benefits of an event if it takes place
  65. Gray Swan – reducing Black Swans surprise effect by getting a general idea about the possibility of their outcomes
  66. An early, initial advantage tends to follow people through life
  67. For something to become “contagious” it must agree with human nature
  68. Luck is the grand equalizer
  69. Moving forward we will have fewer but more sever crises
  70. 80/20 rules can become the 50/01 rule – 50% of work done by 1% of workers (80/20 might even be more extreme in Extremistan, like 97/20)
  71. Study the intense, uncharted, humbling uncertainty in the markets as a means to get insights about the nature of randomness that is applicable to psychology, probability, mathematics, decision theory and even statistical physics . You will see the sneaky manifestations of the narrative fallacy, the ludic fallacy and the great errors of Platonicity (going from representation to reality)
  72. Fractal randomness is a way to reduce these surprises, to make some of the swans appear possible, so to speak, to make us aware of their consequences, to make them gray. Fractal randomness does not yield precise answers
  73. Worries less about small failures than large, catastrophic ones (“safe” blue chips vs. venture capital)
  74. “Missing a train is only painful if you run after it.” – it is more difficult to lose in a game that you set up yourself
  75. Redundancy equals insurance
  76. Mother Nature does not like overspecialization, anything too big, too much connectivity and globalization,
  77. The organism which has the highest number of secondary uses is the one that will gain the most from environmental randomness and opacity
  78. Certain fields make distinctions which make sense in their narrow world but have no effect in the real world
  79. Let human mistakes and miscalculations remain confined – artificially reducing volatility and ordinary randomness increases exposure to Black Swans as it creates an artificial quiet
  80. Living organisms need variability and randomness in order to avoid become fragile – diet, workouts, tabata, slow meditative walks, thermal variability, sleep deprivation, fasting – trade duration for intensity
  81. A little bit of extreme stress is vastly better than a little bit of stress all the time
  82. Volatility does not equal risk
  83. Do not bet on Black Swans taking place – he is advocating acts of omission and not comission
  84. Evolution does not work by teaching but by destroying
  85. The Black Swan corresponds mainly to an incomplete map of the world
  86. Focus more on the consequences of decisions than on their probabilities
  87. People are suckers and will gravitate to those variables which are unstable but appear stable
  88. There is no reliable way to compute small probabilities
  89. It is much more sound to take risks you can measure than to measure the risks you are taking
  90. Recommendations of the style “do not do” are more robust empirically. Success consists mainly in avoiding losses, not in trying to derive profits
  91. Acting, doing something, often more harmful than doing nothing
  92. How to move from the Third to Fourth Quadrant (Black Swan)
    1. Have respect for time and nondemonstrative knowledge
    2. Avoid optimization; learn to love redundancy (do not overspecialize)
    3. Avoid prediction of small-probability payoffs – thought no necessarily of ordinary ones
    4. Beware the “atypically” remote events
    5. Beware moral hazard with bonus payments
    6. Avoid some risk metrics
    7. Positive or negative Black Swan?
    8. Do not confuse absence of volatility with absence of risk
    9. Beware presentations of risk numbers
  93. 10 Principles for Black Swan Robust Societies
    1. What is fragile should break early, while it’s still small
    2. No socialization of losses and privatization of gains
    3. People who were driving a school bus blindfolded (and crashed it) should never been given a new bus
    4. Don’t let someone making an “incentive” bonus manage a nuclear plant – or your financial risks
    5. Compensate complexity with simplicity
    6. Do not give children dynamite sticks, even if they come with warning labels
    7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”
    8. Do not give an addict more drugs if he has withdrawal pains (no leverage)
    9. Citizens should not depend on financial assets as a repository of value and should not rely on fallible “expert” advice for their retirement (investments should be for entertainment)
    10. Make an omelet with broken eggs (have the right people like entrepreneurs take the risks, not bankers; smaller firms with less effects if the fail)

    What I got out of it

  1. Awesome book. I think Antifragile ties in all his books into one but still makes a lot of great points and might be worth re reading at some point

Antifragile: Things that Gain from Disorder by Nassim Taleb

Summary
 
  1. Taleb describes that something is antifragile when it gets better with chaos, disorder, and time whereas anything fragile hates volatility. Nature is the ultimate example of something antifragile as it can adapt and gets stronger with difficult times. Forecasts, predictions, and the desire to be too precise are all examples that cause fragility.

 

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You can also find more of my articles in audio version at Listle

  Key Takeaways  

  1. Anything that has more upside than downside during random events has antifragility
  2. Suppressing randomness from antifragile things (ourselves are one of the most antifragile things) actually harms them and makes them weaker. The diet, our economy are antifragile but we have been making them weaker
  3. Fragility and antifragility can be measured but rare events cannot be predicted accurately
  4. Should focus on the fragility of things instead of the probability of something happening. Things lie on a scale of fragility (the triad – antifragile, robust and fragile)
  5. Moving towards simplicity and removing things makes things more antifragile than adding anything 
  6. Absence of challenge degrades the best people and firms. Mental and physical effort forces people into a higher gear
  7. Evolution one of the best examples of antifragility as it loves randomness and volatility and gets stronger from it. Natural things love randomness up to a point – if all life on earth wiped out the fittest will not survive to reproduce
  8. Central illusion in life – randomness is risky. Man made smoothing of randomness makes things more fragile. Daily variability helps strengthen a person or system 
  9. Extremely important to try to differentiate between true and manufactured stability
  10. Much more difficult to examine people who have been successful by procrastinating or non acting as it is not obvious or apparent as that is what caused their success
  11. Believes that in eliminating projections which are almost never right will make us and our economy more robust. What is not measurable and non predictable will remain that way. Let’s not kid ourselves and make us more exposed than we already are
  12. Turkey problem – mistaking what we don’t see for the nonexistent
  13. Exposure more important than knowledge. Do, rather than just learn
  14. Time is the worlds best debunker of fragility 
  15. Small occurrences and events effect us much less than a large event does. For example, a 10 lb thrown at your head would do more than 5x the damage of a 2 lb stone thrown at your head. That which is fragile is hurt much more by extreme events than by a succession of small ones
  16. Barbell – medium risks are still exposed to massive volatility. Better to be at either end (completely anti black swan or for black swan) than stuck in the middle. Don’t do things in the middle – pure action or pure reflection. Barbell method is the domestication not the elimination of risk
  17. You are antifragile when you have more to gain than lose from volatility – more upside than downside. First decrease your exposure to downside
  18. When have optionality, do not need to understand something perfectly and can make good decisions with less information. Can still limit downside and have upside. Having options helps us understand ourselves as we are forced to decide
  19. Tinkering and iterations are much more antifragile than blueprints and hard plans. This allows for more optionality and better decisions since will have better information
  20. When you find antifragile options, there are hidden benefits and therefore need to be right less often compared to linear payoffs to still wind up on top
  21. Avoiding mistakes and being a sucker is quickest way to become antifragile. We know much more of what is wrong than what is right (negative knowledge). Disconfirmation much more rigid than confirmation
  22. Robust decisions rarely require more than one good reason. The man with the most alibis is usually guilty. In addition, a man should be known for one great idea
  23. The longest surviving works are the most robust as time devours everything, the fragile first
  24. Longer term forecast are most prone to error and exponentially so compared to short term. Any reliance on predictions is fragile. Respect and consume the wisdom of our ancestors – philosophy, food, tools, etc.
  25. Perishable v nonperishable – for perishable, younger expected to live longer but for non the older can be expected to lived longer. Established tech more likely to outlive new tech
  26. There is logic in nature much deeper than we can often understand 
  27. Even if there is solid evidence (lose fat if limit carbs), People often don’t act until there are theories they believe. Should be the opposite, if solid evidence, should act regardless of theory as they change all the time
  28. Via negativa – Subtracting things not seasoned by nature reduces the chances of black swans while leaving one open to improvements. For example, eating less extends lives and avoiding new foods and sugars
  29. He argues against buying things with huge marketing budgets as most high quality things do not require it (eggs, meat, art, museums, etc .)

  What I got out of it  

  1. An thoroughly thought-provoking book which makes you very aware how fragile many systems and institutions truly are. The most powerful part of this book is understanding that this mental model can be integrated into every single part of your life – from diet to work to investing to relationships, etc. An absolute must read
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