Although
he has not yet practiced the profession of high-sea piracy, he is now convinced
that even that occupation would present more dull moments than that of the
trader.
Trading
forces someone to think hard; those who merely work hard generally lose their
focus and intellectual energy. In addition, they end up drowning in randomness;
work ethics, Nero believes, draw people to focus on noise rather than signal.
Nero
believes that risk-conscious hard work and discipline can lead someone to
achieve a comfortable life with a very high probability. Beyond that, it is all
randomness: either by taking enormous (and unconscious) risks, or by being
extraordinarily lucky. Mild success can be explainable by skills and labor.
Wild success is attributable to variance.
His wife
had rarely encountered repressed new wealth – the type of people who have felt
the sting of indigence at some point in their lives and want to get even by
exhibiting their wares. The only dark side of being a trader, Nero often says,
is the sight of money being showered on unprepared people.
She felt
as if she had been somewhat swamped in the competition of life. Somehow words
and reason became ineffectual in front of an oversized diamond, a monstrous
house and a sports car collection.
Nero
tried to soothe his jealousy by investigating the rules of pecking order.
Psychologists have shown that most people prefer to make $70000 when others
around them are making $60000 than to make $80000 when others around them are
making $90000.
Nero
felt ashamed of his feelings of Schadenfreude, the joy humans can experience
upon their rivals’ misfortunes. But in this case, Nero’s merriment did not come
from the fact that John went back to his place in life, so much as it was from
the fact that Nero’s methods, beliefs and track record had suddenly gained in
credibility. Part of Nero’s elation also came from the fact that he felt proud
of his sticking to his strategy for so long, in spite of the pressure to be the
alpha male.
Lucky
fools will act as they deserved the money. Their strings of successes will
inject them with so much serotonin (or some similar substance) that they will
even fool themselves about their ability to outperform markets (our hormonal
system doesn’t know whether our successes depend on randomness).
There
seems to be curious evidence of a link between leadership and a form of
psychopathology (the sociopath) that encourages the non-blinking,
self-confident, insensitive person to rally followers.
One
can’t judge a performance in any given field by the results, but by the costs
of the alternatives. Such substitute courses of events are called alternative
histories. The public observes the external signs of wealth without even having
a glimpse at the source. USD 10 million earned through Russian roulette doesn’t
have the same value as USD 10 million earned through the diligent and artful
practice of dentistry. They are the same, can buy the same goods, except that
one’s dependence on randomness is greater than the other. To an accountant,
though, they would be identical; to your next door neighbor too. Yet, deep
down, I can’t help but consider them as qualitatively different. The notion of
such alternative accounting has interesting intellectual extensions and lends
itself to mathematical formulation (illustrative). Mathematics is just not a
“numbers game”, it is a way of thinking.
For
Leibniz God’s mind included infinity of possible worlds, of which he selected
just one.
Reality
is far more vicious than Russian roulette where the risk is visible to
everyone. One doesn’t observe the barrel of reality.
It can
be disturbing for many self-styled “bottom lone” oriented people to be
questioned about the histories that didn’t take place rather than the ones that
actually happened.
Heroes
are heroes because they are heroic in behavior not because they won or lost.
As a
derivative trader I noticed that people do not like to insure against something
abstract; the risk that merits their attention is always something vivid.
Both
risk detection and risk avoidance are not mediated in the “thinking” part of
the brain but largely in the emotional one. Much of what rational thinking
seems to do is rationalize one’s actions by fitting some logic to them.
In that
sense the description coming out of journalism is certainly not just an
unrealistic representation of the world but rather the one that can fool you
the most by grabbing your attention via your emotional apparatus - the cheapest
to deliver sensation. This sensationalism can divert empathy towards wrong
causes. Malnutrition in Africa and
Southeast Asia no longer causes the emotional impact- so it literally dropped
out of the picture.
The
discussions in the media of the “terrorist threats” magnified the effect of
these market moves in people’s heads. This is one of the many reasons that
journalism may be the greatest plague we face today.
From the
standpoint of an institution, the existence of a risk manager has less to do
with actual risk reduction than it has to do with the impression of risk
reduction.
Things
are always obvious after the fact. When you look at the past the past will
always be deterministic since only one single observation took place. Our minds
are not quite designed to understand how the world works, but rather to get out
of trouble rapidly and have progeny. A mistake is not something to be
determined after the fact, but in the light of the information until that
point. A more vicious effect of such hindsight bias is that those who are very
good at predicting the past will think of themselves as good at predicting the
future, and will feel confident about their ability to do so.
Look at
the dramatic changes that have been brought about by the arrival of new
technologies, such as the automobile, the airplane, the telephone, and the
personal computer. Middlebrow inference (inference stripped of probabilistic
thinking) would lead one to believe that all new technologies and inventions
would likewise revolutionize our lives. But the answer is not so obvious: here
we only see and count the winners, to the exclusion of the losers. The
opportunity cost of missing a “new new thing” like the airplane and the
automobile is miniscule compared to the toxicity of all the garbage one has to
go through to get to these jewels (assuming these have brought some improvement
to our lives, which I frequently doubt).
People
do not realize that the media is paid to get their attention.
Let us
remember that economists are evaluated on how intelligent they sound , not on a
scientific measure of their knowledge of reality.
The
reason is that John was never skilled in the first place. He is one of those
people who happened to be there when it all happened. He may have looked the
part but there are plenty of people who look the part.
The
economist Robert Lucas dealt a blow to econometrics by arguing that if people
were rational then their rationality would cause them to figure out predictable
patterns from the past and adapt so that past information would be completely
useless for predicting the future.
No
amount of observations of white swans can allow the inference that all swans
are white, but the observation of a single black swan is sufficient to refute
that conclusion.
There
are only two types of theories:
1.
Theories that are known to be wrong, as
they were tested and adequately rejected (falsified)
2.
Theories that have not yet been known to be
wrong, not falsified yet, but are exposed to be proved wrong.
The
simple notion of a good model for society that cannot be left open for
falsification is totalitarian.
The
major problem with inference in general is that those whose profession is to
derive conclusions from data often fall into the trap faster and more
confidently than others. The more data we have, the more likely we are to drown
in it.
In real
life one sees only the winners - it is natural for those who failed to vanish
completely.
Here we
have a woman who married an extremely successful man but all she can see is
comparative failure, for she cannot emotionally compare him to a sample that
would do him justice. You get rich, move to rich neighborhoods, then become
poor again (social treadmill effect).
Optimism,
it is said, is predictive of success. Predictive? It can also be predictive of
failure. Optimistic people certainly take more risks as they are over confident
about the odds; those who win show up among the rich and famous, others fail
and disappear from the analyses. Sadly.
Remember
that nobody accepts randomness in his own success, but only in his failure.
Carl
Sagan examined the cures from cancer that resulted from a visit to Lourdes in
France, where people were healed by simple contact with the holy waters, and
found out the interesting fact that of the total cancer patients who visited
the place, the cure rate was, if anything, lower than the statistical one for
spontaneous remissions. It was lower than the average for those who did not go
to Lourdes!
Philosophers
of statistics call this the reference case problem to explain that there is no
true attainable randomness in practice, only in theory.
What has
gone wrong with the development of economics as a science? There was a bunch of
intelligent people who felt compelled to use mathematics just to tell
themselves that they were rigorous in their thinking, that theirs was a
science.
Buridan’s
donkey: Imagine a donkey equally hungry and thirsty placed at equal distance
from sources of food and water. In such a framework, he would die of both thirst
and hunger as he would be unable to decide which one to get to first. The
reader no doubt has played a version of Buridan’s donkey, by flipping a coin to
break some of the minor stalemates in life where one lets randomness help with
the decision process.
We can
conjure up one and only one state at a given time, i.e. either 0 or $2000. Left
to our own devices, we are likely to bet in an irrational way, as one of the
states would dominate the picture – the fear of ending with nothing or the
excitement of an extra $1000.
Rules
have their value. We just follow them not because they are the best but because
they are useful and they save time and effort.
Satisficing
(melding together of satisfy and suffice) was the idea of Herbert Simon. We are
rational but in a limited way: boundedly rational.
Since
the Kahneman and Tversky results, an entire discipline called behavioral
finance and economics has flourished.
Neurobiologists
believe that we have three brains: a very old one, the reptilian brain that
dictates heartbeat that we share with all animals; the limbic brain centre of
emotions that we share with mammals; and the neocortex or cognitive brain that
distinguishes primates and humans.
Damasio
reported that the purely unemotional man was incapable of making the simplest
decision. It seems that the emotions are the ones doing the job. Psychologists
call them lubricants of reason.
Unless
the source of the statement has extremely high qualifications, the statement
will be more revealing of the author than the information intended by him.
Wittgenstein’s ruler: Unless you have confidence in the ruler’s reliability, if
you use a ruler to measure a table you may also be using the table to measure
the ruler.
We are
not made to view things as independent from each other. When viewing two events
A and B, it is hard not to assume that A causes B, B causes A, or both cause
each other. Our bias is immediately to establish a causal link.
It is
emotionally harder to reject a hypothesis than to accept it.
The
Greek philosopher Pyrrho, who advocated a life of equanimity and indifference,
was criticized for failing to keep his composure during a critical circumstance
(he was chased by an ox). His answer was that he found it sometimes difficult
to rid himself of his humanity.
Most of
us know pretty much how we should behave. It is the execution that is the
problem, not the absence of knowledge.
Many
people get married to their ideas all the way to the grave. Beliefs are said to
be path dependent if the sequence of ideas is such that the first one
dominates.
When
French writer Henry de Montherlant was told that he was about to lose his
eyesight to a degenerative disease, he found it most appropriate to take his
own life. The stioc’s prescription was precisely to elect what one can do to
control one’s destiny in front of a random outcome. At the end, one is allowed
to choose between no life at all and what one is given by destiny; we always
have an option against uncertainty.
Recall
that epic heroes were judged by their actions and not by the results. No matter
how sophisticated our choices, how good we are at dominating the odds,
randomness will have the last word. We are left only with dignity as a solution
– dignity defined as the execution of a protocol of behavior that doesn’t
depend on the immediate circumstance. It may not the optimal one, but it
certainly is the one that makes us feel best.
The poem
“Apoleipein o Theos Antonion” (The God abandons Antony) by Greek poet Cavafy
addresses Marc Antony, who has just lost
the battle against Octavius and was forsaken by Bacchus, the god who until then
had protected him. It is a beautiful poem advising a man who had just received
a crushing reversal of fortune (According to legend even his horse deserted him
to go to his enemy Octavius). It asks him just to bid her farewell, Alexandria
the city that is leaving him. It tells him not to mourn his luck, not to enter
denial, not to believe that his ears and eyes are deceiving him. Antony, do not
degrade yourself with false hopes.
The God Abandons Antony
If
unexpectedly, in middle night,
an
unseen company be heard to pass,
with
music and with voices exquisite, —
turn
not away and uselessly lament
your
fortune that is giving in, your work
that
came to nothing, the projects of your life
that
proved illusory from first to last.
As
one prepared long since, as fits the brave,
bid
now farewell to the departing city,
farewell
to the Alexandria you love.
And
above all, do not deceive yourself:
say
not that your impression was a dream,
that,
it may be, your hearing played you false:
to
futile hopes like these never descend.
As
one prepared long since, as fits the brave,
as
most fits you who gained so great a city,
approach
the open window steadily,
and
with emotion, but without the plaints
and
supplications of the timorous,
listen
— knowing it to be your last delight —
listen
to the elysian sounds, the exquisite
instruments
of the mystic company;
and
bid farewell to the city you are losing,
farewell
to the Alexandria you love.
(Poems
by C. P. Cavafy. Translated, from the Greek, by J. C. Cavafy. Ikaros, 2003)
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