Sunday, March 02, 2014

Mind and Spirit –> “We Won’t Be Fooled Again (by Randomness)”

In 2010, I was sitting in a meeting called by the President of our Company.  I respect this man due to the nature of his overwhelming desire to do the right thing, and his ability to listen to people.  He had invited some of us to an offsite where he was exploring some of the things that that we should be doing together.  This was a smaller group, and I had a good relationship with this man.  While I can’t remember how we got onto the subject in the group, I remember speaking up in the middle of the offsite.

“I have been reading some of the thoughts of Nassim Nichols Taleb,” I said to the group.  “He has a very simple and powerful principle that companies and individuals basically get wiped out because of severe issue that they really haven’t thought through.  These events are called Black Swan events.  You know, something like an earth quake or a flood.  I think we should also spend some time on these type of event to make sure that we can survive them.”

The great thing about our President was his willingness to think through ideas, and he paused for a second, and he said,”Yes, you are right.  We should also be considering these types of events.”

However, as I wrote in my last post, much of our life is lived by habit.  (And we will have a review later on the “Power of Habit” so we can truly get a sense of how dominating habit can be.)  As far as I know, I have never seen a company plan for Black Swan events, and in the rush of our daily business, this thought was left behind.  However, I was a prophet, because in 2011, we had a flood event in Thailand.

Suddenly, we were predicting a $200M dollar loss to the street, and there were some very dire words inside of our company on how this may end up impacting our entire business.  This could have been a terminating event for our company, but due to the unique nature of our products, we raised our prices and our customers had no other alternatives.  The fact that we were a major player in our market allowed us to live.  However, if this had happened 10 years ago, when there were many companies in our field, the other people would have used this event to put us out of business.  By the grace of God, we survived.  However, we were fortunate.

There is nobody in our company that has ever come up to me and said, “Wow, you were so unbelievably smart to call this out.”  As a matter of fact, I know I am the only person that even remembers that I was talking about Nassim Nicholas Taleb, and Black Swan events.  I do not consider myself a prophet in this way.  I consider myself as not being able to communicate the powerful concept that Taleb has put down in his writings.  I do not feel too bad, because I know that most people are unable to apply his principles.  I am hoping that if you stumble across my blog, you will be willing to invest some time in understanding where he is coming from.  Then you should invest a small amount of your life in reading his writings.

Taleb rose to prominence because he publically called out that Wall Street was filled with charlatans, and that the interrelationship of all the banks were placing all of the world at risk.  These comments were made long before the 2008-2009 collapse of Wall Street.  He is known for basically name calling and clearly stating that others are stupid and ignorant.  He is hot as a two dollar pistol.

So who is this man and what is he saying?  Taleb showed up on Wall Street as a trader, and he became complete disillusioned with the people that he saw there.  While you would expect that handling money would result in the smartest being rewarded.  Instead, he found out that the very, very stupid were being rewarded.  Taleb is not shy about calling this out.  This does not make himself popular with those in power.  They say, “I am not stupid.  I am powerful.  I am rich.”

To this, Taleb simply says, “No, you are lucky.”  He is almost insufferably arrogant in this standpoint.  Yet, I can understand why he has to say this so hard.  Because the rest of society has difficultly in hearing, listening to him, and understanding. 

As written in the last blog post, all of humankind has a remarkably hard time distinguishing the wrapper from the package.  This is very true in the United States.  If we see somebody that is wealthy, we automatically assume that they are capable.  However, Taleb doesn’t assume they are capable at all.  He simply says they are lucky.  While Taleb, in his writing, emphasizes the luck aspect (or probability), I would emphasize that there is a bit of both. 

To bring this last idea to a point, we have often heard, “Luck is what happens when preparation meets opportunity,” but in reality, the quote should say, “Luck is what happens when we mix preparation, opportunity, and randomness together.”  (By the way, the original quote is often attributed to Seneca the Younger, but he probably never said it.  I guess that Seneca was just lucky in getting credit for the quote.)  We need to understand that Taleb is doing nothing more than explaining the Bible.  We can see this in a quote from the Old Testament.

Ecclesiastes 9:11-12

Living Bible (TLB)

Again I looked throughout the earth and saw that the swiftest person does not always win the race, nor the strongest man the battle, and that wise men are often poor, and skillful men are not necessarily famous; but it is all by chance, by happening to be at the right place at the right time.  A man never knows when he is going to run into bad luck. He is like a fish caught in a net, or a bird caught in a snare.

From this axiom, flows the rest of his knowledge.  Now realize that the Bible has much more to say about chance, and more specifically God’s providence.  However, the wisest man in the world according to Scriptures, King Solomon, called out the same thing as Taleb about chance, a few thousand years earlier.  Taleb is a little more pointed in his explanations.  He calls out some of the principles that we have seen from Tversky and Kahneman from the last posting.

Wikipedia summarizes these points that he make nicely.

1. Taleb points out that we see patterns everywhere.  Unfortunately, these patterns are not grounded in real facts.  We will often look at the clouds and see patterns of elephants in these clouds.  It is foolish to think that the clouds really are representing elephants, but our brain will throw them up there.

2. We think that somehow we can explain these patterns or cause them to react to us.  He points out that gamblers will pick up superstitions so they can become lucky.  Many traders have superstitions, which is our subconscious looking for something that causes patterns of success.

3. We think just because somebody has accidently survived an event, they must have hidden knowledge.  If we had 5 men playing Russian roulette with a revolver with 5 bullets, just one would survive.  In our world, we would run up to the survivor and ask him “what is the secret to your survival?”  He might say, “Well, I have very good parents, and I love playing this game.”  These facts may be true, but they have nothing to do with his surviving.  Yet, we do these types of questions all the time.  “What is Microsoft’s secret?” or “What is Google’s secret?”  Maybe they were just lucky.

4. We are probability blind.  Let’s say that we have a machine that loses $1 ever time that we pull the lever.  However, once every 1000 pulls, it wins $1100.  Most people will constantly see a minor loss of money, and eventually give up.  Taleb remarks this is the central investing theme that he does.  He loses a little bit all the time, then every once in while he strikes it rich.  However, he calls out that this is investment strategy that virtually nobody has the discipline to follow.  However, mathematically it pencils out.

While all of these facts are simple, it is difficult for us to hear them do to the habits and our blindness.  While it looks like I can describe his book in a few words, make no mistake that saying his principles is anything like reading the book.  I suggest that he makes these principles standout and gain real foothold into your brain.  From here, you will grow in wisdom in the way you see the world.

Yet, I see even more in his language.  We need to understand that our lives are surrounded by randomness, fate, or providence.  As a Christian, I select providence believing that we have no skill, we only have the roller coaster of a life that God has thrown us into.  Into this life, we are given both good times and bad.

If we are smart, we will make sure that we have systems that can withstand challenges.  I believe that God allows random stuff to happen to us.  In this type of a world, we need to take out insurance against the ills that happen.  There are others that may be brought low by these things.  Instead of saying, “Well they should have prepared better,” we should instead say, “Well, there, if not for the Grace of God, I would be.”  In this light, we need to reach out and support those that are less fortunate.

We should not assume that our position is a right.  It is a lucky accident.

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