Fooled By Randomness – Part 2

Part 2: Monkeys on Typewriters – Survivorship and Other Biases

Part 2 of the book discusses the different biases of randomness:
(a) The survivorship biases (we see only winners and thus a distorted view of the odds)
(b) The fact that luck is more frequently the reason for extreme success
(c) The biological handicap of understanding probability

Chapter 8: Too Many Millionaires Next Door
The survivorship bias, as discussed earlier is the failure to consider those that followed the same path as the people we are analyzing, but failed to reach the same success (or be successful at all). It is extremely difficult to view these people, since history does not record them. To correct for this bias, we may want to adjust the success of those we are considering to take into account the effect of those that failed to survive.

We tend to mistake one realization among all possible random histories as the most representative one, forgetting that there may be others… The survivorship bias implies that the highest performing realization will be the most visible. Why? Because the losers do not show up.

Conclusion: Taleb’s point is that survivorship bias is a chronic syndrome affecting most people. We naturally ignore the data we do not see, so we must work hard to counter survivorship bias.

Chapter 9: It is Easier to Buy and Sell than Fry an Egg
Taleb uses this chapter to illustrate the Survivorship Bias in several different common situations.
Two important things come from the examples in this chapter:

1. A large group of poor performers will eventually yield a few performers that appear to be quite skillful due to their success. This is simply volatility from the norm, but is often confused for skill.

2. Success is more greatly correlated with the number of people in the original pool than the skill of the players (since, the larger the pool, the longer the survivors had to survive, and the more successful they will appear as a result.)

Chapter 10: Loser Takes All – On the Nonlinearities of Life
Life is unfair in a nonlinear way. Small advantages often translate into disproportionately large payoffs, or simple randomness can lead to the same thing without any advantage at all.

Nonlinearity is the disproportionate result resulting from a proportionate increase in force. Adding sand to a sandcastle tower, growing at a linear rate, until suddenly one extra grain of sand causes it to all come crumbling down – that is the nonlinear result.

The reason life is nonlinear is that past success increases the probability of future success, due to a multitude of reasons (network externalities being one). Each step on our path is not independent

The nonlinearities of life cause us to confuse sucess with skill. Nonlinearities allow tiny amounts of randomness to build ever greater success (or failure), confusing us into thinking that the tiny amount of randomness was ineffectual.

Chapter 11: Randomness and Our Brain: We are Probability Blind
You are diagnosed with cancer, but have a 72% chance of surviving the next 5 years. You are overjoyed, but why? After all, you have a 28% chance of death. But people do not look at things this way. Our brains are wired to think of one state only. So rather than thinking of yourself as 72% alive and 28% dead, you think of yourself as 100% alive. We are probability blind which causes all of the biases we have discussed previously.

Taleb discusses the many biases that affect our ability to understand probability, including the difficulty in determining causality (and our likely use of the post hoc ergo propter hoc fallacy), and filtering out noise (rather choosing often to interpret the noise!).

Part 2 Conclusion
As a great man GI Joe said, knowing is half the battle. By being aware of our biases, you can think critically about your decisions, interpret information more clearly, and formulate better decisions.