…an increase in personal performance (regardless of whether it is caused deterministically or by the agency of Lady Fortuna) induces a rise of serotonin in the subject, itself causing an increase of what is commonly called leadership ability. One is "on a roll". Some imperceptible changes in deportment, like an ability to express oneself with serenity and confidence, makes the subject matter look credible - as if he truly deserved the shekels. Randomness will be ruled out as a possible factor in the performance, until it rears its head once again and delivers the kick that will induce the downward spiral.

Source:   Fooled By Randomness

Mathematics is principally a tool to meditate, rather than to compute.

Source:   Fooled By Randomness

MBAs, typically, can interpret their superficial knowledge of the rules of the game into "expertise".

Source:   Fooled By Randomness

MBAs learn the concept of clarity and simplicity - the five-minute-manager take on things. The concept may apply to the business plan of a fertilizer plant, but not to highly probabilistic arguments - which is the reason I have anecdotal evidence in my business that MBAs tend to blow up in financial markets, as they are trained to simplify matters a couple of steps beyond their requirement. (I beg the MBA reader not to take offense; I am myself the unhappy holder of the degree.)

Source:   Fooled By Randomness

It is a fact that our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease [with which] they come to mind. In addition to such [a] problem with the perception of risk, its is also a scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the "thinking" part of the brain but largely in the emotional one (the "risk as feelings" theory). The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is rationalize one's actions by fitting some logic to them.

Source:   Fooled By Randomness

From 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.

Source:   Fooled By Randomness

…it is not natural for us to learn from history…It is a platitude that children learn only from their own mistakes; they will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest part form of consciousness. Adults, too, suffer from such a condition...This congenital denigration of the experience of others is not limited to children or to people like myself; it affects business decision-makers and investors on grand scale.

Source:   Fooled By Randomness

Veteran Trader Marty O'Connell's Firehouse Effect: He had observed that firemen with much downtime who talk to each other for too long come to agree on many things that an outside, impartial observer, would find ludicrous.

Source:   Fooled By Randomness

The science of econometrics consists of the application of statistics to samples taken at different periods of time, which we called time-series. It is based on studying the time series of economic variables, data, and other matters. In the beginning, when I knew close to nothing, I wondered whether time-series reflecting the activity of people now dead or retired should matter for predicting the future. Econometricians who knew a lot more than I did about these matters asked no such questions; this hinted that it was in all likelihood a stupid inquiry...I am now convinced that, perhaps, most of econometrics could be useless - much of what financial statisticians know would not be worth knowing.

Source:   Fooled By Randomness

It was confidently believed that the scientific success of the industrial revolution could be carried through into the social sciences, particularly with such movements as Marxism. Pseudoscience came with a collection of idealistic nerds who tried to create a tailor-made society, the epitome of which is the central planner. Economics was the most likely candidate for such a science; you can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment. Now the spirit of such methods, called "scientism" by its detractors, continued past Marxism, into the discipline of finance as a few technicians thought that mathematical knowledge could lead them to understand markets. The practice of "financial engineering" came along with massive doses of pseudoscience. Practitioners of these methods measure risks, using the tool of past history as an indication of the future. We will just say at this point that the mere possibility of distributions [of data] not being stationary makes the entire concept seem like a costly (perhaps very costly) mistake. [presciently written before the Great Recession of 2008-09]

Source:   Fooled By Randomness

In his 'Treatise on Human Nature', the Scots philosopher David Hume posed the issue [of induction] in the following way: "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 than conclusion".

Source:   Fooled By Randomness

The reason I feel that he [Karl Popper] is important to us traders is because to him the matter of knowledge and discovery is not so much in dealing with what we know, as in dealing with what we don't know…My extreme an obsessive Popperism is carried out as follows: I speculate in all of my activities on theories that represent some vision of the world, but with the following stipulation: No rare event should harm me. In fact, I would like all conceivable rare events to to help me.

Source:   Fooled By Randomness

Like [Pascal's Wager], I will therefore state the following argument: If the science of statistics can benefit me in anything, I will use it. If it poses a threat, then I will not. I want to take the best of what the past can give me without its dangers. Accordingly, I will use statistics and inductive methods to make aggressive bets, but I will not use them to manage my risks and exposure. Surprisingly, all the surviving traders I know seem to have done the same. They trade on ideas bases on some observation (that includes past history) but, like the Popperian scientists, they make sure that the costs of being wrong are limited (and their probability is not derived from past data).

Source:   Fooled By Randomness

"Satisificing" was [Herb Simon's] idea (the melding together of satisfy and suffice): You stop when you get a near-satisfactory solution. Otherwise it may take you an eternity to reach the smallest conclusion or perform the smallest act.

Source:   Fooled By Randomness