Fooled by Randomness

Fooled by RandomnessThe Hidden Role of Chance in Life and in the Market

By: Nassim Nicholas Taleb

Presented By:Nikunj Patel (10029)Piyush Kakkar (10030)

E-mail: [email protected]

Nassim Nicholas Taleb

An MBA from Wharton and a PhD from the University of Paris.He is currently a Distinguished Professor of Risk Engineering at New York University's Polytechnic Institute and Visiting Professor of Marketing (Cognitive Science) at London Business School.

Outline of the book

Book is divided in three parts:• Part 1: Solon’s Warning

• Part 2: Monkey’s on Typewriters

• Part 3: Wax in My Ears

Part 1: Solon’s Warning

• Introduces the concept of randomness and rare events (the black swan)

• Explains the understanding of human beings towards randomness

• Explains the impact of these rare events

Part 2: Monkey’s on Typewriters

• Explains the human biasness towards the randomness

• Explains the luck factor and probability blindness of human beings

Part 3: Wax in My Ears

• How human beings deal with the uncertainties/randomness

Theory of Determinism Vs.

Theory of Randomness

MediocristanVs.

Extremistan

Ten Thousand Monkeys on Typewriter

Luck or Skill???

Past is Imperfect Guide of Future

Something did not happen till now that does not mean that it will not

happen in the future

Black Swan Event

Silent Evidence

We always try to learn from the

winners

Process is Important…

Good Process

Bad Process

Good Outcome Skilled Lucky

Bad Outcome Unfortunate Fool who

deserves that

Frame of Reference

We always try to relate our

success with others

Useless Bell...

Life is not always 50:50

Taleb’s DistributionHigh probability of a small gain, and a small probability of a very large loss

Learned statistics ???Please…

Unlearn it Most Dangerous Knowledge Given by Professors and Teachers

Incorrect application of statistics

Dr. John(statistician) & Tony(Layman)

What we don’t know is more important than what we know…

Our decisions depends on only what we know.

Noise ??? Information

Timescale and NoiseTimescale

Probability of success Noise

1 sec 50.02% 49.98 %

1 min 50.17% 49.83 %

1 hour 51.3% 48.7 %

1 day 54% 46 %

1 month 67% 33 %

1 quarter 77% 23 %

1 year 93% 7 %

Madhucon Projects Ltd.

Take Your Decision

25 %

10 %

How Much???

Investor

Market Event

Significant ???

Decision

Gain / Loss

Frame of Reference

Unpredictable

Analyze

Yes

Comparison

Outcome

Decision

Black Swan Event

Don’t Know

Past Vs. future

Noise/ Information

Silent Evidence

Taleb Distribution

Our Conflicts

• Statistics Vs. No Statistics• Theory Vs. Reality• How to identify Noise (Randomness)

Further Reading…

• After “Fooled by Randomness” in 2001 N.N. taleb has published…

• “Black Swan” in 2007 and• “The Bed of Procrustes- Philosophical and

Practical Aphorisms”in Dec-2010.

Any Noise???