Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets

A concept of probability in mathematics, ergodicity “means, roughly, that (under certain conditions) very long sample paths would end up resembling each other” (92). Taleb clarifies “that time will eliminate the annoying effects of randomness” (192). In addition, Taleb notes, over the long term it becomes mathematically probable that a rare event will take place.

Deductive and inductive reasoning are two different ways to reach logical inferences. In deductive reasoning, if the premises are true, the conclusion must be true. The conclusion is dependent on verifying the premises. By contrast, inductive reasoning extrapolates a general conclusion based on available evidence. Inductive conclusions can prove “difficult, even impossible, to verify […] and empiricism can be worse than any other form of hogwash when it gives someone confidence” (106). The problem of induction was illustrated by the philosophers David Hume and Karl Popper and their analyses of the black swan problem.

Survivorship bias is a “cognitive fallacy in which, when looking at a given group, you focus only on examples of successful individuals (the ‘survivors’) in the selection process rather than the group as a whole (including the ‘non-survivors’)” (MasterClass, “Survivorship Bias”). Taleb defines it as “the difference between the average of [a] distribution and the unconditional distribution of winners and losers” (192). He uses a hypothetical in which an infinite number of monkeys type on a keyboard. At some point, according to the laws of probability, one of them will randomly produce a replica of The Iliad. In this sense, it would be the winner. However, this does not mean that monkeys can suddenly write like Homer. In the hypothetical, only the monkey who wins draws any attention while the sample size of the remaining monkeys is dismissed. Furthermore, the monkey that “succeeded” did so due to random chance.

Heuristics are shortcuts that humans use to streamline their decision-making. Since the brain cannot compute every possible consideration in a given circumstance, humans have developed algorithmic rules. Taleb says that these rules are generally irrational and further claims that “one central aspect of a heuristic is that it is blind to reasoning” (228).

Attribution bias occurs when someone attributes their success to their skill and hard work while they attribute their failure to bad luck or something outside of their control. Taleb adds that attribution bias “gives people the illusion of being better at what they do, which explains the findings that 80 to 90% of people think that they are above the average (and the median) in many things” (283). Attribution bias is at the heart of the problems with The Distinction Between Luck and Skill and the Human Perceptions of Cause and Effect.