Tuesday, April 28, 2015

Fooled by randomness?

I've ever seen a student who is delusional. When he gets right, he'll claim that he's smart and clever. Especially if he didn't put in the effort compared to those 'muggers' who studied all day and night but scored worse than him. When he gets it wrong, he'll blame circumstances (oh he's sick, the paper is too hard, he's studying for another subject etc). What I think is that he didn't study at all, and it's just luck that got him good results, or luck that got him bad results. Basically, it's not consistent.


There are people like that when they participate in the stock market too. Except that they research deep into the company and bought it, and when the bullish market brings everything up, they mistook it for skill. These are the people whom you see screaming x% returns in y days. But when the market turns down, will they blame bad luck instead? People should read Nassim Nicholas Taleb's Fooled by Randomness. It's a good thesis on how we are fooled by seemingly random events, taking those good events as your own achievements, label it as 'skill' while discarding those failures and call it 'bad luck'.




I think it's useless to think whether your method of participating in the stock market is successful if you didn't test it in at least one cycle of bull/bear. Even then, I can't be sure if the method is successful. It's always work in progress and earning in progress. What the market provides, it can just as easily take it away. Don't ever think that because you reaped so much from the stock market, you're a smart market participant. The market might be starting the next round of fighting while you're still celebrating your victory from the previous round.


It's not easy behaving with the carefulness and humbleness of a newbie when you're no longer one. That's the lesson we all have to learn, if we want to be a long term survivor.


8 comments :

Rolf Suey said...

Hi LP,

Good one and could not agree more. Not only in school and stocks, fooled by randomness happened a lot in career also.

Very often, a promotion, pay rise etc can be accounted to random events of luck, right time, right place...When they take place, people will be so over the moon and behave arrogant and complacent.

Eventually, the stock test of one cycle perhaps can be extended to even 20-30 years, that is where you truly see the results.

It is all about "Sustainability over a pro-longed periods of time!"

Sillyinvestor said...

Hi LP,

I however, think that old birds are actually more restrained and "humbled" with their views as compared to young cubs who are not afraid of tigers.

I myself been through that arrogance phase.

Career. Promotion, I agree with Rolf there is so much randomness in it.

Of course, there are extreme cases, but anything in between it can goes both way, gray can be more white or more black, depending of the eye of the beholder.

la papillion said...

Hi Rolf,

I think it takes a wise person to distinguish between good luck and skill. And that usually takes patience. Totally agree about sustainability over long periods of time!

la papillion said...

Hi SI,

Hmm, you mean more experience will be more arrogant? I think I know what you mean. I always remember this lesson: If you're not humble on your way up, you'll be humbled on your way down.

I think the best is not to be discouraged by failures, yet not be proud by achievements. Not the most easy thing to do.

Sillyinvestor said...

Actually, I mean I tind newbiews more arrogant. Lol

la papillion said...

Hi SI,

Oopsie!

But you made me realise that newbies and oldies can be arrogant! lol :)

Newbies are arrogant because they thought that they are young and the world is made for them. Oldies are arrogant because they thought they had made it so far so they are smart lol

Rolf Suey said...

Capability & Hardwork 1/3, EQ 1/3, Randomness 1/3!

All 3 in place... career progression !

la papillion said...

Hi rolf,

They say that it's better to be lucky than to be clever. Well, some luck can be created by yourself! Totally agree with your career progression factors!