Thursday, June 2, 2016

Luck - VI

In The Shiva Trilogy by Amish Tripathi, there were some statements that I disagreed with, one of which was that 'nothing is random; everything has a cause'. (Of course earthquakes, for example, have reasons but those reasons have nothing to do with us.) Humans have evolved to notice patterns and ascribe significance to them. English philosopher and scientist Francis Bacon said that humanity has a proclivity to “suppose the existence of more order and regularity in the world than it finds.” Zodiac signs, Roscharch test and paredolia are examples of the human tendency to find patterns where none exist.

Human beings make up stories that sound convincing to them. There is an experiment by the psychologist Richard Nisbet which shows this.They placed several stockings on the table. Many women were then allowed to examine the stockings and choose the one they liked best. The women gave all sorts of reasons for their choice but actually the stockings were identical. People are often mistaken about their feelings and give reasons from social conventions, from how things normally work or plain guesses. You can see this habit of trying to spot patterns in randomness in the stock market.  Phil Rosenzweig writes in The Halo Effect:
...take the stock market, whose fluctuation , edging higher one day and a bit lower the next, resemble Brownian motion, the jittery movement of pollen particles in water or gas molecules bouncing off one another. It's not very satisfying to say that today's stock market movement is explained by random forces. Tune in to CNBC and listen to the pundits as they watch the ticker, and you'll  hear them explain, "The Dow is up slightly as investors gain confidence from rising factory orders,"or, "The Dow is off by a percentage point as investors take profits,"or, "The Dow is a bit higher as investors shrug off worries about the Fed's next move on interest rates." They have to say something. Maria Bartiromo can't exactly look into the camera and say that the Dow is down half a percent today because of random Brownian motion.
In Fooled by Randomness, Nassim Taleb gives an example of how a perfectly random process can produce a result that mimics what happens in the real world. Suppose there are 10,000 fictional investment managers who play a perfectly fair game: each has a 50% chance of winning $10,000 at the end of the year and a 50% chance of losing $10,000. Once a manager loses money, he is thrown out of the sample.Thus, each year half the managers lose their job.

At the end of the first year, we can expect 5000 managers to survive, after two years, 2500 will have won 2 years in a row and so on. At the end of the fifth year, there will be 313 managers who would have won money five years in a row in a game akin to a coin toss. The number of survivors depends only on the initial number who play the game. If one of these survivors is in the real world, what will the reactions be? Taleb writes:
...we would get very interesting and helpful comments on his remarkable style, his incisive mind, and the influences that helped him achieve such success. Some analysts may attribute his achievement to precise elements among his childhood experiences. His biographer will dwell on the wonderful role models provided by his parents; we would be supplied with black and white pictures in the middle of the book of a great mind in the making. And the following year, should he stop outperforming (recall that his odds of having a good year have stayed at 50%) they would stat laying blame, finding fault with the relaxation in his work ethics, or his dissipated lifestyle. They will find something he did before when he was successful that he has subsequently stopped doing, and attribute his failure to that. The truth will be, however, that he simply ran out of luck.
To understand successes, the study of traits in failure need to be present. For instance, some traits that seem to explain millionaires, like appetite for risk, only appear because one does not study business failures. If one includes bankrupt people in the sample, then risk-taking would not appear to be a valid factor explaining success. The Halo Effect also contributes to making a coherent story by making our view of all the attributes of an individual match our judgment of one attribute that stands out. As Philip, the protagonist in Somerset Maugham's Of Human Bondage muses:
 He did not know that he had ever done anything but what seemed best to do, and what a cropper he had come! Other men, with no more advantages than he, succeeded, and others again, with many more, failed. It seemed pure chance. The rain fell alike upon the just and upon the unjust, and for nothing was there a why and a wherefore.
Or as it says in Ecclesiastes: 'I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.' In this speech, Michael Lewis describes how luck played the key role in putting him in the right place at the right time.

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