Nassim Taleb Michel Pireu     | Business Day Tuesday, October 16, 2018
Nassim Nicholas Taleb is the idiosyncratic author of INCERTO “a philosophical and practical essay on uncertainty” that consists of Skin In the Game, Antifragile , The Black Swan, Fooled by Randomness and The Bed of Procrustes a (so far) 5-volume, in his words, "investigation of opacity, luck, uncertainty, probability, human error, risk, and decision making when we don’t understand the world”.

Taleb began his career as a derivatives trader on Wall Street, but disapproves of many of the models promoted by the finance industry. Despite a Wharton MBA and a PhD from the University of Paris, he believes academia produces insights that are far removed from the realities of the world. Prompting him to say things like “Probability is a liberal art; it is a child of scepticism, not a tool for people with calculators on their belts to satisfy their desire to produce fancy calculations and certainties.”

Other Nicholas Taleb quotes together with the reason they may be of particular significance to investors:

“They think that intelligence is about noticing things that are relevant; in a complex world, intelligence consists in ignoring things that are irrelevant.”

Your brain abhors disorder. You see faces in clouds and demons in bonfires. When you need something to be true, you look for correlations and patterns. But as Art De Vany explained: “Complex systems don't have causes. If you think you can look back and see some cause of events, you are probably suffering hindsight bias or what I call complexity blindness.”

“In science you need to understand the world; in business you need others to misunderstand it.”

Nowhere does this apply more than in the stock market. In order to be successful one has to bet against the consensus and be right. But, how does one do that? “People are so attached to being right, and yet could so easily find out how they’re wrong,” says Ray Dalio, “if they just said to themselves, ‘I’m not sure that I’m right, so let me go find people who have alternative point of views.’ Not to pay attention to their conclusions, but to the thought process … this itself reduces the probability of being wrong and produces a great deal of learning. People are so hung up on being right. Starting their discussion and deriving some sort of satisfaction if, at the end of the discussion, they were where they began the discussion. That doesn’t make any sense, because there’s not going to be any learning. So ego plays an important role in that. The people that feel like, ‘I’m good. I’ve got it,’ won’t learn. If you’ve got it, you won’t learn. So you have to get rid of this ego barrier, ‘I’ve got it’ thing. It changes how you see things because it starts to make you think, how do I know I’m not the wrong one? When you start to realize that people are actually seeing in those [different] ways — and that it’s a valid way of seeing — it gives you the evidence base that it’s okay to be different. After all, you just want it to be right, right?”

“The best way to spot a charlatan: someone who tells you what to do instead of what not to do.”

Why ignore good advice? Unless, of course, you think, like Ken Fisher, that much of it is wrong and investing success depends more on not doing the wrong thing than on doing the right thing. Fisher thinks the investment world is littered with myths and poor advice, and that two-thirds of investment success lies in not doing the wrong thing, only one-third in doing the right thing. If he’s right we need to put more effort into challenging the things that we all know “to be right” and asking if the reverse might not be true.

“The media is paid to get your attention. For a journalist, silence rarely surpasses any word.”

“Most of us consume news every day without even thinking about the damage we are doing to ourselves. Financial news may be among the most damaging of all,” says Tim Price.

To quote Thomas Schuster of Leipzig University: “The media select, they interpret, they emotionalize and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where ‘actually’ none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and, of course, that the news disseminated by the media decisively contributes to the emergence of price movements. When the reality is that for most of the time, about almost everything that takes place in the financial markets – and elsewhere – nobody really knows.”

“If you have more than one reason to do something don’t do it. It does not mean that one reason is better than two, just that by invoking more than one reason you are trying to convince yourself to do something. Obvious decisions (robust to error) require no more than a single reason.”

“If a company's value doesn't just scream at you, it's too close,” says Warren Buffett. “Once deep calculations are needed, you're running down the path of confirming whatever you want to believe, often because you want your effort to be justified.”

“It has been more profitable for us to bind together in the wrong direction than to be alone in the right one.”

The problem with exploiting the wisdom of the crowd is that every financial transaction necessarily involves two crowds – buyers and sellers – so one will eventually prove the wiser, but what’s the value of “collective wisdom” if you can’t identify the ‘wise’ crowd before the fact?

“Few understand that procrastination is our natural defence, letting things take care of themselves… it results from some ecological or naturalistic wisdom, and is not always bad.”

Jesse Livermore came to the same conclusion when he realised that it was not his “thinking” that made the big money but his “sitting”.

“It is no trick at all to be right on the market,” said Livermore. ”You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine - that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
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