Top critical review
10% insight, 90% rambling.
5 March 2019
Nassim is an intellectual with original ideas, but a bad communicator, so it's not worth your time to wade through the 90% rambling to get to the 10% insight. Which is ironic, because Nassim criticises people who appear on TV as being good at communication but wrong in what they're communicating. He's right, one the opposite is no good either, because there are thousands of other books we could be reading to learn things, and this book is a poor ROI. Nassim should have cut out 90% of the pages, and I'd then rate it 5 stars.
In another instance, Nassim criticises an interviewer for pointing out to an expert that his ideas if followed would have caused a loss. Nassim doesn't explain why this objection is invalid.
On the plus side, there are some interesting ideas here:
- We're good at understanding even bets, where there's a 50% chance in your favor, not skewed bets, where the chance is more on one side.
- A 20% chance of making 1 crore is not the same as a 10% chance of making 2 crores, though both have the same expected value of 20 lac. Expected value is not the only factor in analysing bets.
- The human mind is poor at understanding probabilistic thinking, because it's counter-intuitive.
- When Nassim was asked on one instance whether he thinks the market will go up or down, he said that it's likely to go up but he bet that it went down. Why? Because if it goes up, it goes up only a little, but if it goes down, it's expected to go down a lot, so the expected value is negative.
- The more often you check your portfolio, the more likely you'll find dips, which will make you feel bad. A negative event isn't counter-balanced by a positive event — it requires roughly two positive events to counter-balance it. So Nassim, aware of his own irrational mind, checks his portfolio rarely. And so should we.
- Randomness plays a big part in outcomes, and most people take credit for good luck but blame bad luck on things beyond their control. Plus there's so much ego involved.
- A family earning half a million dollars a year and staying in fashionable Park Avenue in New York, where they're the poorest in their apartment building, will be happier if they move to a middle-class area, where people will look up to, not down at, them.
- A person who repeatedly takes bets and is proven right for a decade can still be wrong, and gives us the example of a trader who was right for two decades, and then went bankrupt. If you bet that rare things won't happen, it may take a decade or two for luck to catch up with you.
- Everyone assumes rare things won't happen, while Nassim bets that they will. Nassim loses money every day for years, and finally earns a lot to make up for all the losses, though it's emotionally draining to see money go out every day. Nassim knows his worst-case scenario, while others don't.
- Wall St banks have bad incentives and will never behave properly. Bad behavior is ignored as long as it produces a profit.
- "Stochastic" means a process consisting of a sequence of random events. Not one event.
- Monte Carlo techniques are computer programs that simulate thousands of scenarios, all random, and give you a conclusion like: 20% of the time, you go bankrupt. 30% of the time, you make a million dollars. The rest of the time, you earn a modest return of 10-20% on your investment. This is a much better way of analysing things than a single number, like: what is the probability that this investment technique produces a 15% profit?
- Monte Carlo techniques are the only option when the equations to model things are too complex. Monte Carlo is brute force, and works.
- Survivorship bias means that the average fund manager has a high return because the rest are out of business. If you count them, the average return is low.
- Nassim is an intellectual and prefers thinking to working.