Fooled By Randomness

Nassim Tabeb's "Fooled By Randomness" is such a great book, I thought I'd save some great passages here.

On Success

A few years ago, when I told one A, a then Master-of-the-Universe type,
that track records were less relevant than he thought, he found the remark 
so offensive that he violently flung his cigarette lighter in my direction.
The episode taught me a lot.  Remember that nobody accepts randomness in 
his own success, only failure.  His ego was pumped up as he was heading up
a department of "great traders" who were then temporarily making a fortune
in the markets and attributing the idea to the sounding of their business,
their insights, or their intelligence.  They subsequently blew up during
the harsh New York winter of 1994 (it was the bond market crash that followed
the surprise interest rate hike by Alan Greenspan).  The interesting part 
is that several years later I can hardly find any of them still trading 
(ergodicity).

On Cycles

Recall that some economists call the rare event a "peso problem."  The
designation peso problem does not appear to be undeservedly stereotypical.
Things have not gotten better since the early 1980s with the currency of
the United States' southern neighbor.  Long periods of stability draw hordes
of bank currency traders and hedge fund operators to the calm waters of
the Mexican peso; they enjoy owning the currency because of the high interest
rate it commands.  Then they "unexpectedly" blow up, lose money for 
investors, lose their jobs, and switch careers.  Then a new period of 
stability sets in.  New currency traders come in with no memory of the bad
event.  They are drawn to the Mexican peso and the story repeats itself.

On Asymmetry

I was once asked in one of those meetings to express my views on the stock 
market.  I state, not without a modicum of pomp, that I believed that the 
market would go slightly up over the next week with a high probability. 
How high?  "About 70%".  Clearly, that was a very strong opinion.  But then
someone interjected.  "But Nassim, you just boasted being short a very large
quantity of SP500 futures, making a bet that the market would go down. 
What made you change your mind?" "I did not change my mind!  I have a lot
of faith in my bet!  As a matter of fact I now feel like selling even more!" 
The other employees in the room seemed utterly confused.  "Are you bullish
or are you bearish?"  I was asked by the strategist.  I replied that I could
not understand the words bullish and bearish outside of their purely
zoological consideration.... my opinion was that the market was more likely
to go up ("I would be bullish"), but that it was preferably to short it 
("I would be bearish"), because, in the event of its going down, it could go
down a lot.  Suddently, the few traders in the room understood my opinion 
and started voicing similar opinions.  And I was not forced to come back to
the following discussion. 

Let us assume that the reader shared my opinion, that the market over the 
next week had a 70% probability of going up and 30% probability of going down.
However, let us say that it would go up by 1% on average, while it could go
down by an average of 10%.  What would the reader do?  Is the reader
bullish or bearish?

Accordingly, bullish or bearish are terms used by people who do not engage
in practicing uncertainty, like the television commentators, or those who have
no experience in handling risk.