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Randomness Is There

by das monde Tue Sep 25th, 2007 at 11:15:23 AM EST

Recently I picked up a random book at the Schiphol airport, it was "Fooled by Randomness" by Nassim Nicholas Taleb. Still doubting whether I need to know more about random things, I paid for the book.

The author is a no-nonsense practitioner and educator of uncertainty, hunting at Wall Street for upshots of risk ignorance. The book considers probability not as an engineering or computational discipline; the chapter on human misconceptions about randomness is acknowledged as the least original part.  Instead, probability is introduced as a method of dealing with our ignorance and lack of certainty.

Most illustratively, the author develops stories of three Wall Street traders (Nero, John, Carlos) whose fates were vigorously shifted by the 1998 summer crises. You can look very smart for some time, but the same "skills" may blow you up at some rare circumstances. And vice versa, great achievements (or mere survival) may be preceded by long periods of

[Think] of someone involved in scientific research. Day after day, he will engage in dissecting mice in his laboratory, away from the rest of the world. He could try and try for years and years without anything to show for it. His significant other may loose patience with the looser who comes home every night smelling of mice urine. Until bingo, one day he comes up with a result. Someone observing the time series of his occupation would see absolutely no gain, while every day would bring him closer in probability to the end result.

Reasonably successful and cautious people may have difficult social times living in a neighborhood of "better performers", even if hotter performance requires taking pure chances. Stock trading or company management may be very rewarding, but they are not as skillful as dentistry, cooking, or playing Rachmaninov.

CEOs take a small number of large decisions, more like a person walking into the casino with a single million dollar bet. External factors [play] a considerably larger role than with the cook. The link between the skill of the CEO and the results of the company are tenuous. [The CEO] may be subjected to the monkey-on-the-typewriter problem. There are so many companies doing all kinds of things that some of them are bound to make "the right decision".

What does there to say about investors paying enormous salaries to CEOs for perhaps 90% random performance? The stock market game could be like the Russian roulette only with much more empty chambers. Imagine the oligarch Abramowitch offering you $10 million if you stay alive after one shot. Odds are good, only the worst case is terrible.

An extreme case of an asymmetric bet is known as Pascal's wagger: you rather believe in God, because you have way to much to loose if he does exist. Are we not in the same situation regarding global warming or peak oil?

A perfect model (absent in the book) of luck determining fat rewards is modern poker tournaments. The last few World Series of Poker championships were won by relative novices, often getting to the main event by winning small satellite tournaments online or in a local Indian casino. Then you outlast the other few thousand players in an aggressive fest of "all-in" moves. Daring to go "all-in" for near 50-50 chances is a necessary skill of tournament poker, negating many other skills. The latest winner, Laos born South Californian Jerry Yang has mathematical and psychologist background, but undoubtedly quite a number of players were using the same skills and strategies but were eliminated by luck.

Human emotions can hardly acknowledge random factors and evolutions, especially when political and military leadership, or corporate fortunes are at stake. Sensationalist media is doing its best to overwhelm and exaggerate the senses. Are we helpless against our emotions and mind making connections whenever conceivable?

Go to the airport and ask travelers en route to some remote destination how much they would pay for an insurance policy paying [say, $1 million] if they died during the trip (for any reason). Then ask another collection of travelers how much they would pay for an insurance that pays the same in the event of death from a terrorist act (and only from a terrorist act). Guess which one would command a higher price? Odds are that people would rather pay for the second policy (although the former includes death from terrorism).

The author is content to confront natural psychological biases against randomness at work, and gladly enjoys its playful deceits in arts. It is quite an achievement to meet randomness with a clear mind. People may even have some intuitive tools to deal with uncertainty after all, if only they are not fooled by modern "certainties", such as (in my opinion) progress by greed?

I would not agree with everything in the book. Say, generation of "truly" random number sequences is a serious mathematical problem, with implications for the Monte Carlo simulations favored by the author. The particular division between Utopian and Tragic Visions of humankind is debatable: falsificationism of Karl Popper is not particularly related to homo sapiens (being counter-intuitive above that) but is an issue for any cognitive subject. (To my view, Popper is presented very much in Feyerabend's way.) Secondly, Milton Friedman's "distrust" of governments might soon become the greatest utopia under implementation till now. Human knowledge will never be complete, and humble realization of that is very healthy. But it is still usually valuable to know more, especially when there are probably some fellow humans bound to shock and overwhelm you with confusion and uncertainty.

But I have to say, I enjoyed new understanding of randomness from the book.

I am still not able to contribute regurlarly - will be working on that.

Additionally, I just posted a somewhat related comment in Migeru's diary.

by das monde on Tue Sep 25th, 2007 at 11:21:28 AM EST
Hi das monde, haven't read your diary yet. Will after my class tonight. Just wanted to say hello and nice to see you here at ET again. Hope you are well.
by Fran on Tue Sep 25th, 2007 at 11:56:26 AM EST
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Hello! Thank you all for responding. Yet yesterday I failed again to login...
by das monde on Thu Sep 27th, 2007 at 10:57:49 PM EST
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Great to see you again!
by In Wales (inwales aaat eurotrib.com) on Tue Sep 25th, 2007 at 03:37:40 PM EST
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Good to see you, dm!
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 25th, 2007 at 04:52:18 PM EST
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Happy... happpy..

And about probability...... wow...

Patterns with noise as driving force....Randomness and non-randomens....

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Sep 26th, 2007 at 05:32:24 AM EST
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I've quoted Taieb a few times here on ET, and can only recommend his books (his more recent ones on "Black Swans" is also widely quoted, as it seems to describe this summer's crisis quite well - markets repeatedly underestimate the probability of rare events and get wiped out when they actualyl happen.

His book and his site are a lot about himself, but there is a lot of good thing to chew too. From his site:

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Sep 26th, 2007 at 05:53:15 AM EST

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 26th, 2007 at 05:54:07 AM EST
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Fine and interesting diary, das monde! Thanks!

And a 4 for mentioning Feyerabend!

kcurie should like this:

philosophy can neither succeed in providing a general description of science, nor in devising a method for differentiating products of science from non-scientific entities like myths

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Sep 26th, 2007 at 07:11:34 AM EST
Against Method is one of my favorite books.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Sep 26th, 2007 at 07:38:41 AM EST
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Together with Gaston Bachelard and other constructivist epistemologists (and Thomas S. Kuhn), he is major source of inspiration.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Sep 26th, 2007 at 08:54:59 AM EST
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I got an A being tested on Feyerabend, when doing my philosophy exam (as part of my theology degree) - one of my proudest moments - especially since I played Settler on the Computer the night before until 2...
by PeWi on Wed Sep 26th, 2007 at 09:17:57 AM EST
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I do wish Lakatos had finished the book he was to have written as the answering member of the pair.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Sep 26th, 2007 at 10:52:40 AM EST
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I have to admit, I did not look for Feyerabend's books hard enough. But friends mentioned him a few times.

My first impression was that Popper was quite a positivist with the falsification method. On the other hand, if falsification is (or were) all that there is to the scientific method, than science indeed offers not so much, in a sense.

But Feyerabend goes too far as well with anarchistic or democratic views of science. Since most people don't even want to know basic scientific notions, it would be strange to let them decide what is science. Just as martial arts dans are not decided by popular vote, scientific standards deserve protection.

Of course, there are at least two sides of scientific research. For generation of new ideas indeed "anything goes" - if only you come up with a great idea, it does not matter whether you got it "methodologically". But then comes the work of testing ideas - and here we may discern a universal method in Popper's falsification. That method may not be complete - there might come new methodological framework, perhaps incorporating fully theories dealing with rare events, or differentiation between chaotic and systematic or cybernetic phenomena. But it is not "anything going" in the methodological evolution.

Universal distinctions of science and "non-science" may not be complete - Godel's incompleteness theorems are hiding somewhere behind (just as in Popper's falsificationism). But so what? Not only perfect knowledge, but perfect security or justice or government are not possible. Western philosophy is probably too much obsessed with universal rules and "fear" of exceptions to them. (Do we not see where insistence on perfect and most efficient markets and even democracies lead us to?) Scientific understanding and standards were evolving till now, and they will evolve in the future. Scientific revolutions will happen, but boy, you have to do a lot of work to make one. I doubt whether we need to be more efficient there.

by das monde on Fri Sep 28th, 2007 at 12:19:29 AM EST
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