The Directed Life

Date read: 1/29/2023

Notes from the first book in Taleb’s Incerto series

Preface

Taleb’s rules for writing the book (vii):

The rules while writing the first edition of this book had been to avoid discussing (a) anything that I did not either personally witness on the topic or develop independently, and (b) anything that I have not distilled well enough to be able to write on the subject with only the slightest effort.

Past events will always look less random than they were (it is called the hindsight bias). (ix)

I believe that the principal asset I need to protect and cultivate is my deep-seated intellectual insecurity. (ix)

Montaigne is a role model for the modern thinker (x).

Probability as coming from Hume’s problem of induction and Aristotle’s inference to the general (x).

Probability is more about confronting nature’s uncertainty more than computation (x).

Markets are a mere special case of randomness traps—but they are by far the most interesting as luck plays a very large role in them. (xi)

Everything is more random than we think, but it’s not all completely random (xii).

Prologue

Luck gets disguised as skill, randomness as determinism.

The more literary you are the easier it is to mistake meaning for noise (xl).

Great thinkers involved in the “Tragic Man” argument—that we are inherently flawed, irrational, etc: Karl Popper, Hayek, Friedman, Adam Smith, Herbert Simon, Kahneman and Tversky, Soros (xlv). My own connection: Be wary of rational man arguments—seek the great thinkers who first presume man is flawed (Christianity, Stoicism).

Before the “enlightenment” and the age of rationality, there was in the culture a collection of tricks to deal with our fallibility and reversals of fortunes. The elders can still help us with some of their ruses. (xlvi)

Part 1: Solon’s Warning

Solon’s response to Croesus on whether or not he should be considered the happiest man (3):

“The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.”

Taleb on Solon (4):

Solon was wise enough to get the following point; that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside … is that things come with little help from luck are more resistant to randomness.

Think hard vs. work hard (11): what occupation is requiring you to think hard, but not necessarily work hard? When working hard becomes conflated with success / improvement, you begin to conflate signal for noise.

Be thoughtful enough to study history (16).

For one cannot consider a profession without taking into account the average of the people who enter it, not the sample of those who have succeeded in it.

Myths, particularly well-aged ones, as we saw with Solon’s warning, can be far more potent (and provide us with more experience) than plain reality. (21)

Judge outcomes through alternative histories: not what results were achieved, but by the costs of the alternative outcome(s) (22).

Life is Russian roulette with a thousands of barrels and an invisible revolver. Don’t numb yourself into a false sense of security; prepare for when the barrel with the bullet comes around (26).

The Hero in myth (34):

Heroes won and lost battles in a manner that was totally independent of their own valor; their fate depended upon totally external forces, generally the explicit agency of the scheming gods (not devoid of nepotism). Heroes are heroes because they are heroic in behavior, not because they won or lost.

So called “rational” thinking (38):

In addition to such problems with the perception of risk, it is also a scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the “thinking” part of the brain but largely in the emotional one (the “risk as feelings” theory). The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is rationalize one’s actions by fitting some logic to them.

Monte Carlo Mathematics (44):

Mathematics is principally a tool to meditate, rather than to compute.

What we’re designed to do (56):

Our minds are not quite designed to understand how the world works, but, rather, to get out trouble rapidly and have progeny.

Ergodicity: very long sample paths will likely end up resembling one another—Reversion to long term properties (57-58).

Value “distilled thought over newer thinking, regardless of its apparent sophistication” (59).

The importance of the path (68):

Note also the implication that wealth does not count so much into one’s well-being as the route one uses to get to it.

An advantage worthy of cultivation (69):

My sole advantage in life is that I know some of my weaknesses, mostly that I am incapable of taming my emotions facing news and incapable of seeing a performance with a clear head.

Be rational with harm; reason comes after beauty in everything else (77-78):

We do not need to be rational and scientific when it comes to the details of our daily life—only in those that can harm us and threaten our survival. Modern life seems to invite us to do the exact opposite; become extremely realistic and intellectual when it comes to such matters as religion and personal behavior, yet as irrational as possible when it comes to matters ruled by randomness (say, portfolio or real-estate investments).

A theory could be used to prove a certain event true and the inverse, but consider theory when it works vs. testing the theory in different time periods when it wouldn’t have worked / alternative histories. (91)

Be unmarried to your ideas (92):

Loyalty to ideas is not a good thing for traders, scientists—or anyone.

The longer you go without encountering the rare event the more vulnerable you become to it (96):

For evolution means fitness to one and only one time series, not the average of all the possible environments.

Don’t confuse probability with expectation—probability times payoff (99).

Never mind the frequency of success; determine the magnitude of the outcome of potential success (102-103):

How frequent the profit is irrelevant; it is the magnitude of the outcome that counts.

The best description of my lifelong business in the market is “skewed bets,” that is, I try to benefit from rare events, events that do not tend to repeat themselves frequently, but, accordingly, present a large payoff when they occur. I try to make money infrequently, as infrequently as possible, simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price. In addition to my own empiricism, I think the counterintuitive aspect of the trade (and the fact that our emotional wiring does not accommodate it) gives me some form of advantage.

Viewing history narrowly vs. broadly (108):

The problem is that we read too much into shallow recent history, with statements like “this has never happened before,” but not from history in general (things that never happened in one area tend eventually to happen). In other words, history teaches us that things that never happened before do happen. It can teach us a lot of the narrowly defined time series; the broader the look, the better the lesson.

Becoming a crisis hunter: incurring small losses regularly in order to profit, rarely but in large numbers. (112)

Making sure first that you aren’t sitting on a time bomb (121):

Maximizing the probability of winning does not lead to maximizing the expectation from the game when one’s strategy may include skewness, i.e., a small chance of large loss, one that bankrupts you every several years, you are likely to show up as the winner in almost all samples—except in the year when you are dead.

There is something non-philosophical about investing one’s pride and ego into a “my house/library/car is bigger than that of others in my category”—it is downright foolish to claim to be the first in one’s category all the while sitting on a time bomb.

Theories can’t be verified but they can be falsified; we’ll never know if all swans are white, but once you see a black swan you know black swans exist. (126)

Our brains aren’t built to understand randomness; we use memory to make inductions, generalizing events in the process which takes up less space in our brain. However, this severely reduces our ability to detect randomness. (130)

Pascal’s wager is the model for accepting asymmetry in knowledge; use induction to make calculated but aggressive bets, not to manage risks, then use a stop loss (predetermined exit point) to protect from a negative black swan. (130)

Conclusion of Solon’s warning: Taleb’s wish to create an environment of low-information, more deterministic feeling like in ancient times while benefitting from modern technology, medicine, and social justice. (131)

Part 2: Monkeys on Typewriters

Constantly take note of survivorship bias, where we forget that oftentimes we only see the winner. The many who fail disappear from our view and we only see the few that have succeeded, oftentimes by mere luck. (137)

Becoming “more rational” doesn’t work with us humans—we need to change our environment to short circuit the emotions we could feel in a different environment instead of thinking we can reason with our emotions. Example: stuck in status games? Move out of the environment where they’re being played. (143)

Take heed of the properties of ergodicity, allowing time to eliminate most effects of randomness. The reversion of large outliers causes regression to the mean. The larger the deviation, the more important the effect here. Note that not all deviations are from this effect, but a lot are (155-156).

Chaos theory: small inputs can lead to a “disproportionate response.” (173)

The information age is aggrandizing the unfairness of Polya processes, where the winning probability increases with past wins which results in large outcome variance; a few large successes and many failures (175-177):

It is obvious that the information age, by homogenizing our tastes, is causing the unfairness to be even more acute—those who win capture almost all the customers.

Be aware of non-linearities, but don’t attempt to model them. Taleb on this (179):

Our brain is not cut out for nonlinearities. People think that if, say, two variables are causally linked, then a steady input in one variable should always yield a result in the other one. Our emotional apparatus is designed for linear causality. For instance, you study every day and learn something in proportion to your studies. If you do not feel that you are going anywhere, your emotions will cause you to be demoralized. But rarely reality gives us the privilege of a satisfying linear positive progression: You may study for a year and learn nothing, then, unless you are disheartened by the empty results and give up, something will come to you in a flash. My partner Mark Spitznagel summarizes it as follows: Imagine yourself practicing the piano every day for a long time, barely being able to perform “Chopsticks,” then suddenly finding yourself capable of playing Rachmaninov. Owing to this nonlinearity, people cannot comprehend the nature of the rare event. This summarizes why there are routes to success that are nonrandom, but few, very few, people have the mental stamina to follow them. Those who go the extra mile are rewarded. In my profession one may own a security that benefits from lower market prices, but may not react at all until some critical point. Most people give up before the rewards.

Another nonlinear effect of success, cultivating a truly devoted niche audience (180-181):

I am also realizing the nonlinear effect behind success in anything: It is better to have a handful of enthusiastic advocates than hordes of people who appreciate your work—better to be loved by a dozen than liked by the hundreds.

Allow randomness to be a positive force in your life by controlling what you can control and then submitting to chance / fortune. (180)

We are blind to linear combinations and operate with mental shortcuts. (185-186)

The fact that your mind cannot retain and use everything you know at once is the cause of such biases. One central aspect of a heuristic is that it is blind to reasoning. (191)

System 1 thinking (emotional, social, automatic) vs. System 2 thinking (effortful, deductive, slow)—System 1 can be impacted by practicing using System 2 (196-197).

Brains made for fitness instead of truth (197).

We use heuristics as shortcuts for thinking and decision-making and we are severely prone to making probability mistakes (198).

A life of true simplicity involved living in a narrow space of probabilities which means lack of outside information / effect. (199)

Religion, habitat and gene changes (200):

Popular belief holds that the religious backdrop of the first and second millennia blocked the growth of tools that hint at absence of determinism, and cause the delays in probability research. The idea is extremely dubious; we simply did not compute probabilities because we did not dare to? Surely the reason is because we did not need to. Much of our problem comes from the fact that we have evolved out of such a habitat faster, much faster, than our genes. Even worse, our genes have not changed at all.

Emotions control our thinking. (203)

We often confuse the expected value with the most likely scenario. (208)

It is very pleasant to go to work in the morning with the expectation of being up some small money. It requires some strength of character to accept the expectation of bleeding a little, losing pennies on a steady basis even if the strategy is bound to be profitable over longer periods. (208-209)

We overvalue our own knowledge and undervalue the chance that we’re wrong. (210)

Be like Odysseus’s sailors and fill your ears with wax; block out as much of the noise of the modern world and information age as you can. (221, 225)

Probability isn’t just about odds, it’s about the belief in alternate outcomes existing. (234)

As the skeptics’ main teaching was that nothing could be accepted with certainty, conclusions of various degrees of probability could be formed, and these supplied a guide to conduct. (236)

Become devoid of path dependence—don’t marry your ideas. (239-240)

We have been getting things wrong in the past and we laugh at our present institutions; it is time to figure out that we should avoid enshrining the present ones. (243)

It’s choosing the course of action, not the outcome of the course of action (246):

Recall that epic heroes were judged by their actions, not by the results. No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word. We are left only with dignity as a solution—dignity defines as the execution of a protocol of behavior that does not depend on the immediate circumstance.

Stoicism (248-249):

There is nothing wrong and undignified with emotions—we are cut to have them. What is wrong is not following the heroic or, at least, the dignified path. That is what stoicism truly means. It is the attempt by man to get event with probability.

… it [stoicism] developed by Roman time into a life based on a system of virtues—in the ancient sense when virtue meant virtu, the sort of belief in which virtue is its own reward.

Its tenets can be summarized as follows: The stoic is a person who combines the qualities of wisdom, upright dealing, and courage. The stoic will thus be immune to life’s dirty gyrations as he will be superior to the wounds from some of life’s dirty tricks.

The interesting thing about stoicism is that it plays on dignity and personal aesthetics, which are part of our genes. Start stressing personal elegance at your next misfortune. Exhibit sapere vivere (”know how to live”) in all circumstances.

The only article Lady Fortuna has no control over is your behavior. Good luck.

Postscript

• Don’t let desires move with experiences
• We’re not made for rigid fixed schedules
• Poor & free or rich & a modern slave?

Closing thought from postscript (262):

We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.