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Tue Jun 3 22:38:01 2008 Fooled By Randomness A book report.
Don't be fooled! Image courtesy of Maximaximax (wiki) I recently read (well, re-read) Nassim Taleb's Fooled By Randomness, subtitled "The Hidden Role of Chance in Life and the Markets." It is an excellent book, well-worth reading for two reasons: It is written in a fairly direct style. Mr. Taleb is clearly opinionated and felt he should tell his story, regardless of what publishers thought. It makes a strong case for how much randomness influences what we do and perceive, and how little we notice it. Randomness definitely affects everyone. But Mr. Taleb has worked for over a decade as an options trader, subject to the daily fluctuations of multiple global markets. And he has seen traders and companies rise and fall based on randomness. Randomness was very explicit there (although not obvious to everyone), and once he saw its pervasive effects in that industry, he was able to generalize the concept to other areas. I had two main take-aways. The first take-away was a deeper appreciation for the Survivor Bias, which occurs when a supposedly statistical study fails to include all data properly. In finance, it is common to compare only long-lived mutual funds (for example) and ignore all of those that have failed. It is very sobering to realize that if you put a bunch of people and funds into place, had them guess randomly about investments and tracked them over time, you would see many fail and a few survive for a long time (by chance)--exactly the same situation we observe today! Only we don't say long-lived or successful funds are random survivors. We say the fund managers are geniuses, and expect them to repeat their successes. (Again, soberingly, most don't). The second take-away was people's poor appreciation for probability. Even in his world of trading, where people with scientific and mathematics backgrounds were working on algorithmic strategies, there was a disconnect with simple statistics. Even basic concepts such as Expected Value were often missed! Nassim's main point was that a person well-versed in basic probability, and aware of the large role of randomness in the world, could avoid many common mistakes and maybe even make money off other peoples' ignorance. Certainly that's true in his profession. It isn't a perfect book. He extended some of the survivorship bias to good people management. I think enough of us have had good (and bad!) managers to know that good managers often aren't survivors--they are actually good managers. I see Nassim's point that sometimes managers get lucky (due to happening to manage an organization during a moment of critical success or riding a market bubble, etc.), so a few "star" CEOs may actually be just average managers who happened to be at the right place at the right time. But some of his arguments here felt a bit jaded. Still, an overall enjoyable read, and a good reminder while the markets are in their current volatile state. I don't know how Mr. Taleb did in the subprime mortgage crash, but given his stated preference for targeting large crashes, I suspect he did quite well. Comments	Related: economics mathematics > books < Unrelated: energy environment geopolitics lists predictions science

Wed May 7 21:39:24 2008 Human Nature Top Books on Human Nature
Something else to think about. Image courtesy of User:CJ (wiki) For most of history, human nature was the domain of philosophers, theologians, and writers of novels. It was thought to be beyond the realm of mathematics or science, either because the soul was considered supernatural or because it was just a hard problem. But then I think there were two things that happened in the 20th century that opened the door to the scientific study of human nature. And now scientists and mathematicians are expanding the study of human nature, properly exploring the hard questions that had been examined but never solved by previous generations of philosophers and theologians. The first breakthrough was the publication of The Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. That laid the foundations for game theory. Suddenly scientists had a way to analyze and model how multiple agents could cooperate or compete in a variety of economic (ie, real-world) scenarios. The second enabler was the discovery (or more accurately, the first plausible physical description of) DNA. The double helix solved what had been a long-standing problem: how genetic information was passed down in plants and animals--basically anything living on Earth that we know of. The understanding of genetics, plus game theory, helped bring about a new field: evolutionary psychology. I think the wikipedia definition is good: "Evolutionary psychology ... is a theoretical approach to psychology that attempts to explain mental and psychological traits -- such as memory, perception, or language -- as adaptations, that is, as the functional products of natural selection..." But let's face it, that's basically the study of human nature, with the hypothesis (now well-tested) that human nature has evolved as a set of adaptations. Given this recent revolution, where a whole field of study was recently opened up to investigation, what do I (as an outsider to the field) consider the best books for the layman? Here is my list, in chronological order: 1976: The Selfish Gene by Richard Dawkins. Although not strictly about evolutionary psychology, it is the clearest book I know on a fundamental issue of evolution: genes evolved for themselves, not us. It shook up evolutionary biology at the time, and his viewpoint is still what guides practically all studies of evolution, whether biological or psychological. It is surprisingly readable even today. [As an aside, read the first review on Amazon.com. Clearly that reviewer was impacted by the implications for human nature as well! Although I think the reviewer missed the difference between science and religion, and suffered for years as a result. Evolutionary psychology has nothing to say about God or His purpose. You can believe in both.] 1992: The Third Chimpanzee by Jared Diamond. The book is subtitled "The Evolution and Future of the Human Animal." Oddly, his other books such as Guns, Germs and Steel and Collapse, seem to be more well-known. But I consider "The Third Chimpanzee" to be his best work. The chapter names alone tell you that he is addressing key human behaviors ("How we pick our mates and sex partners", "Why do we smoke, drink, and use dangerous drugs?"). And the last chapters of the book lay down the basic themes that he picks up in more detail in his later books. 1994: The Language Instinct by Steven Pinker, subtitled "How the Mind Creates Language". Although some reviewers now question his exact theories of language mechanisms, he is an excellent writer that conveys some key learnings about language development. One of the reasons this book makes the list is that it is a fun and engaging read. You start to pick up on how the mind has been built and evolved from multiple components over time, a theme that led to his next book... 1997: How the Mind Works. This book is one of the better surveys, in my mind (no pun intended). Just as readable as his "The Language Instinct", but now focused on the computational theory of the mind, rather than language specifically. A great read! Darwin has the last laugh. Image courtesy of User:Stw (wiki) Honorable Mention These are books that came to mind, but didn't make my mental list of "best" books for one reason or another. 1978: On Human Nature by Edward O. Wilson. No listing of books on human nature would be complete without it! Although I found it a good read, I didn't find it as groundbreaking idea-wise as the other books on the list, or as memorable. But it deserves mention since many other readers consider it the definitive work on the subject. 1995: An Anthropologist on Mars by Oliver Sacks. (Another good title would be The Man Who Mistook His Wife for a Hat, 1985). Although not about evolutionary psychology, Oliver Sacks has studied the brain for a long time. If you have spent any time debugging computer programs, attempting to figure out what is broken inside by observing external behavior, you will be powerfully impacted by Sacks' description of how he had to debug the neurological conditions of his patients. Great works, and they don't make the list only because they are slightly off-topic. After reading "An Anthropologist on Mars", I was struck by some of the similarities between myself and the title character, who was autistic but functional (and successful!). I wondered if I was autistic! So I took some online autism tests like this one and quickly reassured myself that no, I am not autistic. Most Importantly... Most importantly, keep a sense of perspective. As far as evolutionary psychology has taken us, and as far as it has to go, I'm surprised at how we keep coming back to the basics. And for that, you can't beat Voltaire's Candide. It is short, and remarkably relevant after almost 250 years (especially if you consider the context in which it was written). If you could only read one book on human nature, this is probably it. Comments	Related: lists mathematics > books < Unrelated: economics energy environment geopolitics predictions science

Sun Apr 20 21:49:45 2008 Best Books - Economics and Finance I list my favorite books on economics and finance.
What are my current favorite books on economics and finance? Money. Image courtesy of User: Although (wiki) To make the list, a book had to meet these criteria: Be interesting to read. This is hard for this subject! I just wanted books that had an engaging style and narrative thread. Give a solid big picture. Many books in this area are just one recent author's attempt to sell the public on their latest "winning" strategy. (Isn't it funny how for most of these authors the best way to make money is often just to sell books about making money?) I wanted books that would give a coherent overview of how markets worked, so an intelligent reader could figure out strategies on their own. Be reasonably objective. I wanted books where the author realized that although they were experts, they didn't know everything. Usually good authors compensate by presenting different viewpoints, and clearly separating personal feelings and anecodtes from facts. So, flipping through my small library, here are my top picks (no particular order): Personal Finance: Easy, this has to be A Random Walk Down Wall Street by Burton Malkiel. Debunks a lot of the investment myths you hear about. His simple (and very practical) advice on dollar-cost-averaging has gotten me through two boom-bust cycles. Economics: A favorite is The Worldly Philosophers by Robert Heilbroner. It is a combination of a History of Economics and a primer all in one. Macroeconomics: I'd pick The World Economy Since the Wars by John Kenneth Galbraith. Maybe an odd choice, since I don't see many other references to it! But I trust very few textbooks on macroeconomics since I don't believe anyone really knows how it works. What I like about Galbraith's book is that it is just him rambling about his experiences and observations during the 20th century. He was not just an observer: he was a participant, and held key posts in the US Government throughout World War II and after. Great book. And speaking of Galbraith, that reminds me of Busts: One of the most important things you can do, either as an individual investor or the leader of a country or company, is to recognize (and if possible ameliorate) boom/bust cycles. Unfortunately, most of those in charge don't seem to be able to recognize busts until after they've happened. If those in charge can't prevent them, at least a savvy investor can take precautions to limit their exposure. And I know of no better way to recognize these cycles than to study previous ones. The Great Crash, again by Galbraith, is probably the best such book. It meets all of the criteria, especially readability. Although Galbraith was better known for other books such as The Affluent Society and The New Industrial State, I would not be surprised if The Great Crash became his biggest legacy, if only because it remains timeless, whereas some of his other works were hugely relevant in the 1950s but are less so now. The other boom/bust book to read is of course Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, first published in 1841. Not all of it is excellent, but the chapters on The Mississippi Scheme, The South-Sea Bubble, and Tulipomania are stunning. Even in 1841, he was writing about historical events, but those chapters could be from the from the headlines of today. Later chapters on Alchemy, Fortune Tellers, Magnetisers, and so on, just add to the point. The bottom line: the clever have taken advantage of the foolish for all of recorded history. Hopefully you can avoid being foolish by reading these, and hopefully you have the integrity not to take advantage of those who have not read them. Comments	Related: economics lists > books < Unrelated: energy environment geopolitics mathematics predictions science

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