Monday, November 19, 2018

Statistics, Randomness, And My Misspent Youth

I've just been reading Nassim Taleb's Fooled by Randomness. It is a fun read, but at the risk of sounding intellectually immodest, I feel like it is full of things I already knew. Rare, unexpected, and often bad things can happen. It is easy to be fooled by statistics. It is easy to be fooled by life in general. You never really know what's going to happen. Plan accordingly.

Taleb's main target audience is traders and others who think they're succeeding and failing because of skill and insight or lack thereof. He says they are often just the victims of survivorship bias and other forms of bad reasoning. Survivorship bias is when you look at the winners and assume that whatever they did made them winners, while failing to look at the losers and what they were doing. Everyone might be throwing darts at the Wall Street Journal stock pages. Some might be winners, and tautologously, some will be winners relative to others. If you focus on the winners and blindly follow their strategy or their stock picks, you'll be SOL.

More broadly, the book is about unpredictability and how unexpected and surprising things can derail your life. This is something I knew from a young age, mostly because it features prominently in both fiction and reality. You might study for years then develop a brain tumor. You might train as an athlete then get hit by a car. You might raise your kids on organic food and still one of them might die -- from food poisoning, or a really bad flu, or ... anything, for god's sake. If I hadn't had the predictability of unpredictable events hammered home to me enough by the time I was fifteen, I definitely absorbed it when my father died suddenly -- and unexpectedly! -- from a heart attack at that time. He was forty-eight years old.

So I absorbed the epistemological lesson early. From a practical point of view, Taleb says that in the face of uncertainty, a reasonable response is to be risk-averse, and I completely agree. As I understand it, for a trader this means seeker smaller steadier gains, but to be honest I sort of zoned out on that part of the book because I am almost aggressively uninterested in thinking about investment strategy.

At this point you may be wondering: So, Patricia, did you become a risk-averse young person? Why yes -- yes I did! I skipped class, stayed up late drinking with friends, majored in two abstract and relatively useless majors (math and dance), drove around in my mom's ancient and poorly maintained VW Rabbit, and engaged in various activities we won't describe here but that are usually represented as paradigm cases of adolescent devil-may-care behavior.

To me, these were risk-averse activities. My reasoning -- which I stand by today -- was that the pleasures of impulsive behavior have an excellent chance of working out in the immediate moment, while the pleasures of planning and carefulness are distant in time and thus far less likely to actually work out.

The pleasures of hanging out with friends with you should be in class, eating cake for lunch, drinking and smoking, dancing at parties, spending a beautiful sunny day with a romantic interest instead of writing papers, etc. -- when you're a bright-eyed eighteen year-old, these are very dependable pleasures in the short-term run. Sure, they often lead to unhappiness in the long run. But whatever -- the long run is unpredictable. That is the whole point.

To forego these pleasures in the moment to get better grades, avoid lung cancer at middle-age, or even just try to live a longer period of time seemed to me like a crazy and extremely risky strategy. What if you followed all the rules and got hit by a bus at age 20? FFS. To me, my life strategy was based on getting while the getting was good -- a paradigm example of risk-averseness if ever there was one.

Over time, I stopped being so impulsive. Partly it was because the pleasures of short-term pleasures got less intense for me as I got older (as they do for so many people), and I started getting bored. Partly it was because I started to experience the negative effects of doing whatever I wanted to do in the moment: my health declined, I worked at shitty jobs like waitressing, and I had no health insurance. Partly it was because I formed close relationships with people who wanted me to flourish in the long term, which made me want to flourish in the long term as well.

For whatever it's worth, none of these reasons has to do directly with the kind of caring about the future me that is supposed to characterize rational risk-averse thinking in the standard model of human decision-making.

When people talk about risk-averseness and the rationality of overcoming impulse, I feel like there are assumptions in the background: that what it makes sense to do is plan for the future, store up your chestnuts for the winter, try to live to a ripe old age. But from the unpredictability-of-life perspective, those assumptions are peculiar and it's more the other way around. When you do whatever thing you want to do in the moment, that pleasure -- even if it's just the pleasure of a desire immediately satisfied -- is yours, and no one can take it away from you. It's a sure thing. Whereas the long term? You never really know what's going to happen.

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