Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto Book 1)

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

Now, when something is in relation to something else, that something else can be manipulated. Psychologists call this effect of comparing to a given reference anchoring. If we take it to its logical limit we would realize that, because of this resetting, wealth itself does not really make one happy (above, of course, some subsistence level); but po

Accordingly investors, merely for emotional reasons, will be drawn into strategies that experience rare but large variations.

Say you get a windfall profit of $1 million. The next month you lose $300,000. You adjust to a given wealth (unless of course you are very poor) so the following loss would hurt you emotionally, something that would not have taken place if you received the net amount of $700,000 in one block, or, better, two sums of $350,000 each.

This is the major conflict with economic theory, as according to economists, someone with $1 million in the bank would be more satisfied than if he had half a million. But we saw John reaching $1 million having had a total of $10 million; he was happier when he only had half a million (starting at nothing) than where we left him in Chapter 1.

When will John recover from the ordeal? Probably never. The reason is not because John lost money. Losing money is something good traders are accustomed to. It is because he blew up; he lost more than he planned to lose. His personal confidence was wiped out. But there is another reason why John may never recover. The reason is that John was never

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.

The mistake of ignoring the survivorship bias is chronic, even (or perhaps especially) among professionals.

Normative economics is like religion without the aesthetics.