Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.

In the latter case, consider that two average-sized parents produce a large litter. The largest dogs, if they diverge too much from the average, will tend to produce offspring of smaller size than themselves, and vice versa. This “reversion” for the large outliers is what has been observed in history and explained as regression to the mean. Note th

Note that the economist Robert Lucas dealt a blow to econometrics by arguing that if people were rational then their rationality would cause them to figure out predictable patterns from the past and adapt, so that past information would be completely useless for predicting the future (the argument, phrased in a very mathematical form, earned him th

some medications succeed in medical trials for mere random reasons.

Recall that the survivorship bias depends on the size of the initial population. The information that a person derived some profits in the past, just by itself, is neither meaningful nor relevant. We need to know the size of the population from which he came.

Behavioral scientists believe that one of the main reasons why people become leaders is not from what skills they seem to possess, but rather from what extremely superficial impression they make on others through hardly perceptible physical signals—what we call today “charisma,” for example.

Now let us look at a situation where there are 23 people in a room. What is the chance of there being 2 people with the same birthday? About 50%. For we are not specifying which people need to share a birthday; any pair works.

people do not like to insure against something abstract; the risk that merits their attention is always something vivid.