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"Fooled by Randomness"
On the other hand, decades of savings can be wiped out through misfortune, but his advice is still the basis of a sound start. Staying healthy, and staying married certainly would help improve one’s odds.
I enjoyed his relating a quiz given to medical doctors, borrowed from the book “Randomness” by Deborah Bennett;
A test of a disease presents a rate of 5% false positives. The disease strikes 1/1000 of the population. People are tested at random, regardless of whether they are suspected of having the disease. A patient’s test is positive. What is the probability of the patient having the disease?
Of course the answer is about 2%, since we know that of 1000 people there will be one with the disease, and nearly 50 false positives. One in fifty is 2%. Here, Taleb missed his chance to offer some further math suggesting how much accuracy such a test would need to offer. In this case even .1% false positive would make for a 50/50 confidence for our random patient. The original author states that one in five doctors got this question correct.
He also offers a tale whose moral suggests that staring at the ticker or looking at one’s portfolio too frequently, can only lead to misery. Assume one has a portfolio returning 15% per year with volatility of 10%. This would be a great return, positive in 93% of years observed. But as we move the timeline shorter, say to every quarter, only 77% of the quarters are positive, and to push further, only 67% of months show positive. A daily look at the portfolio will show positive returns on 54% of the days observed. This is the corollary of the lessons shared in my reference to MoneyChimp and discussions of investing for the long term. By looking at returns for the shorter periods we can drive ourselves to a level of worry and distraction that would scare us from the market altogether.
I'd recommend this book as a worthy read. While Taleb’s style has him jumping around from the running theme of the infinite number of monkeys typing the great works back to the multiple stories of traders ‘blowing up’, his theme of “Fooled by Randomness” is woven throughout the book. I look forward to reading his second book “The Black Swan”: the impact of the highly improbable.
Until next month, JOE