Fooled by Randomness

Fooled by Randomness is a book by Nassim Nicholas Taleb on The Hidden Role of Chance in the Markets and in Life. Until I read this book I believed that Luck contributed 99% in determining success. Now I've revised that to 100%.

The primary premise of the book is that we commonly mistake luck for skill. And the author has in his engaging style, used the financial markets to illustrate his point very effectively. There are quite a few outstanding examples he has used that seem obvious and most people, including professionals like traders and even doctors would take decisions based on their understanding of the obvious. Yet, simple mathematics would show them how wrong they are. Let me give a couple of these examples to illustrate the point.

An example of a mistake cited in the book is one that most of us make in handling our financial investments. It revolves around probability, outcome and expectations. Lets say we engage in an investment strategy that has 999 chances in 1000 of making $1 and 1 (Event A) and a chance in 1000 of losing $10,000. The expectation is a loss of $9.

Event -  A
Probability - 999/1000 
Outcome -  $1      
Expectation - $0.999

Event -  B
Probability - 1/1000
Outcome -   (-$10,000)      
Expectation - (-$10)

Total - (-$9.001)

Whilst we are quick to spot the problem and hence not take this strategy in a normal bet. Yet we do it all the time in the financial markets. One of the probable reasons could be that the negative outcome is something which we don't anticipate and hence end up ignoring. We focus on the frequency and probability of a profit. The mathematical truth is that "frequency or probability if the loss, in and by itself is totally irrelevant; it needs to be judged by the magnitude of the outcome.

According to Mr. Taleb, one of the major issues that results in us making gross errors is our understanding or rather lack of it in probability and our inherent biases.

"Below is an account of a well-known test. A test of a disease presents a rate of 5% false positives. The disease strikes 1/1,000 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's the probability of the patient being stricken by the disease.
Most doctors answered 95%, simply taking into account the fact that the test has a 95% accuracy rate. The answer is the conditional probability that the patient is sick and the test shows it - close to 2%. Less than 1 in 5 professionals got it right."

Are you too wondering how is it 2% ?

"Consider that out of 1,000 patients who are administered the test, 1 will be expected to be afflicted with the disease. Out of the population of the remaining 999 healthy patients, the test will identify about 50 with the disease, since its 95% accurate. The correct answer should be the probability of being afflicted with the disease for someone selected at random who presented a positive test is the following ratio:

No. of afflicted persons/No. of true and false positives = 1 / 51

Think of the number of times you'll be given medication that carries damaging side effects for a given disease you were told you had, when you may only have a 2% probability of being afflicted"

The takeaway for me is that in most aspects, especially the financial aspects, most individuals especially experts don't really understand the fundamentals. If you realize this, along with the realization that neither do you, you could become very rich, relatively quickly. I plan to try in 2012, and will let you know in Dec. of 2012 how it al worked out. Until then, happy trading.

US - Response to a slowdown

I just flew from San Francisco and the airport was busy, very busy. It seemed like most flights were full and overall it seemed like it was business as usual. Every single leg of mine in the US I have travelled and this is at odd times on weekdays, every single seat was taken up. The flights are so full that on my SFO - NWK flight, there were 45 standby passengers for upgrade to business. And this is after all business class seats were full. All 16 of them.

I was unable to see any visible impact of the global slowdown, financial crises, and various other bad news that seems to originate regularly from the US. And I guess that’s what makes this is the greatest country in the world. Wherever I went, I saw happy faces, busy shops, malls that were full. I've observed over a period of time that the best way to determine spending is not to check out the crowds in the shops or malls, but observe the lines at the checkout counters. These were long, with most customers having large shopping carts full.

Wherever I go, the conversation revolves around the current financial crises and the impact on businesses, both globally and worldwide. I guess that a lot of the impact may not be visible. Nevertheless, the feeling I got was that the atmosphere and the energy was far more positive than it was a year ago or even 2 years ago. This is based on simple individual observations, and since I'm neither trained nor an expert, it’s possible I'm imagining or just plain wrong. Nevertheless, I believe that we  are at the beginning of a reversal and that 2012 and 2013 is likely to be good years for the US. This, by extension means I'm predicting happy times ahead for the rest of the world.

I'm a contrarian, not by choice but it seems by virtue of what I think is likely to happen. As I write this the economic crisis seems to deepen not only in the US, but globally. Greece, Ireland, were already in trouble and now most of the other European nations including the UK, France and Germany have issues if their own. These are exactly the reasons I believe a turnaround is round the corner. When you are at the bottom, no matter what you do, chance are you'll end up going up.

All experts are predicting that 2012 and 2013 are likely to be worse years than 2011 and 2012. They were wrong in 2010 when they predicted happy days ahead, and I hope they're wrong this time too. In addition to making me feel good about being right, the bigger picture is that we'll have a happier, financially stable world.

India - US : Nonstop

Just got into Newark after flying nonstop from Mumbai. The journey of 16 hrs. was uneventful, yet interesting. Most people just cannot imagine how anyone can undertake a nonstop flight of 16 hours, which means you're likely to be inside the aircraft for over 17 hours.

I was flying Continental after several years. hadn't used Conti, ever since Air India had introduced a nonstop flight from Mumbai to New York. Now since that flight goes via New Delhi, I was flying Conti from Mumbai to Newark. The flight was scheduled to take 16 hrs and we got in an hour earlier.

My daughter who left for a field trip, a couple of days before put this journey into perspective, when she mentioned how lucky I was to have just a 16 hour trip and would reach the US, when it would take her longer to reach Madhya Pradesh for a field trip. Yes, we have come a long way from the 24+ hours it would take.

The flight takes off on time, just before midnight. By the time the plane levels off, and dinner is served, yet another hour goes by. In seat the personal entertainment system offers, video on demand. The collection of over 100 movies and 100 shows, and games, and ... means you have entertainment choices sufficient for several flights. I watch a movie and by the time, its over, we have just around 14 hours to go. The exact position, time left, height, temperature and the countries we're overflying is available on the Live Map.

The good thing about this night flight is that you're quite tired after a full day of work. And so, you get a good nights  sleep as soon as you try. 6 hours later, I awaken with sounds of movement in the cabin. It’s the breakfast service and we have 8 hours to go. Had breakfast, saw another movie,  a couple of coffees, and by now, we just have 6 hours to go. Time for another nap. And before I know it, I awaken with movement in the cabin. Its time for lunch, although it'll be 7 am in a few hours when we land. I guess they call it lunch, because its served after what they called breakfast.

The flight touched down almost an hour before schedule. The lines at Immigration took 1 hour and 20 minutes. Yes, you read right, 80 minutes in a line awaiting your turn to go through Immigration. It was fascinating to see all the people who keep grumbling about lines in India, criticizing our systems even when they have to wait 5 minutes, patiently and uncomplainingly standing in a line, with no attempts to do the great India line breaking trick. A couple near me had a connecting flight they were getting late for. The wife egged the husband to go check if they could be given priority and jump the queue. The lady supervising the lines firmly told him to get back in line, else he would be sent back to the end of the line.
 
Ironically, for most of us when in the US, officers remarks are firm, in India, the same gets called rude. I love the US, their systems and processes. And I love the way they enforce discipline, without prejudice or bias. If only, we could learn to be as disciplined, and behave the way we do abroad when we are back in India.

Fortunately, the rest of the processes of collecting baggage, customs, checking in again, security, were relatively faster and here I'm sitting at the gate awaiting boarding with around an hour to go. Another 6 hour flight to San Francisco, but relativity kicks in and its 1/3rd of the flying time I just completed. So it can't be too bad.

Fitness - Key to Health

Yesterday the enthusiastic youngsters at Web Access organized a cricket session at the Purandhare Ground at Dadar, in Central Mumbai.

You reached the ground after navigating through one of the most crowded areas of Mumbai, Dadar. And suddenly there's this huge open ground, surrounded by greenery, grass, trees, plants, ... It takes your breath away and you find it difficult to believe that this huge open space is there in the heart of the city.

I was part of the Yellow team (differentiated by our T-Shirts). We were first up to field. Within a couple of overs of fielding, I realized exactly how unfit I was. Given an over to bowl, confirmed my state of fitness. Managed to get 2 wickets and give away just 4 runs, if you conveniently ignore the 4 wides. At the end of the over, I was out of breath. And this was our first match.

At the end of 6 hours, with aching hands and legs, I was just happy that it was all over. We came in 2nd, which wasn't that great considering that there were only 3 teams. On the way back, I reflected, a nice way to reduce the aching bones, on how come I was so unfit. There had to be some good reasons. Translated that means, there must be someone I could blame. Unlike most other things, its difficult to find someone else responsible. I mean who could you find fault for you not exercising and not eating all the right foods.

One of the mysteries of life, all delicious and irresistible food is unhealthy and all healthly food is neither delicious nor irresistable. Why couldn't it be the other way around. We would have been the healthiest species on Earth as opposed to the unhealthiest. There we go, its nature's fault. For designing our bodies to be unable to breakdown food efficiently and effectively.

There is a big business opportunity waiting for the inventor of creating tasty and irresistible food, that is also very healthy. Whilst that problem is being solved, I'll need to figure out a way to become fit again. And since only deadlines work, my deadline is in the next 6 months.

So how will I know I'm fit. I guess if I can run a half marathon, it would mean that I'm reasonably fit. Unfortunately I didn't make it to the Mumbai half marathon, which is selection by lottery, this year either. So I'll just need to run it on my own. 26 kms in under 3 hours. Although I've given myself 6 months, lets see if I can do it in 4. That way, I have 2 additional months, in case everything does not go according to plan.

Am headed to San Francisco later tonight, and my fitness freak brother Don, is likely to make me work and walk for the privilege of staying with him. Luckily for both of us, its for just 3 days. So exercising would have to become part of my daily routine. Maybe a morning run. And equally important would be my diet. I think I'll try a light dinner plan. Soups, vegetables, fruits. If all of this doesn't work, then I'm in trouble anyway.

The best of intentions need to be given a good beginning. And so, I'll defer the start of this ambitious plan to when I return from my US trip. There's no point in not enjoying the culinary offerings of the world's melting pot, the US and New York. In any case, I need to drop 10's of kilos, so whats a couple of kilos more ?