In Chapter Five of "Fooled by Randomness," Nassim Taleb makes a list of “randomness constants” to which fools of randomness usually fall prey.
So far, readers of my blogs have met a collection of Taleb’s characters, including Nero (hardly a fool), John (the high-yield trader) and Carlos (trader-economist); read about Solon’s warning and heard quotes by famous philosophers. Their stories weaved into Taleb’s assertion that luck and randomness play far too big a role in the risky business of investing that most players are perfectly content to ignore both, and attribute whatever successes to their own abilities.
In Chapter Five, Taleb makes a list of constants that seem to trip the most those fools of randomness. He says, “An overestimation of the accuracy of their beliefs in some measure, either economic (Carlos) or statistical (John),“ referring to their refusal to acknowledge that past trading successes could also be attributable to a mere coincidence or to a failed attempt to fit some random occurrence into a mould of a financial analysis.
Taleb says that fools of randomness often suffer from “a tendency to get married to [their] positions.” Apparently, there is a saying on the Street that bad traders would rather divorce their spouses than give up on their bad trades. Taleb also writes that foolish traders have “a tendency to change their stories” when their houses in the sand crumble.
Another common trait of fools of randomness is not having a “precise game plan ahead of time as to what to do in the event of losses.” True fools will never acknowledge the possibility of a loss, just as they demonstrate “absence of critical thinking expressed in absence of revision of their stance with stop losses.” The power of denial is great. The desire to create new value is even greater. Only, after catastrophic losses, the latter rarely wins over the former.
