InAction by Uppal Jinny;

Author:Uppal, Jinny; [Uppal, Jinny]
Language: eng
Format: epub
ISBN: 9781637309964
Publisher: New Degree Press
Published: 2021-12-16T20:00:00+00:00

Fooled by Randomness

“There is one world in which I believe the habit of mistaking luck for skill is most prevalent—and most conspicuous—and that is the world of [stock] markets,” says Nassim Taleb, a former stock market trader and author.

Taleb wrote a treatise on the subject of cause and effect in his book Fooled by Randomness, where he tells stories of traders who were wildly successful. However, it is revealed other macro factors were at play that contributed to their success. They had merely stumbled into the right strategy at the right time. And, when measured over a long enough period of time, that strategy eventually failed. The macro factors changed. But the traders, confident of their secret sauce and unaware of the macro conditions, didn’t change their strategies. They were overconfident, and they eventually failed.

Says Taleb, “We often have the mistaken impression that a strategy is an excellent strategy, or an entrepreneur a person endowed with vision or a trader a talented trader, only to realize that 99.9 percent of their past performance is attributable to chance, and chance alone. Ask a profitable investor to explain the reasons for his success; he will offer some deep and convincing interpretation of the results. Frequently, these delusions are intentional and deserve to bear the name ‘charlatanism.’”

This insight from an industry insider is alarming. If professionals are at risk of overestimating the probability of success due to overconfidence, what about us mere mortals? Well, I can confirm that the situation is as bad. A research study published in Journal of Behavioral and Experimental Finance found that regular investors who are overconfident in their ability to make the right choices are more likely to irrationally buy and sell (they keep taking action), which in turn leads to poor performance. As I look hard for a silver lining here, the only one I can find is that if I am going to be as wrong as the professionals, perhaps I ought to take over my investments and not pay someone else a fee to make mistakes with my money.

Joshing aside, the role of chance applies everywhere. Let’s look at the role of luck in business.

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