Here are my 3 lessons from this timeless masterpiece: 1. Chasing leisure, luxury and legacy is what makes a long life appear short. 2. You can be busy aHere are my 3 lessons from this timeless masterpiece: 1. Chasing leisure, luxury and legacy is what makes a long life appear short. 2. You can be busy all your life without ever doing something meaningful, so beware. 3. Your ability to contemplate and appreciate life will never disappear. I hope you’re ready for a few lessons of history that have stood the test of time for ages. Tighten your time pouch, we’re about to get stingy where it counts!
Lesson 1: Life only seems short to those, who spend it chasing leisure, luxury and legacy. A good question to ask yourself, to determine if an activity is worthwhile, is this: “If I did this for 24 hours straight, what would it amount to?” If the answer is “nothing” or not much, then you know it’s one of the activities Seneca considers the trivialities that make life seem short, when it really isn’t. Three typical kinds of such activities are those supposed to lead to: 1. Leisure. He who spends all of his work day fantasizing about the tranquility of retirement, will never truly retire. 2. Luxury. He who works only for the next car, house or vacation, will always worry about where it’ll come from. 3. Legacy. He who hopes for the grandeur of his tombstone, will spend much of his life planning an event he can neither attend nor control. I’m guilty of the last one sometimes. Don’t spend your life preparing for life. The life in the future you’re working towards may never come, so don’t defer what matters to your 50s, 60s and 70s, for they may never come. To close out in Seneca’s words: It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested. But when it is wasted in heedless luxury and spent on no good activity, we are forced at last by death’s final constraint to realize that it has passed away before we knew it was passing. ~Seneca Lesson 2: Don’t spend your life based on other people’s vision. A ship in harbor is safe, but that is not what ships are built for. ~John A. Shedd To illustrate the difference between merely being busy and living a life of actual value, Seneca draws from naval vocabulary. The above quote relates to giving up your comfort zone, getting out there and living your life. Seneca remarks that how a ship fares on its journey matters too. So you must not think a man has lived long because he has white hair and wrinkles: he has not lived long, just existed long. For suppose you should think that a man had had a long voyage who had been caught in a raging storm as he left harbor, and carried hither and thither and driven round and round in a circle by the rage of opposing winds? He did not have a long voyage, just a long tossing about. ~Seneca This “tossing about” happens in many ways: Some adjust course far too often, others never adjust at all, and some know they should but say they’ll do it later – and then never do. Worst of all, however, is to let someone else’s vision be the wind behind your sails. What’s the point of spending your life worried about things that are not yours to worry about, working for someone who’s set sail to where you never want to go? Lesson 3: What’s truly important in life can never be taken from you. Once you see past possessions, pastime and power, Seneca says you will find peace in the fact that true self-worth comes from within. You’re independent and self-reliant when you ground your thinking in the following two truths: 1. You will always be able to contemplate life and its deepest meanings. 2. You will always have the choice to appreciate its beauty. No other mortal can ever take these two things from you. In sickness and in health, in poverty and wealth, in good times and in bad, they will always be yours. So exercise these powers and take solace in their presence. Being offended by other people’s actions and words is a choice. But so is being content. Choose the latter and you will live, in any sense of the word, a long life.
10Top Themes:
1. Preoccupied Mind 2. Busyness, Ambition, & Labor 3. Leisure 4. Learning & Philosophy 5. Past, Present, & Future 6. Wealth & Time 7. Owning Your Time 8. Wasting Time 9. Life ends just when you’re ready to live 10. Death
10 Top Themes from On the Shortness of Life by Seneca 1. Preoccupied Mind “Finally, it is generally agreed that no activity can be successfully pursued by an individual who is preoccupied – not rhetoric or liberal studies – since the mind when distracted absorbs nothing deeply, but rejects everything which is, so to speak, crammed into it. Living is the least important activity of the preoccupied man; yet there is nothing which is harder to learn.“ • “Just as travellers are beguiled by conversation or reading or some profound meditation, and find they have arrived at their destination before they knew they were approaching it; so it is with this unceasing and extremely fast-moving journey of life, which waking or sleeping we make at the same pace – the preoccupied become aware of it only when it is over.” • “It is the mind which is tranquil and free from care which can roam through all the stages of its life: the minds of the preoccupied, as if harnessed in a yoke, cannot turn round and look behind them. So their lives vanish into an abyss; and just as it is no use pouring any amount of liquid into a container without a bottom to catch and hold it, so it does not matter how much time we are given if there is nowhere for it to settle; it escapes through the cracks and holes of the mind.“ • “Indeed the state of all who are preoccupied is wretched, but the most wretched are those who are toiling not even at their own preoccupations, but must regulate their sleep by another’s, and their walk by another’s pace, and obey orders in those freest of all things, loving and hating. If such people want to know how short their lives are, let them reflect how small a portion is their own.“ 2. Busyness, Ambition, & Labor “So it is inevitable that life will be not just very short but very miserable for those who acquire by great toil what they must keep by greater toil. They achieve what they want laboriously; they possess what they have achieved anxiously; and meanwhile they take no account of time that will never more return. New preoccupations take the place of the old, hope excites more hope and ambition more ambition. They do not look for an end to their misery, but simply change the reason for it.“ • ”You are winning affection in a job in which it is hard to avoid ill-will; but believe me it is better to understand the balance-sheet of one’s own life than of the corn trade.” • ”Oh, what darkness does great prosperity cast over our minds!” 3. Leisure “You will notice that the most powerful and highly stationed men let drop remarks in which they pray for leisure, praise it, and rate it higher than all their blessings.“ • “The deified Augustus, to whom the gods granted more than to anyone else, never ceased to pray for rest and to seek a respite from public affairs. Everything he said always reverted to this theme – his hope for leisure…So valuable did leisure seem to him that because he could not enjoy it in actuality, he did so mentally in advance…he longed for leisure, and as his hopes and thoughts dwelt on that he found relief for his labours: this was the prayer of the man who could grant the prayers of mankind.” 4. Learning & Philosophy “In this kind of life you will find much that is worth your study: the love and practice of the virtues, forgetfulness of the passions, the knowledge of how to live and die, and a life of deep tranquillity.” • “Of all people only those are at leisure who make time for philosophy, only those are really alive. For they not only keep a good watch over their own lifetimes, but they annex every age to theirs. All the years that have passed before them are added to their own. Unless we are very ungrateful, all those distinguished founders of holy creeds were born for us and prepared for us a way of life. By the toil of others we are led into the presence of things which have been brought from darkness into light. We are excluded from no age, but we have access to them all; and if we are prepared in loftiness of mind to pass beyond the narrow confines of human weakness, there is a long period of time through which we can roam.” • “So the life of the philosopher extends widely: he is not confined by the same boundary as are others. He alone is free from the laws that limit the human race, and all ages serve him as though he were a god. Some time has passed: he grasps it in his recollection. Time is present: he uses it. Time is to come: he anticipates it. This combination of all times into one gives him a long life.“ 5. Past, Present, & Future “Can anything be more idiotic than certain people who boast of their foresight? They keep themselves officiously preoccupied in order to improve their lives; they spend their lives in organizing their lives. They direct their purposes with an eye to a distant future. But putting things off is the biggest waste of life: it snatches away each day as it comes, and denies us the present by promising the future. The greatest obstacle to living is expectancy, which hangs upon tomorrow and loses today. You are arranging what lies in Fortune’s control, and abandoning what lies in yours. What are you looking at? To what goal are you straining? The whole future lies in uncertainty: live immediately.“ • ”Life is divided into three periods, past, present and future. Of these, the present is short, the future is doubtful, the past is certain.” • “But life is very short and anxious for those who forget the past, neglect the present, and fear the future.” 6. Wealth & Time “People are frugal in guarding their personal property; but as soon as it comes to squandering time they are most wasteful of the one thing in which it is right to be stingy.” • “Just as when ample and princely wealth falls to a bad owner it is squandered in a moment, but wealth however modest, if entrusted to a good custodian, increases with use, so our lifetime extends amply if you manage it properly.” • “Even if all the bright intellects who ever lived were to agree to ponder this one theme, they would never sufficiently express their surprise at this fog in the human mind. Men do not let anyone seize their estates, and if there is the slightest dispute about their boundaries they rush to stones and arms; but they allow others to encroach on their lives – why, they themselves even invite in those who will take over their lives. You will find no one willing to share out his money; but to how many does each of us divide up his life!“ 7. Owning Your Time “Believe me, it is the sign of a great man, and one who is above human error, not to allow his time to be frittered away: he has the longest possible life simply because whatever time was available he devoted entirely to himself. None of it lay fallow and neglected, none of it under another’s control; for being an extremely thrifty guardian of his time he never found anything for which it was worth exchanging.” • “All those who call you to themselves draw you away from yourself…Mark off, I tell you, and review the days of your life: you will see that very few – the useless remnants – have been left to you.” • “Everyone hustles his life along, and is troubled by a longing for the future and weariness of the present. But the man who spends all his time on his own needs, who organizes every day as though it were his last, neither longs for nor fears the next day. For what new pleasures can any hour now bring him? He has tried everything, and enjoyed everything to repletion. For the rest, Fortune can dispose as she likes: his life is now secure. Nothing can be taken from this life, and you can only add to it as if giving to a man who is already full and satisfied food which he does not want but can hold. So you must not think a man has lived long because he has white hair and wrinkles: he has not lived long, just existed long. For suppose you should think that a man had had a long voyage who had been caught in a raging storm as he left harbour, and carried hither and thither and driven round and round in a circle by the rage of opposing winds? He did not have a long voyage, just a long tossing about.” 8. Wasting Time “It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested.” • “Assuredly your lives, even if they last more than a thousand years, will shrink into the tiniest span: those vices will swallow up any space of time. The actual time you have – which reason can prolong though it naturally passes quickly –inevitably escapes you rapidly: for you do not grasp it or hold it back or try to delay that swiftest of all things, but you let it slip away as though it were something superfluous and replaceable.” • “So it is: we are not given a short life but we make it short, and we are not ill-supplied but wasteful of it.” 9. Life ends just when you’re ready to live “Most human beings, Paulinus, complain about the meanness of nature, because we are born for a brief span of life, and because this spell of time that has been given to us rushes by so swiftly and rapidly that with very few exceptions life ceases for the rest of us just when we are getting ready for it.” • “So what is the reason for this? You are living as if destined to live for ever; your own frailty never occurs to you; you don’t notice how much time has already passed, but squander it as though you had a full and overflowing supply – though all the while that very day which you are devoting to somebody or something may be your last. You act like mortals in all that you fear, and like immortals in all that you desire. You will hear many people saying: ‘When I am fifty I shall retire into leisure; when I am sixty I shall give up public duties.’ And what guarantee do you have of a longer life? Who will allow your course to proceed as you arrange it? Aren’t you ashamed to keep for yourself just the remnants of your life, and to devote to wisdom only that time which cannot be spent on any business? How late it is to begin really to live just when life must end! How stupid to forget our mortality, and put off sensible plans to our fiftieth and sixtieth years, aiming to begin life from a point at which few have arrived!“ • “But learning how to live takes a whole life, and, which may surprise you more, it takes a whole life to learn how to die.” 10. Death “No one will bring back the years; no one will restore you to yourself. Life will follow the path it began to take, and will neither reverse nor check its course. It will cause no commotion to remind you of its swiftness, but glide on quietly. It will not lengthen itself for a king’s command or a people’s favour. As it started out on its first day, so it will run on, nowhere pausing or turning aside. What will be the outcome? You have been preoccupied while life hastens on. Meanwhile death will arrive, and you have no choice in making yourself available for that.“ • “But when it is wasted in heedless luxury and spent on no good activity, we are forced at last by death’s final constraint to realize that it has passed away before we knew it was passing.” • “But for those whose life is far removed from all business it must be amply long. None of it is frittered away, none of it scattered here and there, none of it committed to fortune, none of it lost through carelessness, none of it wasted on largesse, none of it superfluous: the whole of it, so to speak, is well invested. So, however short, it is fully sufficient, and therefore whenever his last day comes, the wise man will not hesitate to meet death with a firm step.” • ”I would like to fasten on someone from the older generation and say to him: ‘I see that you have come to the last stage of human life; you are close upon your hundredth year, or even beyond: come now, hold an audit of your life. Reckon how much of your time has been taken up by a money-lender, how much by a mistress, a patron, a client, quarrelling with your wife, punishing your slaves, dashing about the city on your social obligations. Consider also the diseases which we have brought on ourselves, and the time too which has been unused. You will find that you have fewer years than you reckon. Call to mind when you ever had a fixed purpose; how few days have passed as you had planned; when you were ever at your own disposal; when your face wore its natural expression; when your mind was undisturbed; what work you have achieved in such a long life; how many have plundered your life when you were unaware of your losses; how much you have lost through groundless sorrow, foolish joy, greedy desire, the seductions of society; how little of your own was left to you. You will realize that you are dying prematurely.’” Your Most Important Asset “In guarding their fortune men are often closefisted, yet, when it comes to the matter of wasting time, in the case of the one thing in which it is right to be miserly, they show themselves most extravagant.” Does it make any sense to value anything above your only life? Seneca certainly doesn’t think so. Yet we find ourselves trading our only life away to make others like us, to get money (which we cannot use in the grave), and be lazy, distracted and entertained. The main reason that we do so, Seneca argues, we waste so much of our time is because we forget that it is limited, that we are going to die. Seneca scolds, “You live as if you were destined to live forever, no thought of your frailty ever enters your head, of how much time has already gone by you take no heed. You squander time as if you drew from a full and abundant supply, though all the while that day which you bestow on some person or thing is perhaps your last.” Wasting time is the worst thing we can do to ourselves, but of course, there are many things and people that would take away our precious time. When Seneca says to be “miserly” with your time, he means it. He implores us to be suspicious of any activity that will take a lot of time and be prepared to defend ourselves against unworthy pursuits....more
Few thoughts on philosophy: 1. Philosophy is a discipline, based on rational beliefs, thoughts & feelings and it makes a person responsible for the actFew thoughts on philosophy: 1. Philosophy is a discipline, based on rational beliefs, thoughts & feelings and it makes a person responsible for the actions & decisions in one’s life 2. What’s special about Stoic philosophy? A few things amongst many: a. The Stoic Philosophers had “skin in the game” i.e. they were not mere preachers; they practiced what they preached! The most scintillating example is Marcus Aurelius, the Roman Emperor. b. Stoicism is based on the simple belief that all the events can be bifurcated into 2 components – ones which we can control and the others which we cannot. Thus, one should focus on the events within one’s locus of control c. It is also based on the fact that events do not disturb us; it is only our judgement of them d. It deals with three pillars – Physics, Ethics and Logic. Physics – to live in accordance with Nature (now, Nature implies both your internal nature as well as the external environment). Ethics – live ethically. Logic – it is based on the presumption that everything is an impression. Therefore, we should segregate our irrational beliefs from our rational thoughts and thus think rationally. e. People are unhappy because we keep thinking about the future (i.e. I will retire at 60, I will buy a house etc.). Stoic philosophy keeps you grounded by constantly reminding that life is short; living in the present is the best course of action. f. Always question popular beliefs! Socrates used to call popular beliefs “the monsters under the bed”—only useful for frightening children with.
Interesting facts about Meditations/ Marcus Aurelius: 1. It was not intended to be published as a book. Instead, it’s a collection of his musings. The reader would find his thoughts to be scattered across places. And rightly so because it was not written in a sequential order. 2. Marcus died of the Antonine plague which had befallen the Roman empire. (similar to the COVID 19 Coronavirus, in terms of the havoc).
Snippets of quotes: 1. Doctrine of 3 disciplines – the disciplines of perception (objectivity of thought), action (relationship with other people) and will (counterpart to discipline of action; approach things which are in our circle of control) 2. Everywhere, at each moment, you have the option: • to accept this event with humility [will]; • to treat this person as he should be treated [action]; • to approach this thought with care, so that nothing irrational creeps in [perception].
3. The triad – objective judgement, unselfish action and willing acceptance of all external events
4. Death is not to be feared, Marcus continually reminds himself. It is a natural process, part of the continual change that forms the world. At other points it is the ultimate consolation. “Soon you will be dead,” Marcus tells himself on a number of occasions, “and none of it will matter” When you wake up in the morning, tell yourself: The people I deal with today will be meddling, ungrateful, arrogant, dishonest, jealous, and surly. They are like this because they can’t tell good from evil. But I have seen the beauty of good, and the ugliness of evil, and have recognized that the wrongdoer has a nature related to my own—not of the same blood or birth, but the same mind, and possessing a share of the divine. And so none of them can hurt me.
5. Concentrate every minute like a Roman—like a man—on doing what’s in front of you with precise and genuine seriousness, tenderly, willingly, with justice. And on freeing yourself from all other distractions. Yes, you can—if you do everything as if it were the last thing you were doing in your life, and stop being aimless, stop letting your emotions override what your mind tells you, stop being hypocritical, self-centered, irritable. 6. People try to get away from it all—to the country, to the beach, to the mountains. You always wish that you could too. Which is idiotic: you can get away from it anytime you like. By going within. Nowhere you can go is more peaceful—more free of interruptions—than your own soul. Especially if you have other things to rely on. An instant’s recollection and there it is: complete tranquillity. And by tranquillity I mean a kind of harmony.
7. The world is nothing but change. Our life, only perception
8. External things are not the problem. It’s your assessment of them. Which you can erase right now.
Please do share your thoughts after reading the book. Happy reading!...more
The book contains simple yet deeply profound pearls of wisdom.
Learning “how to think” means learning how to exercise some control over how and what yoThe book contains simple yet deeply profound pearls of wisdom.
Learning “how to think” means learning how to exercise some control over how and what you think. It can be easy to spend our entire lives accepting our natural default ways of thinking rather than choosing to look differently at life.
Key takeaways:
• There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?” The point of the fish story is merely that the most obvious, important realities are often the ones that are hardest to see and talk about. • The Truth is about life before death. It is about the real value of a real education, which has almost nothing to do with knowledge, and everything to do with simple awareness; awareness of what is so real and essential, so hidden in plain sight all around us, all the time, that we have to keep reminding ourselves over and over: “This is water.” “This is water.” • Another didactic story – 2 men are in a bar at Alaska – one is religious, the other is an atheist. • Atheist: It's not like I haven't ever experimented with the whole God and prayer thing. last month, I got caught in that terrible blizzard, and I was totally lost and I couldn't see a thing, and it was fifty below, and so I tried it: I fell to my knees in the snow and cried out 'Oh, God, if there is a God, I'm lost in this blizzard, and I'm gonna die if you don't help me.'" • And now, in the bar, the religious guy looks at the atheist all puzzled. "Well then you must believe now," he says, "After all, here you are, alive." • The atheist just rolls his eyes. "No, man, all that was was a couple Eskimos happened to come wandering by and showed me the way back to camp." It's easy to run this story through kind of a standard liberal arts analysis: the exact same experience can mean two totally different things to two different people, given those people's two different belief templates and two different ways of constructing meaning from experience.
• As if a person's most basic orientation toward the world, and the meaning of his experience were somehow just hard-wired, like height or shoe-size; or automatically absorbed from the culture, like language. As if how we construct meaning were not actually a matter of personal, intentional choice.
• You are not at the centre of the universe –self-centeredness is a default setting hardwired at birth. Hence, be “well-adjusted” by altering or getting free of this default setting.
• It means being conscious and aware enough to choose what you pay attention to and to choose how you construct meaning from experience. The mind is an excellent servant but a terrible master.
• In the day-to-day trenches of adult life, there is actually no such thing as atheism. There is no such thing as not worshipping. Everybody worships. The only choice we get is what to worship. And an outstanding reason for choosing some sort of god, or some set of ethical principles -- is that pretty much anything else you worship will eat you alive. If you worship money, you will feel you never have enough; worship you body & you will feel ugly; worship power & you will feel weak
Take-Aways • People confuse luck with skill, probability with certainty and belief with knowledge. • Recognize the role of randomness in investing and Take-Aways • People confuse luck with skill, probability with certainty and belief with knowledge. • Recognize the role of randomness in investing and in everyday life to avoid becoming a victim of superstitious foolishness. • A single, random event can destroy the success of lucky fools. • Randomness sometimes leads to the survival of the least fit. • Some successful traders are like Russian roulette players; outwardly they have signs of wealth, but if they keep playing, they can lose everything. • In estimating the value of an outcome, consider alternative histories. • Don’t confuse probability with expectation, which is the probability times the payoff. • Asymmetry is critical in finance, since rare events can have major consequences. • Using induction to generalize from a number of cases can produce mistakes due to the effects of randomness. • To adjust for randomness in trading, use statistics and induction to make aggressive bets, but not for risks or exposure due to the danger of big losses from random events. Summary A Random Life You must understand the role of randomness in both trading and everyday life to avoid becoming a victim of your own superstitious foolishness. Consider the fortunes of two fictional traders, Nero and John: • Nero was a proprietary trader – An independent trader with internal funds to invest. He used a conservative, risk-aversive trading style, so he didn’t make as much money as many other traders. • John was a high-yield trader – He made considerably more money than Nero, but when a random event caused a rapid shift in the markets in the summer of 1998, John’s fortunes collapsed and he lost everything. The moral of this story is that sometimes the more cautious style pays off, since it compensates for the potential of the rare, destructive, random event in daily life. Nero’s goal was not to maximize profits, but to avoid losing his opportunity to trade and make money. Therefore, he rapidly exited trades after experiencing a predetermined loss and never sold naked options, which would expose him to potentially very large losses. His approach didn’t depend on the bull market, so he didn’t have to worry about a bear market. Unlike high-risk traders, he could not blow up, because his losses were limited. “Never ask a trader if he is profitable; you can easily see it in his gesture and gait.” The potential for randomness can be a disruptive force in whatever you are doing. People can be lucky fools without ever even being aware that they are successful by virtue of luck. Such good fortune will be reflected in the way they act and think, since an increase in personal performance for whatever reason causes a rise in serotonin, enhancing leadership abilities. “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 trading.” Successful people appear more powerful and dominant, just as an animal’s behavior signals other animals about his dominance. But with a single shift of fortune, that could all be taken away. The Mistakes People Make Unfortunately, most people don’t pay enough attention to randomness. They underestimate the effects of randomness and have little understanding of how probability affects events. People’s misconceptions can be exemplified by distinguishing between what many people believe is the reason for their success or the market's success – and the reality: • They believe they are skillful, when in fact they were lucky. • They think a certain event was determined to happen when it was mere randomness. • They assume certainty where there is only probability. • They confuse knowledge and certitude with belief and conjecture. • They believe that theory is reality, that coincidence is law, and that forecast is prophecy “It is foolish to think that an irrational market cannot become even more irrational.” This confusion, when applied to the market, often results in lucky idiots - people who have succeeded due to essentially random events beyond their control, but deem themselves skilled investors. Such perceptions cause people to overlook real volatility and focus only on returns. Alternative Histories Some successful traders are like Russian roulette players. They have the external signs of wealth, but the probability over the long haul is that they will lose and lose big. “Beware the spendthrift ’businesswise’ person; the cemetery of markets is disproportionately well stocked with the self-styled ’bottom line’ people.” In fact, reality is even more vicious than Russian roulette, since it only infrequently delivers the fatal bullet, so you can easily forget that this bullet is there. Thus, you can be lulled into a false sense of security, forgetting that reality is like a revolver with hundreds or thousands of chambers. In reality, risks are hidden away, whereas Russian roulette is a well-defined game. As a result, you may not be aware that you are playing the game while you are generating your wealth, so you lose sight of your risks. You keep playing, not realizing the potential for very high losses. People also tend to get focused on considering the probable outcomes of their decisions, without giving any attention to what might have happened if they had chosen a different alternative. “Evolutionary psychology claims that such physical manifestations of one’s performance in life, just like an animal’s dominant condition, can be used for signaling: it makes the winners seem easily visible, which is efficient in mate selection.” Essentially, you must consider alternative histories, which examine what might have been. Since people are not wired to understand probability, the importance of alternative histories doesn’t make intuitive sense. Generally, mathematical truths don’t make much sense, especially in thinking about random outcomes. The conventional wisdom is to look for quick and simple "in a nutshell" explanations, rather than spending the time to look more deeply at what is actually correct. “One cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e. if history played out in a different way.)” You can understand a sequence of random historical events with the Monte Carlo metaphor. Imagine a perfect roulette wheel that simulates random events. You have a certain probability of achieving enrichment and a certain probability of achieving annihilation. Although mathematicians generally don’t like this Monte Carlo approach - on the grounds that it detracts from the finesse and elegance of mathematics - this is a realistic way to account for the potential for randomness. Using the Monte Carlo method, you can explore alternate paths of history and see what is most likely under different conditions. By using the model to simulate how the bulls, bears and cautious traders fare under different boom and bust scenarios you can better understand prospects for success. “I view people distributed across two polar categories: on one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.” Using this model, you’ll see that: • Bull traders who get rich from a rally buy more assets and drive prices higher until they ultimately fail. • Bearish traders rarely make it to the boom to participate in the bust. • Options traders fare best because they buy insurance against a random blow-up. Survival of the Least Fit If it doesn’t seem plausible that people can be so easily fooled by randomness, consider computer programs that create language by randomly selecting phrases and connectors. Although meaningless, these randomly created sentences can often fool people into believing that they are literary or intellectual texts. “Realism can be punishing. Probabilistic skepticism is worse. It is difficult to go about life wearing probabilistic glasses, as one starts seeing fools of randomness all around, in a variety of situations - obdurate in their perceptual illusion.” Also remember that many people like to be fooled by randomness as a counterpoint to the harshness of rational, scientific thinking. But even as you have room for some irrational behavior in your daily and personal life, an approach like this can be disastrous in the markets. Of course, irrational investment decisions are not always punished. Randomness can lead to the survival of the least fit. The richest traders at any one point in time can often be the worst traders. Take, for example, the high-yield trader who lost $14 million when the market collapsed. As the meltdown began, his first reaction was to ignore the market, thinking this was just a mood swing, and that the noise in one direction would soon be offset by the noise in another direction. But that didn’t happen. The noise kept going in the same direction. “Researchers of the brain believe that mathematical truths make little sense to our mind, particularly when it comes to the examination of random outcomes. Most results in probability are entirely counterintuitive.” Traders get fooled by randomness when they: • Overestimate the accuracy of their beliefs in an economic or statistical measure; they don’t consider that their trading worked in the past because it was merely coincidental or that their economic analysis masked the random element in past events. • Get married to positions. • Lack a precise advance game plan for dealing with losses. • Engage in denial. Asymmetry and Induction People often confuse probability with expectation, which is the probability times the payoff. People intuitively apply lessons learned from symmetric environments - like a coin toss - in which minor differences don’t matter. “Bad traders have a short- and medium-term survival advantage over good traders.” But in the market slight difference can be decisive when you factor in the potential payoff or loss. This is why words like "bullish" and "bearish" can be misleading, since they imply a high probability that the market can go up or down, without indicating exactly what that probability is. The idea of asymmetry doesn’t matter in most disciplines, but it is critical in finance, where an event, even if rare, cannot be ignored if it brings large consequences. Statistics often fail to detect rare events because statistical formulas become complex and easily fail when dealing with distributions that are not symmetric. Therefore, you must either find more accurate predictive measures or limit your assessments to situations in which you can make a judgment independent of how frequently such rare events occur. Inference and induction also are complicated by randomness, but even so, they are extremely useful tools in making aggressive bets in the hopes of winning big. However, don’t try to use inference or induction in managing risks and exposure, since a single, random event could spell your ruin. Living with Randomness Once you have recognized and understood the important role that randomness plays in our lives and in our markets, follow these three simple pieces of advice to improve your performance: First Don’t use highly visible examples of success to prove a point, since there may be many examples of failure that you don’t see. Second Avoid survivorship bias: Don’t give financial survivors too much credit. The fact that a person made money in the past isn’t meaningful or relevant unless you know the size of the population the person came from. To assess the winner's record properly, you need to know how many other managers tried and failed. If a lot of people also succeeded, ignore the result. Third Remember that it isn’t the estimate or forecast that matters as much as the level of confidence in that opinion. Likewise, guide your activity in the market more on the degree of error you are willing to allow and less on where you think the market is going....more
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