Reality is in the eye of the beholder

I recently finished reading the book, The Drunkards Walk. Written below is a summary of key takeaways from the book.

Random processes are fundamental in nature and are ubiquitous in our everyday lives, yet most people do not understand them or think much about them.

Human intuition is ill suited to situations involving uncertainty. Research has shown that when chance is involved, our thought processes are often seriously flawed. Based on intuitive feelings of correlation, a team’s success or failure is often attributed largely to the ability of the coach.

Human perception is not a direct consequence of reality but rather an act of imagination. Perception required imagination because the data people encounter in their lives are never complete and always equivocal.
We draw conclusions and make judgments based on uncertain and incomplete information, and we conclude, when we are done analyzing the patterns, that our “picture” is clear and accurate. 

We routinely misjudge the role of chance in our lives and make decisions that are demonstrably misaligned with our own best interests. Imagine a sequence of events. The events might be quarterly earnings or a string of good or bad dates set up through an Internet dating service. In each case the longer the sequence, or the more sequences we look at, the greater the probability that we’ll find every pattern imaginable – purely by chance. As a result, a string of good or bad quarters, or dates, need not have any “cause” at all.

People systematically fail to see the role of chance in the success of ventures and in the success of people. And we unreasonably believe that the mistakes of the past must be consequences of ignorance or incompetence and could have been remedied by further study and improved insight. We afford automatic respect to superstar business moguls, politicians, and actors and to anyone flying around in a private jet, as if their accomplishments must reflect unique qualities not shared by those forced to eat commercial-airline food. And we place too much confidence in the overly precise predictions of people – political pundits, financial experts, business consultants – who claim a track record demonstrating expertise.

To swim against the current of human intuition is a difficult task. The human mind is built to identify for each event a definite cause and can therefore have a hard time accepting the influence of unrelated or random factors. And so the first step is to realize that success or failure sometimes arises neither from great skill nor from great incompetence but from, as the economist Armen Alchian wrote, “fortuitous circumstances.” 

Outline of our lives, like the candle’s flame, is continuously coaxed in new directions by a variety of random events that, along with our responses to them, determine our fate. As a result, life is both hard to predict and hard to interpret.

A lot of what happens to us—success in our careers, in our investments, and in our life decisions, both major and minor—is as much the result of random factors as the result of skill, preparedness, and hard work. So the reality that we perceive is not a direct reflection of the people or circumstances that underlie it but is instead an image blurred by the randomizing effects of unforeseeable or fluctuating external forces. That is not to say that ability doesn’t matter—it is one of the factors that increase the chances of success—but the connection between actions and results is not as direct as we might like to believe. Thus our past is not so easy to understand, nor is our future so easy to predict.

We all understand that genius doesn’t guarantee success, but it’s seductive to assume that success must come from genius.

Deciding just how much of an outcome is due to skill and how much to luck is not a no-brainer. Random events often come like the raisins in a box of cereal—in groups, streaks, and clusters.

When we look at extraordinary accomplishments in sports—or elsewhere—we should keep in mind that extraordinary events can happen without extraordinary causes. Random events often look like nonrandom events, and in interpreting human affairs we must take care not to confuse the two.
In random variation there are orderly patterns, patterns are not always meaningful. And as important as it is to recognize the meaning when it is there, it is equally important not to extract meaning when it is not there. 

Avoiding the illusion of meaning in random patterns is a difficult task.

Full Disclaimer: I am not a financial planner. The views expressed in this post are all mine and they may or may not suit your needs. Please do you own due diligence. I do not make money on any of the products suggested in this post. 

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