Betting against the odds

“There are some enterprises in which a careful disorderliness is the true method” – Herman Melville, Moby Dick

Let’s come back to Nassim Taleb again. He was in a post on Sunday, via Chuckles, in which he put a thesis:

Trader and mathematician, Nassim Taleb scoffed at claims [about comparing Ebola]. Comparing the risk of dying from cancer to Ebola was flawed, he said, because the numerator and denominator of cancer don’t change dramatically moment to moment.

But if you make an error estimating the risk of Ebola, the error will be exponential, not arithmetic, because once Ebola gets going, the changing numerator and denominator of risk makes a mockery of the original calculations.

The fear of Ebola, claimed Taleb, far from being irrational, was reasonable and it was its comparison to death from cancer and vending machines which was irrational and simplistic.


The error of “experts” was in failing to appreciate the asymmetry of error. Error is often unequal. The error from underestimating Ebola is magnitudes higher than the error from overestimating its impact. Their error lay in dismissing counterfactuals. Counterfactuals eventually catch up with you.

Warren Buffett was betting against a similar phenomenon:

In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees.

Dearieme wrote:

The Jha piece on Taleb’s ideas was rather good. I add my own objection to the wild systematisers who want to standardise everything – such people never leave enough slack in a system, or enough redundancy.

By way of a simple example of the limited rationality and practicality of Our Masters I cite the fact that I have never seen any building or building complex that was equipped with enough parking spaces. Even huge hospital campuses don’t have enough places although the designers/administrators know the number of employees and should have a good estimate of the number of patients. They never get it right and then they are puzzled that staff resign because they can’t park their bloody cars.

Not exactly the same thing but decades ago, the RTA [or whatever it was called] in Melbourne had estimated that they needed a southern freeway of a certain number of lanes for the following twenty years.  On the basis of businesses, commuters, dormitory suburbs and all that, they built it but very quickly found it inadequate within a year.

What happened was the asymmetric thinking of commuters or rather the quite predictable nature of humans to change suddenly when they saw advantage in it suddenly came out.  The RTA found that drivers were coming from miles away, the SF not being anywhere near their usual commuter route, simply because it made part of their journey easier and cheaper.

These are not really asymmetrics, unpredictables, because if one thinks it through, this is human nature and in the case of Buffett, sheer economics of a real kind.

I had a mixed portfolio at one time in which three sound accounts were working away at a protected low yield. Over time, they built up a sizeable amount and the other 20%, more speculative, had also done well but then came the crash and that was pretty well wiped out, plus it threatened the overall capital. I came out a couple of thou down, a small proportion but I learnt.

Reading politics also helped but sadly, after the event. As it was clear the way things were headed, I should have understood realpolitik more as today and not following the MSM rags.

I once took up with a woman and was told by some fairly astute friends that she would ruin me.  Not so much from profligacy because she understood the dangers in that but because the whole deal was threatened by her general unpredictability and bloodymindedness, plus my besottedness. In fact, one of my friends put a year to it and was one year out.

Coming back to the Sunday article:

A “0.1 % chance of a catastrophic event” is meaningless without acknowledging the error in that point estimate. Some events are so catastrophic that they render both point estimates and their range meaningless.

It does cut both ways – sometimes one goes with the risk and sometimes one has no choice but to.  But more often than not there is choice.  One might not think there is choice but there is.

I’m not a naturally wise person, in fact there is much dorkishness in there, and am second rank intelligent as far as I can see.  But I am experienced and the attitude is always to learn from errors. Plus I file away the things I learn. That can’t cover everything but it covers a fair amount.

Finally let me come back to Moby Dick:

“There are some enterprises in which a careful disorderliness is the true method” – Herman Melville, Moby Dick

I’d include my boat in that. Building in along the way several options at various places, such that I could reverse what I’d done at any point seems infirm of mind and may well be but it’s now allowed me to change direction suddenly without much £££s loss in response to my suspicion that things might get a bit tricky, healthwise. Though I’d underestimated the level of risk to my health, the possibility of it still had me building in options from the beginning. And now I’m using Plan C. Ho hum.

Knowing all the above is one thing, having the mental steel to stick to it is quite another.

2 comments for “Betting against the odds

  1. The Jannie
    September 18, 2017 at 18:08

    I seem to remember reading that British motorways confounded the planners from the start. They fixated on high-speed journeys over long distances; meanwhile the scruff were using them to go to work, go shopping etc. Whoda thunkit?

    • dearieme
      September 18, 2017 at 19:22

      That’s because they put in too many exits and entrances for their assumption to hold true: this was a bone of contention in the design of the M25.

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