What The Dog Didn't Tell

I think Malcolm Gladwell slipped up; or whoever in charge of publicity of his latest book What the Dog Saw has.
They only had to leak out the information that one of the essays in the book is on Nassim Nicholas Taleb.
That alone should have ensured a good readership - I am going by his followers on twitter (@nntaleb); they number 9035 at the time of typing (not a huge number but considering the fact that he has people like Tom Peters (@tom_peters) and Rosabeth Moss Kanter (@Rosabethkanter) as followers). Not that Malcolm Gladwell needs to beg for readership. His books always have been best seller. But a little extra always helps.
In his essay, Blowing Up, Gladwell has done a wonderful job of bringing to life Taleb's personality.
If you have read Fooled By Randomness or The Black Swan, and have wondered about the man, then you must read this essay.
By the way, I had blogged about Gladwell's and Taleb's connection some time ago. A lot of it was guesswork. Seems like one has been studying the other more closely that I thought. Check out Black Swan Tipping Over and decide for yourself.

The Statistically Insignificant Wall Street Journal

In my previous post I have been a little unfair. I took a potshot at Wall Street Journal without actually quoting Fooled By Randomness. So here goes ...

On rare occasions when I boarded the 6:42 train to New York I observed with amazement the hordes of depressed business commuters (who seemed to prefer to be elsewhere) studiously buried in The Wall Street Journal, apprised of the minutiae of companies that, at the time of writing now, are probably out of business. Indeed it is difficult to ascertain whether they seemed depressed because they were reading the newspaper, or if depressed people tend to read the newspaper, or if people who are living outside their generic habitat both read the newspaper and look sleepy and depressed. But while early on in my career such focus on noise would have offended me intellectually, as I would have deemed such information as too statistically insignificant for the derivation of any meaningful conclusion, I currently look at it with delight. I am happy to see such mass-scale idiotic decision making, prone to overreaction in their postperusal investments orders - in other words I currently see in the fact that people read such material an insurance for my continuing business of option trading against the fools of randomness.

Do you still want to read The Wall Street Journal?

Black Swan Tipping Over

It is fascinating to see how ideas germinate, take shape and blossom. But what is even more fascinating is how authors use each others ideas as stepping stones to push their own.

What follows is entirely speculation. I am not insinuating plagiarism here.

Malcolm Gladwell brought out his international best seller The Tipping Point in the year 2000. The book is about how trends reach a critical mass and tip over to become an avalanche. Simple example from the book, some young kids start wearing Hush Puppies and suddenly the near-dead brand is a rage.

Fooled By Randomness by Nassim Nicholas Taleb (NNT) is published in 2001. He follows it up with The Black Swan in 2007. The idea of black swan is introduced in Fooled By Randomness and formalised in The Black Swan. NNT rejects Normal Curve as the basis for describing all random activities. He claims and proves that Normal Curve can be used for describing events that are associated with tossing of coins and other similar random phenomena, such as, weight of randomly picked sample of human beings. Power law rules the social and financial world. Thus, events that tip over are basically black swans. NNT also makes the statistical concept, outlier, popular ... but only among those who have read the book.

In 2008, Malcolm Gladwell publishes a book called, guess what, Outliers.

It is as if the two authors draw energy from each other to expand their thesis. Unless they are the same author writing under pseudonyms, in one avatar the author establishes a formal basis of an idea and in another avatar he comes up with a popular version of the idea. (Yes! I have seen their photographs, they look different :-))

If I remember it correctly, NNT makes a one line mention of The Tipping Point in The Black Swan.

The approach and styles vary widely but they both talk of the same thing.

Picture courtesy: Nicole Shackelford

Are You Being Fooled By Random Purple Cows?

I don't know how well Seth Godin takes to criticism. He is a marketing guru, but I think he has fallen into the same trap in Purple Cow as many other management authors: the desire to explain random outcomes as non-random. This is a classic case of survivorship bias (learning from the winners without taking into account the losers who might have done similar stuffs but failed.)

The need to do something remarkable to capture market is a given. In order to dislodge an existing market leader an upstart has to come with something that grabs attention. But what works may not be just a remarkable product or service well marketed. Sometimes success is achieved by being at the right place at the right time. And how does one do that: by trying and trying and trying and hoping for the best.

To be fair to Godin, I am sure he understands this very well. Sample this from his book:

So is there a foolproof way to create a Purple Cow every time? ... Of course not. There is no plan. Looking into our rear-view mirror, we can always say, "Of course that worked." ... When we take off the rear-view mirror, though, creating a Purple Cow suddenly gets a lot more difficult.

Unfortunately, I find the approach too uni-dimensional.

What could have been done to make The Purple Cow more rounded? I wish there were as many case studies of failures as there are of success. An analysis of what did not work - in spite of putting out a fantastic product - may be as important, if not more so, as analysing what went right.

This is my first book by Seth Godin. I am right now following him his blog by e-mail. I will perhaps understand his point of view better. Meanwhile, I will continue analysing The Purple Cow and all other management books I read through the lens of Fooled By Randomness.

Photo courtesy: Natalija Stanivuk

***
Update as on 01-Apr-2009

Purple Cow continued to haunt me. So I re-read the complete book again (one of the advantages of buying books). I think I will retain my initial impression in this post. It still stands.
Would I recommend this book to others?
I think I will.
It has many positive points that will grab you and force you to think differently.
For a review of the book click on the icon below


Does this change of heart has anything to do with Seth Godin responding positively to my book review? Not really.
Remember I wrote the review before Godin responded! In the process I discovered that he is a good man. See my post here.

The Hedgehog and The Fox

I first read about the hedgehog and the fox in Good To Great by Jim Collins. The fox is clever and knows many thing. The hedgehog is a simple soul but knows one big thing.

When I first read Good To Great I was heavily impressed. Of course, by then I hadn't laid my hands on two trend busting business books: Hard Facts, Dangerous Half-Truths And Total Nonsense, and Fooled By Randomness. I now know that what was done in Good To Great was backward fact-fitting and was inspired by a desire to find a cause for success while in fact it might just have been a case of being at the right place at the right time. (Read Blue Ocean Strategy for a small critique on Good To Great).

But just because I prefer books like Fooled By Randomness over Good To Great, doesn't automatically translate into Good To Great is crap. There are elements in Good To Great which could be some value, right? Ok, I reject the theory in Good To Great that companies that are led by silent, determined type CEO's make the leap and those that are led by aggressive but not exactly humble don't. (Where in actual fact the CEO's personality may have no bearing on a company's good performance.) But one cannot, off hand, reject the fact that companies that follow the hedgehog concept are more likely to emerge superior to those who do not. The hedgehog concept looks suspiciously like core competency, doesn't it? So isn't focusing on core competency good for a company? Or for that matter should being a hedgehog help an individual. Jack or all trade, master of none sort of thing.

It does ... but only if tomorrow is identical to yesterday. Meaning, only if you can extrapolate the future based on past data.

The Black Swan on the other hand pumps for the fox. Too much focus makes a person myopic. Hedgehog is myopic. Fox has a more broader vision. The fox takes in many more inputs from the world that exists outside its own and does not take its future as granted.

Now one might want to justify the both are necessary. When things are going smooth, hedgehog is a better strategy, while in turbulent times being a fox is advantageous.

Wrong.

A Black Swan event can happen exactly when going is smooth. That is why it is a block swan event. So being a fox is always a better proposition. A fox might survive the black swan event but a hedgehog will not.

Do you agree? What is your take on the hedgehog and the fox?

When Cherished Ideas Crash

Ever had a feeling that your carefully constructed world view is crashing all around you as you read a more potent argument against it. You then scramble to qualify your world view so that it remains intact because you have seen it work before - but you are not so sure. Of course you can always have a fall back option (see Fickle) but not before giving a fight.

My basis for determining the validity of any information has always been to evaluate the information against a context. I keep asking, "what is the context?"  So, if some one says, "such and such HR initiative has worked in, say, Infosys." I would always ask, "Let's first examine the context."

And if the context is similar to mine, I would adopt it. To me context represents the sum of all independent variables that matters.

Similarly, story telling, to me at least, has always been the best way of passing information. But apparently narrating is too simplistic a tool and has the impact of forcing certain post-hoc causality on an event where there might be none or many that escapes detection.

Reading The Black Swan and before that Fooled By Randomness has been an humbling experience.

Context matters, but only up to certain extent. Actually only up to a small extent. Ditto with evidence. Because for every evidence and/or context there are many more that are not obvious or hidden.

No I have not given up on my context based filtering of information, but what does one do to counter this:

I propose that if you want a simple step to a higher form of life, ..., then you may have to denarrate, that is shut down the television set, minimize time spent reading newspapers, ignore the blogs. Train your reasoning abilities to control your decisions ... This insulation from the toxicity of the world will have an additional benefit: it will improve your well-being.

Mr. Taleb, would you reconsider leaving "ignore the blogs" bit out from the above quote? We actually help you detect black swans! How? By presenting counter points. If that does not help detect black swans, nothing will.

Removing Bias

I am thrilled to bits!
I wish you could see the grin on my face as I type this.
Some time ago, I had proposed a new mechanism of studying companies.
I repeat my conclusions here:

If I were to conduct a scientific study on business strategies, I would report the context and the decisions live, recording the thought process (as revealed by behaviour) as it happens, without drawing any conclusion. Very much like the National Geographic or such similar recordings of wild life.

I might have just hit upon a new field of management study :-))))
Remember, you read it here first!

Now why am I thrilled?

I just started reading The Black Swan by Nassim Nicholas Taleb (those who have been following my blog already know that I have become a big fan of his after reading Fooled By Randomness. I have quoted from Fooled By Randomness here, here and here.)

Anyways, a few pages into the Black Swan and what do I see?
This:

"While we have a highly unstable memory, a diary provides indelible facts recorded more or less immediately; it thus allows the fixation of our unrevised perception and enables us to study later events in their own context."

Taleb is trying to introduce a method of removing what he calls,

"the retrospective distortion, or how we can assess matters only after the fact, as if they were in a rear view mirror (history seems clearer and more organised in history books than in empirical reality."

I am pleased as a punch to know that I am thinking on same lines as Taleb.

Note: The picture used here belongs to Neil Gould. To see more of his pictures visit his gallery.

Always Come Early For An Interview

Or how to improve your probability ...

I cannot get over this book. Fooled By Randomness so vividly describes how we human do not understand how randomness fools us.

One fact that emerges out of this book is that traders take probability of an event occurring as risk while actually it is the value associated with the risk that needs to be considered.

I therefore decided to test out this hypothesis.

I asked a family member if she would place a bet on a game if there was 99% probability of winning Rs.100 but only 1% probability of losing Rs.100,000. The answer came almost immediately, "yes". I then asked her the second question. Would she undergo an eye operation which has 99% probability of perfect eyesight post-operation but only 1% chances of losing the eye. "Are you crazy?" was the answer.

My conclusion: people understand risk when the value is more personal. The first question remains in the realm of the hypothetical. Though the value is negative, there is actually no such game and she would not lose any money since we are not playing one. But an eye? We understand the value of losing an eye. That is more immediate. I am not a trader but I can now guess why brokers do not worry about value while taking risk. It is not their money - most of the time. The thought of a loss does not hit them hard enough as the thought of losing an eye would. Therein lies the difference.

But wait there is more.

The above incidence happened a few days ago. Yesterday a colleague asked me if I have seen the movie "21". She then asked me why switching the choice of the closed door in the game show would result in 67% probability of winning, when it is obvious that the probability is 50%. (In the movie the professor asks the protagonist the famous Monty Hall Problem, in which the game host offers the player a chance to switch the door after he has revealed that one of the doors not chosen does not contain a valuable item.)

If you follow the this link you will get an answer. But what is important to understand is that not only do human beings react to probability in a very simplistic way but we also refuse to believe that an action by someone could change the probability, especially when that person is in possession of some knowledge that you do not have.

We tend to treat all events as independent. Just like the previous roll of dice has no impact on the next roll of dice. But that is not correct with life except for some very simplistic cases. If you are appearing for an interview in a job, assuming it is a fair selection process, do you think that every candidate has equal chance of selection? Wrong. Your chance depends on who has gone before you. If the candidate before you impresses the selection committee, unless you are superlative, your chances reduce.

Note: The picture used here belongs to Sigurd Decroos. To see more of his pictures go to his gallery here.

What Cyclists Should Do On Roads

Now this is serendipity - an advise on how cyclists should act on roads in an exceptionally brilliant book on business dealing with probability and randomness.

This extract is from Fooled By Randomness by Nassim Nicholas Taleb.

"I am an avid road cyclist. Recently, as I was riding along with other cyclists, slowing down traffic in a rural area, a small woman in a giant sports utility vehicle opened her window and heaped curses at us. Not only did it not upset me but I did not even interrupt my thought process to pay attention. When I am on my bicycle, people in large trucks become a variety of dangerous animals, capable of threatening me but incapable of making me angry."

Hmmmm.... should try this.

Note: The picture used here belongs to Svetlana Maksimovic. To see more of her photographs visit her gallery.

'Fooled By Randomness' - an Antithesis to 'The Secret'.

The two books are as different as chalk and cheese (which is which - you decide). It should not be possible to compare the two. But interestingly they present diametrically opposite thesis.

Given its iconoclastic image, it is not surprising that Fooled By Randomness(FBR), it is not surprising that it beats down everything The Secret stands for.

The Secret is about controlling your destiny by mere thoughts. FBR insists that success is entirely random.

The Secret presents evidences of successful people who have become successful by using, well, the secret. FBR insists that "luck is democratic and hits everyone regardless of original skills" and so there is no secret there.

The Secret quotes the Buddha and confirms "All that we are is the result of what we thought." FBR debunks this: "past event will always look less random that they were ..." and that people just back fit explanations to justify their present.

The central theme of The Secret is that if you follow the secret you will achieve what you desire, rest is incidental. The central theme of FBR is that hard work, discipline, persistence are necessary but not sufficient conditions for success.

The Secret sells you a dream. FBR brings you down to earth. If the Secret works then FBR will attribute it to pure luck.

I think I will make it a hobby to compare books of different genres.

Why do I buy books

I always read books twice. If possible within 6 months. I have experienced that re-reading a book within that duration ensures long term memory retention. That is why I need to buy books. So every book that I discuss on this blog has been purchased by me. Some on Amazon but most during trips. Nothing beats reading something interesting while waiting at airports.

Right now I am re-reading Fooled By Randomness by Nassim Nicholas Taleb. It has been dubbed "One of the smartest books of all time' by Fortune. I would agree, although I cannot claim any mastery over economics and finance.

The following extracts from the preface of the 2nd edition will tell you what to expect:

"Past events will always look less random that they were (it is called hindsight bias)."

"... we don't have much of a clue in the social "sciences" like economics in spite of the fanfares of experts."

"... the kind of luck in finance is of the kind nobody understands but most operators think they understand ..."

This is just the book I need to read (re-read?) to put the Wall St. happenings in perspective.

Note: The photograph used belongs to Zsuzsanna Kilián. Please go here to see more such photographs.