the rational letter

Hello to all you rational people 👋, Iman here.

As you may be aware, the Rational VC podcast has pivoted as of Episode 50, where every episode we explore a Lindy book, and find ideas you can use in business and life 📚📖. If you have a TikTok or Instagram brain, this is not for you; we aim to produce timeless content around evergreen wisdom.

🎙Spotify - Listen to our latest episode on Nassim Taleb’s immortal book: Fooled by Randomness. 

📺 For the YouTube fiends among you, you can watch the video version here.

The detailed podcast breaks down all aspects we found interesting in the book, and we tailor our takeaways to business and life, in particular investing.

Twice a month, the Rational Letter will now provide you with our takeaways of the Lindy books we deep dive into, so you can get to the juicy stuff in 10 minutes of reading!

Let us know what you think of the new format and new content - any and all insights welcome 😃

Without further ado, our favourite takeaways from Nassim Nicholas Taleb’s (NNT’s) “Fooled by Randomness”. 

Please note this is not an exhaustive list, nor a book review. We just want to share our thoughts…

Firstly, this book should be studied, not read. It’s complex and it identifies fundamental principles you will see everywhere (and in Taleb’s later books too). We now exclusively respond with “FBR” to hundreds of posts on X (Twitter) where we see false attribution.

You will see endless threads on X about how some “guru” achieved a mind-blowingly successful outcome, while providing ultra-specific prescriptions on how you can emulate it, WITHOUT identifying the role of luck. Ask yourself: how many times would I get the same outcome if this “guru’s” prescriptions were run 1 billion times? If the answer is not at least 999.999 million, you’ve got yourself a fraud. You may find a lot of techbros and VCs fall into this category.

Cyrus and I read the book a few times before recording the podcast and we still probably didn’t grasp it fully. We will come back to this book again and probably do another podcast on it in the next couple of years, as our experiences develop further and our interpretations change.

Secondly, NNT’s writing style is dense, littered with brilliantly illustrated examples of financier characters like Nero and John. His juxtaposed likening of a competent financial trader to Rasputin, while comparing the hot hedge fund managers of the day to Monte Carlo men of luxury, who ultimately crash and burn, is highly entertaining. But given the sheer volume of concepts he intricately weaves throughout this masterpiece, you need to pay attention to the nuances of each example.

As we will see in future Taleb books, his writing style develops further and his no-nonsense, no-holds-barred positions become increasingly aesthetically pleasing and literarily astute. So, if you’re starting your Talebian journey with this book, you may find it slightly tedious to follow. You will however, find incredible nuggets of Taleb’s unmistakable style, such as his displeasure for MBAs, corporate-speak, forecasters and TV commentators of the financial and political persuasion. 

Thirdly, we loved the book as NNT’s examples harped back to our backgrounds and experiences in corporate, startups and investing. Specifically, I saw commonalities to my season of life in consulting. 

When I left consulting, I had this innate distaste for the lack of direct attribution of my work to pure outcomes. As consultants, you learn to highlight how your input led to specific, measurable outcomes. But in reality, oftentimes you’re trying to fool people with randomness.

As Taleb describes with hindsight and survivorship biases, it’s natural for humans to instigate ex-post reasoning - i.e. create reasons for an outcome after the fact. And when there is a “successful” outcome, whether manufactured or actually successful, humans tend to overestimate the role of skill in that outcome.

He also discusses sample paths and introduces Ergodicity, which I describe later. But in short, 8 years ago, if I were to be replaced by any other LSE, Oxford, Cambridge, Ivy League etc. graduate, who started when I did and worked on the same projects I eulogise so proudly about, the outcomes would likely be the same. Like, we’re not that special.

Now of course, the sample path may have been slightly different, meaning a different end point, but I guess the experiment on consulting has been run long enough that buyers understand the value that comes from a consultant. As the saying goes, “you never get fired for hiring McKinsey”. There is Ergodicity in the consulting sample paths. 

One thing that gives me pleasure though, is that my most difficult clients were Private Equity houses, who would demand ultra specific analysis, particularly on Commercial Due Diligences. 

By applying a satisficed approach to hypothesis testing, and not boiling the ocean on my projects, we were able to get to very specific answers in a timely manner. There is direct attribution to successful outcomes here - we helped determine real valuations and supported PE houses acquire big companies and generate significant value. Looking back, I understood the skewness and asymmetry involved in this market. Put enough effort in, but don’t kill yourself, even if a 26-year-old PE jerk calls you at 4am to ask how you calculated cell AZ137 in your excel model.

The decision to leave consulting was highly rational, as I had strong opportunities elsewhere. But ultimately it must have been an emotional decision at its core, as Taleb explains that all humans make decisions that lead with emotion, then attribute logic afterwards. 

Maybe I’ve been a Talebian disciple for years, without realising it. 

Additionally, the book did raise an important, rather existential question for me: if so many outcomes are incorrectly labeled as skill when in fact they are down to randomness and luck, how can I identify skill and talent? How and where can we draw the line to identify a Warren Buffett from a Technowatermelon or a Lucky Fool?

Well, one of the simple but typically overlooked methods is time. How long has an individual been able to consistently show skill in their arena? Buffett’s been playing this game for 80+ years and wins consistently.

Then there’s the specific domain itself. In other words, a successful dentist is far more likely to be skilful than a successful VC, all other things equal. This is because outcomes in dentistry are far less random and skills count less in highly random environments. Taleb thinks of success in terms of degrees, so mild success might be explained by skill but wild success “is attributable variance.”

Finally, Taleb talks of the role of perseverance and preparedness:

“the conventional values of persistence, doggedness and perseverance: necessary, very necessary. One needs to go out and buy a lottery ticket in order to win.

Furthermore, as most successes are caused by very few “windows of opportunity,” failing to grab one can be deadly for one’s career. Take your luck!”

There is no success without hard work and opportunism. So in order to stack the proverbial deck in your favour, you need to be prepared and that requires dedication to your craft, constant learning, drive and ambition.

Below I outline the most interesting concepts that we enjoyed from the books. Do let us know your takeaways and if we’ve missed anything of note:

1. Randomness and luck 

   1. Wild success is usually attributable to luck more than anything else - sorry VCs!

   2. Lucky fools will win from disproportionate luck, but attribute their success to specific reasons after the fact - don’t be a fool 

   3. Much like Machiavelli’s Fortuna, at least 50% of all outcomes will be down to luck, and the rest, Virtu (individual initiative, intelligence, drive etc.)

   4. But there are areas where skill is the driving force and randomness is low, such as dentistry

2. Hindsight and survivorship biases

   1. Hindsight bias

      1. “A mistake is not something to be determined after the fact, but in the light of the information until that point”

      2. In other words, people will overestimate their knowledge after an event has passed - you think you had more information than you did. This is why regret is pointless if you’re stoic / rational

      3. Past events will always look less random than they were - “backfit explanations concocted ex post by his deluded mind”

   2. Survivorship bias

      1. We have a tendency to focus on successful individuals without considering those who failed due to random factors - we don’t see the losers

      2. The example of monkeys on typewriters: with infinite monkeys on infinite typewriters, one monkey will produce a work of art. But then humans want to attribute value to this after the fact, when in fact it is not possible for that monkey to recreate that artwork immediately - it’s just luck

3. Monte Carlo simulations, sample paths and Ergodicity

   1. Given his background as a trader, NNT would run Monte Carlo Simulations on trades, which can be replicated for life and business

   2. These simulations would generate thousands of random sample paths and identify key characteristics of each path, showing the most likely outcome

   3. This creates alternative sample paths, or invisible histories that could have happened, but did not. You should view any outcome through the lens of the most likely alternative paths

   4. A random sample path is a succession of historic events that start and end at specific dates, but are subject to some varying uncertainty - i.e. some sample paths are less likely than others if you cherry pick them

   5. Ergodicity refers to infinite sample paths that lead to the same outcome if run long enough - i.e. a singular outcome. A point of a moving system will eventually visit all parts of the space that the system moves in. So if you’re a lucky fool, eventually in the long-run, you will regress to the mean

4. Skewness and asymmetry 

   1. “The probability of the loss needs to be judged in connection with the magnitude of the outcome”

   2. In other words, people confuse probability and expectation. Expectation = Probability x Potential Payoff

5. Induction and Pascal’s Wager

   1. “No amount of white swans can allow the inference that all swans are white… The observation of a single black swan is sufficient to refute such a claim”. So data is brilliant to disprove positions (or negative hypothesis testing), but never to prove a position 

   2. As Pascal's Wager determines, it is highly optimal for humans to believe in God. The magnitude of the outcome is massive if God exists, whereas the downside is minimal

6. Chaos Theory

   1. We struggle to understand nonlinearities, with small inputs leading to disproportionate outcomes 

   2. “Too much success is the enemy. Too much failure is demoralising. I would like the option of having neither”

7. Satisficing

   1. Today’s obsession with optimising everything will cost us an infinite amount of time and effort - sorry Tim Ferriss fans

   2. Get to an adequate answer, and not the optimal one and learn to be happy with enough!

8. Emotional decision making

   1. We make our decisions based on our emotions first. We then backfit an explanation that sounds logical 

   2. Your confidence interval in decision-making is more important than the expected value of the outcome - the more confident you are, the better 

9. Normative and positive thinking

   1. How things should be (normative) vs how they actually are (positive)

   2. If you get £1m but lose £300k you’ll be less happy than if you get one £700k cheque, or even better, two £350k cheques

10. Heuristics 

    1. Heuristics help us handle sophisticated statistics and randomness but they can slip us up too. They key heuristics we depend on are outlined below:

       1. Anchoring – comparisons to references

       2. Availability – estimating the frequency of an event according to the ease with which the event can be recalled

       3. Representativeness – gauge the probability that a person belongs to a particular social group by assessing how similar their characteristics are to the typical group member

       4. Simulation – the ease of mentally undoing an event and playing the alternative scenarios

       5. Affect – the emotions elicited by events determine their probability in your mind

11. Attribution bias, skepticism and Stoicism

    1. As humans, we are hard-wired to always seek a causal link. We also tend to attribute success to skill, but failures to randomness

    2. Be open to changing your mind and self-contradiction, as we innately stick to ideas we’ve invested a lot of time and effort in. We get married to our positions

    3. “The stoic is immune from life’s gyrations, as he will be superior to the wounds from life’s dirty tricks”.

Thanks for reading!

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