Stochastic processes - Deepstash

Stochastic processes

The notion of path, as opposed to outcome, indicates that it is not a mere MBA-style scenario analysis, but the examination of a sequence of scenarios along the course of time.

We are not concerned with what the investor's worth would be in, say, a year, but rather of the heart-wrenching ride she may experience during that period.

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One of the most influential book of our times.

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MORE IDEAS FROM Fooled by Randomness

We Are Obsessed With Outcomes

Quality of a decision cannot be solely judged based on its outcome.

The epic poet (Homer) did not judge his heroes by the result: heroes won and lost battles in a manner that was totally independent of their own valor; their fate depended upon totally external forces, generally the explicit agency of the scheming gods (not devoid of nepotism). Heroes are heroes because they are heroic in behavior, not because they won or lost.

One cannot judge a performance in any given field by the results, but by the costs of the alternative (i.e. if history played out in a different way).

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How Often Should We Check Our Portfolio ?

Over a short time increment, one observes the variability of the portfolio (variance), not the returns. Our emotions are not designed to understand the point. We think with our emotions and there is no way around it.

It serves better to check portfolios at sufficiently large intervals to avoid letting your emotions take the driving seat.

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There is no rational reason to keep a painting you would not buy at its current market rate.

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It does not matter how frequently something succeeds if failure is too costly to bear. ( Like playing russian roulette)

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For an idea to have survived so long across so many cycles is indicative of its relative fitness. Noise, at least some noise,was filtered out.

People tend to infer that because some inventions have revolutionized our lives that inventions are good to endorse and we should favor the new over the old.

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It is frequently said in the markets, Bad trades catch up with you.

Mathematicians of probability give that a fancy name: ergodicity. It means, roughly, that (under certain conditions), very long sample paths would end up resembling each other.

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A negative pang is not offset by a positive one (some behavioral economists estimate the negative effect to be up to 2.5 the magnitude of a positive one). It leads to an emotional deficit.

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If I am going to be forced to eat pork, it better be of the best kind.

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I can use data to disprove a proposition, never to prove one. I can use history to refute a conjecture, never to affirm it.

There are only two types of theories

1. Theories that are known to be wrong, as they were tested and adequately rejected.

2. Theories that have not yet been known to be wrong, not falsified yet,but are exposed to be proved wrong.

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RELATED IDEA

Black Swans are not inconsequential anomalies, but a significant phenomenon that shapes the very world we live in. Many historical events that drastically impacted our socities and lives were actually Black Swan events. These incluse the 2 world wars, the fall of the Berlin Wall, the 11 Sep 2001 terrorist attacks, the rise of the Internet or the 2019-2020 Covid pandemic. 

In all these cases, no one could've predicted the events in advance.

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Thomas Hobbes explained

Hobbes, an English philosopher, believes mankind's nature to be solitary, poor, nasty, brutish, and short as described in his book, The Leviathan.

This is why people adhere to social contracts (ceding some rights in return for protection from a governing body) in order to avoid a crippling struggle.

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Maximize Opportunities

Lucky people do not wait for things to happen to them.

They take notice and act upon the opportunities that they find.

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