You may be familiar with an author – Nassim Taleb – he wrote a book called “The Black Swan” and also a book called “Fooled by Randomness“. In both books he looks at events from a viewpoint of predictability or more correctly unpredictability. In the first book the known fact many years ago from thousands of observations of the world concluded that swans were only ever white. This fact was destroyed when explorers reached Australia to find the existence of a Black Swan – thus destroying what was considered to be an irrefutable and evidence based fact.
His experience in the Wall St investment environment reflects on the many traders who thought they had developed a surefire system for smart investment decisions (think White Swan) that would always make money despite the risks. After a number of years of fantastic success they would “blow-up” and lose a lot of money and destroy the theory and their careers (the black swan).
Taleb shows how poor we are at recognising risks and continuing headlong into the next collapse of markets and the huge impact chance is going to play in short-term performance. He uses the analogy of Russian Roulette with a prize of $10 million dollars – 5 out of 6 people are going to tell you what a great way it is to make money and one is going to blow their head off! If you are one of the people invited to play you are going to be so upset when (if) the first three people make $10m that you are convinced you should have a “shot”.
So when your friends, colleagues etc are telling you about a fantastic investment opportunity, a winning idea that lots of people have made money from you need to ask yourself (think Clint Eastwood) am I feeing lucky today?