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A Disturbing Philosophical Thought

June 7th, 2014 by dimpledbrain

If you have been following this blog since its start, you’ll observe that I’m very big on the concept of randomness. We talked about causation vs correlation and looked at specific examples like the capital market and the casino game baccarat. Now I can sum up the entire concept in one statement –

i.e. we think we have more control over the external environment than we actually do. In a sense, randomness is the manifestation of such behaviour – because we think we exert control over the environment, we see patterns that are nothing more than randomness.

A prime example is the outcome bias. I’ve got nothing personal against Steve Jobs but I remember when he died, suddenly whatever he said or did became gold. I think he’s a smart guy, that’s for sure. But we often confuse contribution with attribution, a term I borrow from Phil Rosenzweig – what contributed to Steve Jobs’ success are a world of difference vs the attributions on Steve Jobs’ success. Say he’s a micromanager, he wakes up at 5 am everyday etc…those are attributions of Steve Jobs. We do not know if these contributed to his success. And the two are a world apart. Reading biographies to understand our idol is ok, but be wary, no, I say run away as fast as you can when someone offers you ‘5 habits to be successful’, ‘7 things to do to be rich’ and ‘3 things to avoid in the morning’.

For those of you who are more statistically inclined, the explanation is like this. Say I really want to find out the key factors that contributed to successful people. To do so, I need to select randomly from a population and monitor the difference over a period of time*. I can’t select those who are successful and work the process backward. The latter are called attributions.

That has always been my thought.     

Now Phil Rosenzweig wrote something very, very interesting in his second book. He proposes, “what if we can affect the outcome?” This thought caused me sleepless nights for a few days because if this is true then the work (my work damn it!) on randomness isn’t that big after all.**

So the million dollar question becomes, “what can we change and what we can’t change?”

Yes the serenity prayer comes into mind – God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference. 

What next, then?

 Stay tuned for Part 2.

 

*i.e. longitudinal study to minimize correlation vs causation effect.

**the way to overcome randomness is to rely on models/checklists but if we can affect the outcome then such models will not be very useful because there will be feedback loops. In such cases, biases become important to help us achieve the ‘stretch’ target.

 

 

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