Data Does Not Equal Truth

Meanwhile, if the quantity of information is increasing by 2.5 quintillion bytes per day, the amount of useful information almost certainly isn't. Most of it is just noise, and the noise is increasing faster than the signal. There are so many hypotheses to test, so many data sets to mine-but a relatively constant amount of objective truth. (Page 13)

Uncertainty = Miscalculated Risk

Risk greases the wheels of a free-market economy; uncertainty grinds them to a halt. (Page 29)

Asymmetries Of Information = Low Quality

"If you're in a market and someone's trying to sell you something which you don't understand," George Akerlof told me, "you should think that they're selling you a lemon."

Akerlof wrote a famous paper on this subject called "The Market for Lemons"-it won him a Nobel Prize. In the paper, he demonstrated that in a market plagued by asymmetries of information, the quality of goods will decrease and the market will come to be dominated by crooked sellers and gullible or desperate buyers. (Page 35)

Complexity Magnifies The Impact Of Mistakes

In complex systems, however, mistakes are not measured in degrees but in whole orders of magnitude. S&P and Moody's underestimated the default risk associated with CDOs by a factor of two hundred. Economists thought there was just a 1 in 500 chance of a recession as severe as what actually occurred.

One of the pervasive risks that we face in the information age, as I wrote in the introduction, is that even if the amount of knowledge in the world is increasing, the gap between what we know and what we think we know may be widening. This syndrome is often associated with very precise-seeming predictions that are not at all accurate. Moody's carried out their calculations to the second decimal place-but they were utterly divorced from reality. This is like claiming you are a good shot because your bullets always end up in about the same place-even though they are nowhere near the target. (Page 45)

Foxes vs Hedgehogs

Hedgehogs are type A personalities who believe in Big Ideas in governing principles about the world that behave as though they were physical laws and undergird virtually every interaction in society. Think Karl Marx and class struggle, or Sigmund Freud and the unconscious. Or Malcolm Gladwell and the "tipping point."

Foxes, on the other hand, are scrappy creatures who believe in a plethora of little ideas and in taking a multitude of approaches toward a problem. (Page 53)

Foxes Beat Hedgehogs

Foxes sometimes have more trouble fitting into type A cultures like television, business, and politics. Their belief that many problems are hard to forecast-and that we should be explicit about accounting for these uncertainties-may be mistaken for a lack of self-confidence. Their pluralistic approach may be mistaken for a lack of conviction; Harry Truman famously demanded a "one-handed economist," frustrated that the foxes in his administration couldn't give him an unqualified answer.

But foxes happen to make much better predictions. They are quicker to recognize how noisy the data can be, and they are less inclined to chase false signals. They know more about what they don't know. (Page 56)

Be Wary of Evaluating Approaches From Results

In the United States, we live in a very results-oriented society. If someone is rich or famous or beautiful, we tend to think they deserve to be those things. Often, in fact, these factors are self-reinforcing: making money begets more opportunities to make money; being famous provides someone with more ways to leverage their celebrity; standards of beauty may change with the look of a Hollywood starlet. (Page 326)

The Efficient Market Theory Is Bullshit

Imagine there were no noise traders in the market. Everyone is betting on real information-signal. Prices are rational pretty much all the time, and the market is efficient.

But, if you think a market is efficient-efficient enough that you can't really beat it for a profit-then it would be irrational for you to place any trades, In fact, efficient-market hypothesis is intrinsically somewhat self-defeating. If all investors believed the theory-that they can't make any money from trading since the stock market is unbeatable-there would be no one left to make trades and therefore no market at all. (Page 363)

Chaos Theory Makes Dynamic Systems Hard To Predict

What could go wrong? Chaos theory. You may have heard the expression: the flap of a butterfly's wings in Brazil can set off a tornado in Texas. It comes from the title of a paper delivered in 1972 by MIT's Edward Lorenz, who began his career as a meteorologist. Chaos theory applies to systems in which each of two properties hold:

1. The systems are dynamic, meaning that the behavior of the system at one point in time influences its behavior in the future 2. And they are nonlinear, meaning they abide by exponential rather than additive relationships. (Page 118)

LaPace’s Demon: If We Knew Everything, The Past And Future Look Identical 🤯

Laplace, a French astronomer and mathematician. In 1814, Laplace made the following postulate, which later came to be known as LaPace’s Demon:

We may regard the present state of the universe as the effect of its past and the cause of its future. An intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future just like the past would be present before its eyes." (Page 112)