What if things weren’t as they seem?

Investors rely on predicting the outcome of events. Causation. If this happens, then that will.

But what if randomness and uncertainty were the real movers and shakers of future events? It’s a scary thought. But it’s one that could make you a wiser investor.

It’s all in the Ludic fallacy theory of controversial polymath Nassim Taleb.

We deeply need to be assured it will all end up one way or another. Depression or bounce? Recession or depression. Up or down. The problem is we ignore the random because it is abstract, not logical, and therefore takes more effort to uncover.

Taleb’s exposition of the Ludic fallacy [from Wikipedia]:

We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotional laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage (b******t), the pompous Gaussian economist, the mathematicized crap, the pomp, the Academie Francaise, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated.

Alas, we are not manufactured, in our current edition of the human race, to understand abstract matters — we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial — and we do not know it. This is not a psychological problem; it comes from the main property of information. The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort.

Or take Taleb’s “black swan” events. This from the first chapter of his book The Black Swan: The Impact of the Highly Improbable.

Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird. [...]

Think of the terrorist attack of September 11, 2001: had the risk been reasonably conceivable on September 10, it would not have happened. If such a possibility were deemed worthy of attention, fighter planes would have circled the sky above the twin towers, airplanes would have had locked bulletproof doors, and the attack would not have taken place, period. Something else might have taken place. What? I don’t know.

Is this why crashes blindside investors? We buy into the narrative of Wall Street… and then the inconceivable comes along and knocks it down.

At Contrarian Profits, we like to think we at least question that narrative. Poke fun at it. Turn it on its head.

Not just for the fun of it.

But because it might, now and again, beam a light into the darkness.