The Most Important Thing Is … Appreciating the Role of Luck
The Most Important Thing Is … Appreciating the Role of Luck
This chapter considers what is vital for successful investing: appreciating the role of luck. The investment world is not an orderly and logical place where the future can be predicted and specific actions always produce specific results. Much in investing is ruled by luck, chance, or randomness. In other words, a great deal of the success of everything carried out as investors is strongly dependent on the roll of the dice. This chapter explores the notion of luck by considering some of the ideas advanced by Nassim Nicholas Taleb in his book Fooled by Randomness. In particular, it examines Taleb’s concept of “alternative histories”—the other things that reasonably could have happened—and its relevance to investing. It also looks at the people who belong to what it calls the “I know” school; they ignore the presence of uncertainty and act in ways that will increase profits if they are right but expose them to increased losses if they are wrong. Comments and insights from four renowned investors and investment educators are included.
Keywords: luck, investment, randomness, investors, Nassim Nicholas Taleb, Fooled by Randomness, alternative histories, I know school, uncertainty
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