Fooled by Randomness by Nassim Nicholas Taleb Read Free Book Online Page B

reading complicated papers. Perhaps he should have been involved in the high-yield business, where he would have shined among those shallow-thinkers like John.
    So Nero tried to soothe his jealousy by investigating the rules of pecking order. Psychologists have shown that most people prefer to make $70,000 when others around them are making $60,000 than to make $80,000 when others around them are making $90,000. Economics, schmeconomics, it is all pecking order, he thought. No such analysis could prevent him from assessing his condition in an absolute rather than a relative way. With John, Nero felt that, for all his intellectual training, he was just another one of those who would prefer to make less money provided others made even less.
    Nero thought that there was at least a hint to support the idea of John being merely lucky—in other words Nero, after all, might not need to move away from his neighbor’s starter palazzo. There was hope that John would meet his undoing. For John seemed unaware of one large hidden risk he was taking, the risk of blowup, a risk he could not see because he had too short an experience of the market (but also because he was not thoughtful enough to study history). How could John, with his coarse mind, otherwise be making so much money? This business of junk bonds depends on some knowledge of the “odds,” a calculation of the probability of the rare (or random) events. What do such fools know about odds? These traders use “quantitative tools” that give them the odds—and Nero disagrees with the methods used. This high-yield market resembles a nap on a railway track. One afternoon, the surprise train would run you over. You make money every month for a long time, then lose a multiple of your cumulative performance in a few hours. He has seen it with option sellers in 1987, 1989, 1992, and 1998. One day they are taken off the exchange floors, accompanied by oversized security men, and nobody ever sees them again. The big house is simply a loan; John might end up as a luxury car salesman somewhere in New Jersey, selling to the new newly rich who no doubt would feel comfortable in his presence. Nero cannot blow up. His less oversized abode, with its four thousand books, is his own. No market event can take it away from him. Every one of his losses is limited. His trader’s dignity will never, never be threatened.
    John, for his part, thought of Nero as a loser, and a snobbish overeducated loser at that. Nero was involved in a mature business. He believed that he was way over the hill. “These ‘prop’ traders are dying,” he used to say. “They think they are smarter than everybody else, but they are passé.”
    THE RED-HOT SUMMER
    Finally, in September 1998, Nero was vindicated. One morning while leaving to go to work he saw John in his front yard unusually smoking a cigarette. He was not wearing a business suit. He looked humble; his customary swagger was gone. Nero immediately knew that John had been fired. What he did not suspect was that John also lost almost everything he had. We will see more details of John’s losses in Chapter 5 .
    Nero felt ashamed of his feelings of Schadenfreude, the joy humans can experience upon their rivals’ misfortunes. But he could not repress it. Aside from it being unchivalrous, it was said to bring bad luck (Nero is weakly superstitious). But in this case, Nero’s merriment did not come from the fact that John went back to his place in life, so much as it was from the fact that Nero’s methods, beliefs, and track record had suddenly gained in credibility. Nero would be able to raise public money on his track record precisely because such a thing could not possibly happen to him. A repetition of such an event would pay off massively for him. Part of Nero’s elation also came from the fact that he felt proud of his sticking to his strategy for so long, in spite of the pressure to be the alpha male. It was also because he would no longer