*Once you know the answer.
Executive summary
If you think common sense is a good thing, read this book.
Triumvirate for a complex world
The three books are:
- Obliquity by John Kay
- Adapt by Tim Harford
- Everything is Obvious* by Duncan Watts
There are two problems with the complex world that we live in:
- Our brains are too small
- It’s not clear that any brain would be good enough
Everything is Obvious* makes a devastating case for why all of us are highly incompetent. It is less compelling — though still good — on what to do about it. The what-to-do-about-it is where the other two books come to the rescue.
More common sense please
Here is a quote about the 2009 World Economic Forum in Davos:
… one indignant audience member announced to the audience, “What we need now is a return to common sense!” It’s an appealing notion, and drew loud applause at the time, but … two years earlier at the 2007 Davos meeting, much the same mix of businesspeople, politicians, and economists were congratulating one another … Did anyone suspect that they had somehow taken leave of their common sense? And if not, then how exactly would it help to return to it?
After highlighting how our intuition about physics is often wrong:
But as frustrating as it can be for physics students, the consistency with which our commonsense physics fails us has one great advantage for human civilization: It forces us to do science. In science, we accept that if we want to learn how the world works, we need to test our theories with careful observations and experiments, and then trust the data no matter what our intuition says.
Failure to learn
The book explains the following phenomenon:
In fact, no matter how many times we fail to predict someone’s behavior correctly, we can always explain away our mistakes in terms of things that we didn’t know at the time. In this way, we manage to sweep the frame problem under the carpet — always convincing ourselves that this time we are going to get it right, without ever learning what it is that we are doing wrong.
That “someone” whose behavior we get wrong could be a market.
A related problem is that we overfit our models — not only our statistical models but also our mental models.
Now bias
Figure 1: Cisco is “computing’s new superpower”.
Figure 2: Cisco is flawed.
Figure 3: Now we know the real story of Cisco.
Unfortunately, these explanations will suffer from exactly the same problem as all the explanations that went before them — that at no point in time is the story ever really “over.” Something always happens afterward, and what happens afterward is liable to change our perception of the current outcome, as well as our perception of the outcomes that we have already explained. It’s actually quite remarkable in a way that we are able to completely rewrite our previous explanations without experiencing any discomfort …
Favorite sentence
Why would we be interested in uninteresting things?
There are two reasons that I like this sentence:
- It is reminiscent of the proof that all numbers are interesting
- There is a good reason we should be interested in uninteresting things
Options plot
Page 147 shows quite a nice plot with a prediction distribution of a stock price based on the prices of the set of options on the stock.
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