Credit Suisse - IQ versus RQ: Differentiating Smarts from Decision-Making Skills > 15min

Intelligence quotient (IQ) and rationality quotient (RQ) are distinct. Think of IQ as the horsepower of an engine and RQ as the output. ... We share the results of a classic test of calibration, which is an important facet of rationality. Well calibrated people know what they know and know what they don’t know. ... Consistent with past research, we find that participants overestimate their accuracy as their subjective probability estimates tend to be higher than the actual percent correct. ... Investors and executives can improve their rationality by keeping score, asking about others, using base rates, and updating probabilities. ... A large-scale forecasting project has shown that the best forecasters use inductive and numerical reasoning, have cognitive control and a growth mindset, and are open-minded and effective working as part of a team.

Nautilus - Why It’s Hard to Recognize the Unlikely < 5min

We are exposed to possible events all the time: some of them probable, but many of them highly improbable. Each rare event—by itself—is unlikely. But by the mere act of living, we constantly draw cards out of decks. Because something must happen when a card is drawn, so to speak, the highly improbable does appear from time to time. ... It is the repetitiveness of the experiment that makes the improbable take place. The catch is that you can’t tell beforehand which of a very large set of improbable events will transpire. The fact that one out of many possible rare outcomes does happen should not surprise us because of the number of possibilities for extraordinary events to occur. The probabilities of these singly unlikely happenings compound statistically, so that the chance of at least one of many highly improbable events occurring becomes quite high. ... Persi Diaconis, professor of statistics at Stanford University, describes extremely unlikely coincidences as embodying the “blade of grass paradox.” If you were to stand in a meadow and reach down to touch a blade of grass, there are millions of grass blades that you might touch. But you will, in fact, touch one of them. The a priori fact that the blade you touch will be any particular one has an extremely tiny probability, but such an occurrence must take place if you are going to touch a blade of grass. ... The devil is in the details of how we interpret what we see in life. And here, psychology—more so than mathematics or logic—plays a key role. We tend to remember coincidences such as the one I experienced with my editor Scott and conveniently forget the thousands of times we may have met someone and had a conversation finding absolutely nothing in common.

The New York Times - How ‘Advantage Players’ Game the Casinos 5-15min

Grosjean specializes in finding vulnerable games like the one in Shawnee. He uses his programming skills to divine the odds in various situations and then develops strategies for exploiting them. Only two questions seemed to temper his confidence in taking on this particular game. How long would they be allowed to play before being asked to leave? How much money would they be able to win? ... Many casino executives despise gamblers like Grosjean. They accuse him of cheating. Yet what he does is entirely legal. ... because regulated casino gambling now takes place in at least 40 states, casinos compete for customers in part by introducing new games, some of which turn out to be vulnerable. ... Common advantage-play techniques include “hole carding,” in which sharp-eyed players profit from careless dealers who unwittingly reveal tiny portions of the cards; “shuffle tracking,” or memorizing strings of cards in order to predict when specific cards will be dealt after they are next shuffled; and counting systems that monitor already dealt cards in order to estimate the value of those that remain in the deck. ... Teams of advantage players — which usually require one person to bet and another to spot dealers’ hole cards (those turned down and not supposed to be seen), track shuffles or count cards — have become so prevalent that they often find themselves in the same casino, at the same time, targeting the same game.

Quanta - A Unified Theory of Randomness 12min

Consider the most familiar random shape, the random walk, which shows up everywhere from the movement of financial asset prices to the path of particles in quantum physics. These walks are described as random because no knowledge of the path up to a given point can allow you to predict where it will go next. ... Beyond the one-dimensional random walk, there are many other kinds of random shapes. There are varieties of random paths, random two-dimensional surfaces, random growth models that approximate, for example, the way a lichen spreads on a rock. All of these shapes emerge naturally in the physical world, yet until recently they’ve existed beyond the boundaries of rigorous mathematical thought. Given a large collection of random paths or random two-dimensional shapes, mathematicians would have been at a loss to say much about what these random objects shared in common. ... have shown that these random shapes can be categorized into various classes, that these classes have distinct properties of their own, and that some kinds of random objects have surprisingly clear connections with other kinds of random objects. Their work forms the beginning of a unified theory of geometric randomness. ... “You take the most natural objects — trees, paths, surfaces — and you show they’re all related to each other,” Sheffield said. “And once you have these relationships, you can prove all sorts of new theorems you couldn’t prove before.” ... incoherent is not the same as incomprehensible. ... In practical terms, the results by Sheffield and Miller can be used to describe the random growth of real phenomena like snowflakes, mineral deposits, and dendrites in caves, but only when that growth takes place in the imagined world of random surfaces.

Oaktree - Expert Opinion 24min

The opinions of experts concerning the future are accorded great weight ... but they’re still just opinions. Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it. ... A lot of people's lives would be more tranquil and more productive if they accepted that what the media says about an upcoming event - and whether you watch of not - won't have any impact on the outcome. ... Today many analysts seem preoccupied with central bank behavior, government actions, trends in interest rates and currencies, and the movement of markets, as opposed to the fortunes of individual companies. … Most people don’t want to tempt fate by saying things will go well forever, and in fact they know they won’t. It’s just that they can’t decide what it is that will go wrong. The truth is that while I can enumerate them, the obvious candidates (changes in oil prices, interest rates, exchange rates, etc.) are likely to already be anticipated and largely priced in. It’s the surprises no one can anticipate that would more markets most if they were to happen. But (a) most people can’t imagine them and (b) most of the time they don’t happen. That’s why they’re called surprises. ... People began to ask me what inning we’re in during the financial crisis of 2008, and they’ve continued ever since.

Prospect - Gambling is a feature of capitalism—not a bug 11min

Financial markets accommodate both prudent insurers and reckless gamblers. They provide investors with an opportunity to diversify their portfolios, and allow gamblers to bet on future movements in interest rates. The coexistence of the two can allow speculators to make profits by stabilising prices—buying when markets are fearful, and selling when they are greedy. But when the gambling motive overwhelms the insurance motive, speculation becomes destabilising and then risk, far from being minimised by careful management, becomes concentrated in the hands of those who understand least what they are doing. And when regulators perceive insurance when they should see wagering, their actions magnify a crisis rather than minimise it. Such destabilising speculation, mischaracterised by regulatory authorities as prudent risk assessment, is what caused the global financial crisis of 2008. ... The coexistence of insurance and gambling goes back to the earliest days of markets in risk, and the interaction of the two has been central to financial history. But it was four developments in the second half of the 17th century that combined to frame the way we think about risk, and the institutions we have for dealing with it, through to the present day.

The New York Times - The No-Stats All-Star (2009) 30min

Here we have a basketball mystery: a player is widely regarded inside the N.B.A. as, at best, a replaceable cog in a machine driven by superstars. And yet every team he has ever played on has acquired some magical ability to win. ... The virus that infected professional baseball in the 1990s, the use of statistics to find new and better ways to value players and strategies, has found its way into every major sport. Not just basketball and football, but also soccer and cricket and rugby and, for all I know, snooker and darts — each one now supports a subculture of smart people who view it not just as a game to be played but as a problem to be solved. Outcomes that seem, after the fact, all but inevitable — of course LeBron James hit that buzzer beater, of course the Pittsburgh Steelers won the Super Bowl — are instead treated as a set of probabilities, even after the fact. The games are games of odds. Like professional card counters, the modern thinkers want to play the odds as efficiently as they can; but of course to play the odds efficiently they must first know the odds. Hence the new statistics, and the quest to acquire new data, and the intense interest in measuring the impact of every little thing a player does on his team’s chances of winning. In its spirit of inquiry, this subculture inside professional basketball is no different from the subculture inside baseball or football or darts. The difference in basketball is that it happens to be the sport that is most like life. ... the player who seems one step ahead of the analysts, helping the team in all sorts of subtle, hard-to-measure ways that appear to violate his own personal interests.