(WARNING: This is a bit off topic - a bit of history and
then a modern Investing parallel).
Taleb makes an interesting point on history, and Homer’s Iliad,
“…the epic poet did not judge his heroes
by the result: Heroes won and lost battles in a manner that was totally
independent of their own valour; their fate depended upon totally external forces,
generally the explicit agency of the scheming gods.” (Taleb, Fooled by
Randomness , p39).
“Heroes are heroes
because they were heroic in behavior, not because they won or lost.” Of course to prove your heroic behavior,
you had to at least survive long enough to do something…heroic! (Luck?/Survivor Bias?).
Take Julius Caesar as an example however. Clearly one of history’s most skilled
Generals. But he was also very
lucky (…until he wasn’t)! (Hail
Imperator!)
His Battle of Alesia was a masterful example of
tactics. In a nutshell he besieged
Vercingetorix’s Gaulish town by surrounding it with trenches and fortifications
to starve them out. But, while
waiting on that, he anticipated reinforcements would arrive, and built a second
defensive wall around his army (Skill). An enormous army of reinforcements did indeed arrive
and attack. Caesar took desperate great
risks to win that battle, personally riding through the perimeter to spur on
the legionnaires, and leading a cavalry detachment to attack the enemy in the open
field, which forced his cavalry general to double his efforts after “seeing their leader undergoing such risk,”
(http://en.wikipedia.org/wiki/Battle_of_Alesia). Of course it was lucky he didn’t get
killed, as that usually ended such battles immediately, and world history would
be very different. Paul K. Davis
writes that "Caesar’s victory over
the combined Gallic forces established Roman dominance in Gaul for the next 500
years.”
Caesar accepted the role of fate in his outcomes; “the die
is cast” being one of his quotes.
The goddess of luck Fortuna was also consulted prior to battles and
appeased. But as Brad would say,
he positioned himself to get lucky.
He also was the first expert general/politician in writing his own
history and contemporary propaganda, which only discussed his skill, of course.
Caesar was skillful – and Caesar won (as did Wellington,
Eisenhower, Nelson). But there are
undoubtedly foolish generals that have won a war (most of the British Generals
in France WW1 for instance, who were there mostly due to peerage over inate ability);
and there are skillful generals that lost (Mark Antony, Rommel, Napoleon).
The ancient world was one where the gods interfered in life,
where disease, famine and war uncontrollably altered lives and outcomes
randomly caused reversals of fortune.
They understood that randomness would have the final say in the outcome,
as probability couldn’t be assessed, despite skills or individual choices.
Taleb argues that “we
are left only with dignity as a solution – dignity defined as the execution of
a protocol of behavior that does not depend on immediate circumstance, p227).
This sounds a lot like having a PROCESS to me, in our situation
here, and something I’m certainly still working on developing.
Marc Antony lost to Octavian (Emperor Augustus – and Caesar’s
adopted son) in battle, and returned to Cleopatra and committed suicide. The Romans’ would have understood that
he had been skillful in command his whole life, lucky often, but that in defeat
he was stoic. His Heroism would
never have been questioned, and in fact suicide was heroic and expected of him.
Before getting onto a modern equivalent, one last point on
history’s view.
Chivalry evolved throughout the middle ages and was a set of
behaviors that gentlemen and knights would follow strictly. It was a formalized continuation of the
following of a dignified process that you would be judged by. Skill was important and displayed by
battle and jousts, but only in the context of being chivalrous. So it allowed for a bad outcome and
acceptance; if you followed the process you remained heroic and admired, even when
you were unlucky and lost.
But I believe we have lost that distinction now. Skill and Luck are not considered in those we follow anymore.
Babe Ruth would have been forgotten if he hadn’t been
successful – yet in baseball, luck is fairly important in deciding outcomes. In fact, in professional sports where
every player is highly skilled, luck plays a larger and often hidden component
to the outcomes. Yet they are
idolized as heroes.
In the investment world - even more so. No talking head investment manager
would have been on CNBC if they had been unable to make big money at some
point, a task where skill matters, but luck plays a huge part too.
Partly perhaps, is this because the narrative has changed? One - it is fed to us daily by compelling
sources that have biases. Two - is
that instead of being a narrative about the process of actions (skillful behavior
+ luck = any outcome), it is often a narrative about the outcome of actions (high
skill = successful outcome). The
latter often backed up with inaccurate or misleading statistics.
This plays into our brains difficulty in understanding
probability, especially in the face of a good narrative.
“Such tendency to make
and unmake prophets based on the fate of the roulette wheel is symptomatic of
our ingrained inability to cope with the complex structure of the randomness
prevailing in the modern world.” (Taleb,
Fooled by Randomness , p40).
I’m off to make my offering to the goddess Fortuna. “Fortune favors the bold,” afterall,
and it can’t hurt.
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