Sunday, June 1, 2008

Shaving swans at parties


Illustration: N8W


Don't miss Debt Rattle, June 1 2008: Walking through a hall of mirrors


Ilargi: I haven’t yet read Taleb’s bestselling Black Swans. It shouldn’t surprise those of you who come here regularly that I find little time to read books, given the time I spend reading the material I post here daily.

Then again, it shouldn’t surprise those same people either that I share quite a few opinions with Taleb on matters such as widespread incompetence, skewed views of the world, and the notion of leaving the world behind the way we found it.

What I would like to see more of -but hey, that’s just me- is his take on today’s, let’s call it: deliberate destruction of people and their resources, disguised as bungling stupidity. Think of Greenspan, Bernanke, and W., all of whom succeed in making people believe they simple don’t know any better.

I think that’s a crucial issue, also for Taleb, because without discussing it we’d think that today’s financial breakdown, the worst in history, as well as the invasion of Iraq, are black swans. They’re not. In reality, both are carefully orchestrated chapters in what a handful of Oz masters seek to be the next phase in the development of mankind. They are thus a pair of white swans.

PS: Taleb flies all over the planet giving talks to NASA, banks, governments etc. He gets $50.000 plus per speech, but I still wonder: why bother, when you have $50 million? Sounds awful to me. Something’s got to be wrong wrong with this Mediterraneo.


Nassim Nicholas Taleb: the prophet of boom and doom
by Bryan Appleyard
When this man said the world’s economy was heading for disaster, he was scorned. Now traders, economists, even Nasa, are clamouring to hear him speak

A noisy cafe in Newport Beach, California. Nassim Nicholas Taleb is eating three successive salads, carefully picking out anything with a high carbohydrate content.

He is telling me how to live. “The only way you can say ‘F*** you’ to fate is by saying it’s not going to affect how I live. So if somebody puts you to death, make sure you shave.”

After lunch he takes me to Circuit City to buy two Olympus voice recorders, one for me and one for him. The one for him is to record his lectures – he charges about $60,000 for speaking engagements, so the $100 recorder is probably worth it. The one for me is because the day before he had drowned my Olympus with earl grey tea and, as he keeps saying, “I owe you.” It didn’t matter because I always use two recorders and, anyway, I had bought a replacement the next morning.

But it’s important and it’s not, strictly speaking, a cost to him. Every year he puts a few thousand dollars aside for contingencies – parking tickets, tea spills – and at the end of the year he gives what’s left to charity. The money is gone from day one, so unexpected losses cause no pain. Now I have three Olympus recorders.

He spilt the tea – bear with me; this is important – while grabbing at his BlackBerry. He was agitated, reading every incoming e-mail, because the Indian consulate in New York had held on to his passport and he needed it to fly to Bermuda. People were being mobilised in New York and, for some reason, France, to get the passport.

The important thing is this: the lost passport and the spilt tea were black swans, bad birds that are always lurking, just out of sight, to catch you unawares and wreck your plans. Sometimes, however, they are good birds. The recorders cost $20 less than the marked price owing to a labelling screw-up at Circuit City. Stuff happens. The world is random, intrinsically unknowable. “You will never,” he says, “be able to control randomness.”

To explain: black swans were discovered in Australia. Before that, any reasonable person could assume the all-swans-are-white theory was unassailable. But the sight of just one black swan detonated that theory. Every theory we have about the human world and about the future is vulnerable to the black swan, the unexpected event. We sail in fragile vessels across a raging sea of uncertainty. “The world we live in is vastly different from the world we think we live in.”

Last May, Taleb published The Black Swan: The Impact of the Highly Improbable. It said, among many other things, that most economists, and almost all bankers, are subhuman and very, very dangerous. They live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems. Bankers and economists scorned and raged at Taleb. He didn’t understand, they said. A few months later, the full global implications of the sub-prime-driven credit crunch became clear.

The world banking system still teeters on the edge of meltdown. Taleb had been vindicated. “It was my greatest vindication. But to me that wasn’t a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve]. I wouldn’t use him to drive my car. These guys are dangerous. They’re not qualified in their own field.”

In December he lectured bankers at Société Générale, France’s second biggest bank. He told them they were sitting on a mountain of risks – a menagerie of black swans. They didn’t believe him. Six weeks later the rogue trader and black swan Jérome Kerviel landed them with $7.2 billion of losses.

As a result, Taleb is now the hottest thinker in the world. He has a $4m advance on his next book. He gives about 30 presentations a year to bankers, economists, traders, even to Nasa, the US Fire Administration and the Department of Homeland Security. But he doesn’t tell them what to do – he doesn’t know. He just tells them how the world is. “I’m not a guru. I’m just describing a problem and saying, ‘You deal with it.’”

Getting to know Taleb is a highly immersive experience. Everything matters. “Why are you not dressed Californian?” he asks at our first meeting. Everything in Newport Beach is very Californian. I’m wearing a jacket: it’s cold. He’s wearing shorts and a polo shirt. Clothes matter; they send signals. He warns against trusting anybody who wears a tie – “You have to ask, ‘Why is he wearing a tie?’”

He has rules. In California he hires bikes, not cars. He doesn’t usually carry his BlackBerry because he hates distraction and he really hates phone charges. But he does carry an Apple laptop everywhere and constantly uses it to illustrate complex points and seek out references. He says he answers every e-mail. He is sent thousands. He reads for 60 hours a week, but almost never a newspaper, and he never watches television.

“If something is going on, I hear about it. I like to talk to people, I socialise. Television is a waste of time. Human contact is what matters.”

But the biggest rule of all is his eccentric and punishing diet and exercise programme. He’s been on it for three months and he’s lost 20lb. He’s following the thinking of Arthur De Vany, an economist – of the acceptable type – turned fitness guru. The theory is that we eat and exercise according to our evolved natures.

Early man did not eat carbs, so they’re out. He did not exercise regularly and he did not suffer long-term stress by having an annoying boss. Exercise must be irregular and ferocious – Taleb often does four hours in the gym or 360 press-ups and then nothing for 10 days. Jogging is useless; sprinting is good. He likes to knacker himself completely before a long flight. Stress should also be irregular and ferocious – early men did not have bad bosses, but they did occasionally run into lions.

He’s always hungry. At both lunches he orders three salads, which he makes me share. Our conversation swings from high philosophy and low economics back to dietary matters like mangoes – bad – and apples – good as long as they are of an old variety. New ones are bred for sugar content. His regime works. He looks great – springy and fit. He shows me an old identity card. He is fat and middle-aged in the photo. He looks 10 years younger than that. “Look at me! That photo was taken seven years ago. No carbs!”

This is risk management – facing up to those aspects of randomness about which something can be done. Some years ago he narrowly survived throat cancer. The change in his voice was at first misdiagnosed as damaged vocal cords from his time on the trading floor. It can recur. Also he has a high familial risk of diabetes. He is convinced the diet of civilisation – full of carbs and sugar – is the problem. The grand doctors who once announced that complex carbohydrates are good for you are, to him, criminals responsible for thousands of deaths.

So, you are wondering, who is this guy? He was born in 1960 in Lebanon, though he casts doubt on both these “facts”. The year is “close enough” – he doesn’t like to give out his birth date because of identity theft and he doesn’t believe in national character. He has, however, a regional identity; he calls himself a Levantine, a member of the indecipherably complex eastern Mediterranean civilisation. “My body and soul are Mediterranean.”

Both maternal and paternal antecedents are grand, privileged and politically prominent. They are also Christian – Greek Orthodox. Startlingly, this great sceptic, this non-guru who believes in nothing, is still a practising Christian. He regards with some contempt the militant atheism movement led by Richard Dawkins.

“Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”

Take away religion, he says, and people start believing in nationalism, which has killed far more people. Religion is also a good way of handling uncertainty. It lowers blood pressure. He’s convinced that religious people take fewer financial risks.

He was educated at a French school. Three traditions formed him: Greek Orthodox, French Catholic and Arab. They also taught him to disbelieve conventional wisdom. Each tradition had a different history of the crusades, utterly different. This led him to disbelieve historians almost as much as he does bankers.

But, crucially, he also learnt from a very early age that grown-ups have a dodgy grasp of probability. It was in the midst of the Lebanese civil war and, hiding from the guns and bombs, he heard adults repeatedly say the war would soon be over. It lasted 15 years. He became obsessed with probability and, after a degree in management from the Wharton business school at Pennsylvania University, he focused on probability for his PhD at the University of Paris.

For the non-mathematician, probability is an indecipherably complex field. But Taleb makes it easy by proving all the mathematics wrong. Let me introduce you to Brooklyn-born Fat Tony and academically inclined Dr John, two of Taleb’s creations. You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time? Dr John gives the answer drummed into the heads of every statistic student: 50/50. Fat Tony shakes his head and says the chances are no more than 1%. “You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”

The chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe. It is far, far more likely that somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one thing that drives Taleb more than anything else is the determination not to be a sucker. Dr John is the economist or banker who thinks he can manage risk through mathematics. Fat Tony relies only on what happens in the real world.

In 1985, Taleb discovered how he could play Fat Tony in the markets. France, Germany, Japan, Britain and America signed an agreement to push down the value of the dollar. Taleb was working as an options trader at a French bank. He held options that had cost him almost nothing and that bet on the dollar’s decline. Suddenly they were worth a fortune. He became obsessed with buying “out of the money” options. He had realised that when markets rise they tend to rise by small amounts, but when they fall – usually hit by a black swan – they fall a long way.

The big payoff came on October 19, 1987 – Black Monday. It was the biggest market drop in modern history. “That had vastly more influence on my thought than any other event in history.”

It was a huge black swan – nobody had expected it, not even Taleb. But the point was, he was ready. He was sitting on a pile of out-of-the-money eurodollar options. So, while others were considering suicide, Taleb was sitting on profits of $35m to $40m. He had what he calls his “f***-off money”, money that would allow him to walk away from any job and support him in his long-term desire to be a writer and philosopher.

He stayed on Wall Street until he got bored and moved to Chicago to become a trader in the pit, the open-outcry market run by the world’s most sceptical people, all Fat Tonys. This he understood.

His first book, Dynamic Hedging: Managing Vanilla and Exotic Options, came out in 1997. He was moving away from being a pure trader, or “quant” – a quantitative analyst who applies sophisticated maths to investments – to being the philosopher he wanted to be. He was using the vast data pool provided by the markets and combining it with a sophisticated grasp of epistemology, the study of how and what we know, to form a synthesis unique in the modern world.

In the midst of this came his purest vindication prior to sub-prime. Long-Term Capital Management was a hedge fund set up in 1994 by, among others, Myron Scholes and Robert C Merton, joint winners of the 1997 Nobel prize in economics. It had the grandest of all possible credentials and used the most sophisticated academic theories of portfolio management. It went bust in 1998 and, because it had positions worth $1.25 trillion outstanding, it almost took the financial system down with it.

Modern portfolio theory had not accounted for the black swan, the Russian financial crisis of that year. Taleb regards the Nobel prize in economics as a disgrace, a laughable endorsement of the worst kind of Dr John economics. Fat Tony should get the Nobel, but he’s too smart. “People say to me, ‘If economists are so incompetent, why do people listen to them?’ I say, ‘They don’t listen, they’re just teaching birds how to fly.’ ”

Taleb created his own hedge fund, Empirica, designed to help other hedge funds hedge their risks by using a refined form of his options wins – running small losses in quiet times and winning big in turbulent markets. It did okay but, after a good first year, performed poorly when the market went though a quiet spell. He’s still involved in the markets, but mainly as a hobby – “like chess”.

Finally, with two books – Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, and The Black Swan – and a stream of academic papers, he turned himself into one of the giants of modern thought. They’re still trying to tear him down, of course; last year The American Statistician journal devoted a whole issue to attacking The Black Swan.

But I wouldn’t bother. A bad but rather ignorant review in The New York Times resulted in such a savage rebuttal from Taleb on his website, www.fooledbyrandomness.com, that reviewers across the US pulled out in fear of his wrath. He knows his stuff and he keeps being right.

And what he knows does not sound good. The sub-prime crisis is not over and could get worse. Even if the US economy survives this one, it will remain a mountain of risk and delusion. “America is the greatest financial risk you can think of.”

Its primary problem is that both banks and government are staffed by academic economists running their deluded models. Britain and Europe have better prospects because our economists tend to be more pragmatic, adapting to conditions rather than following models. But still we are dependent on American folly.

The central point is that we have created a world we don’t understand. There’s a place he calls Mediocristan. This was where early humans lived. Most events happened within a narrow range of probabilities – within the bell-curve distribution still taught to statistics students. But we don’t live there any more. We live in Extremistan, where black swans proliferate, winners tend to take all and the rest get nothing – there’s Bill Gates, Steve Jobs and a lot of software writers living in a garage, there’s Domingo and a thousand opera singers working in Starbucks. Our systems are complex but over-efficient. They have no redundancy, so a black swan strikes everybody at once. The banking system is the worst of all.

“Complex systems don’t allow for slack and everybody protects that system. The banking system doesn’t have that slack. In a normal ecology, banks go bankrupt every day. But in a complex system there is a tendency to cluster around powerful units. Every bank becomes the same bank so they can all go bust together.”

He points out, chillingly, that banks make money from two sources. They take interest on our current accounts and charge us for services. This is easy, safe money. But they also take risks, big risks, with the whole panoply of loans, mortgages, derivatives and any other weird scam they can dream up. “Banks have never made a penny out of this, not a penny. They do well for a while and then lose it all in a big crash.”

On top of that, Taleb has shown that increased economic concentration has raised our vulnerability to natural disasters. The Kobe earthquake of 1995 cost a lot more than the Tokyo earthquake of 1923. And there are countless other ways in which we have built a world ruled by black swans – some good but mostly bad. So what do we do as individuals and the world? In the case of the world, Taleb doesn’t know. He doesn’t make predictions, he insults people paid to do so by telling them to get another job. All forecasts about the oil price, for example, are always wrong, though people keep doing it. But he knows how the world will end.

“Governments and policy makers don’t understand the world in which we live, so if somebody is going to destroy the world, it is the Bank of England saving Northern Rock. The biggest danger to human society comes from civil servants in an environment like this. In their attempt to control the ecology, they don’t understand that the link between action and consequences can be more vicious. Civil servants say they need to make forecasts, but it’s totally irresponsible to make people rely on you without telling them you’re incompetent.”

Bear Stearns – the US Northern Rock – was another vindication for Taleb. He’s always said that whatever deal you do, you always end up dealing with J P Morgan. It was JPM that picked up Bear at a bargain-basement price. Banks should be more like New York restaurants. They come and go but the restaurant business as a whole survives and thrives and the food gets better. Banks fail but bankers still get millions in bonuses for applying their useless models.

Restaurants tinker, they work by trial and error and watch real results in the real world. Taleb believes in tinkering – it was to be the title of his next book. Trial and error will save us from ourselves because they capture benign black swans. Look at the three big inventions of our time: lasers, computers and the internet. They were all produced by tinkering and none of them ended up doing what their inventors intended them to do. All were black swans. The big hope for the world is that, as we tinker, we have a capacity for choosing the best outcomes.

“We have the ability to identify our mistakes eventually better than average; that’s what saves us.” We choose the iPod over the Walkman. Medicine improved exponentially when the tinkering barber surgeons took over from the high theorists. They just went with what worked, irrespective of why it worked. Our sense of the good tinker is not infallible, but it might be just enough to turn away from the apocalypse that now threatens Extremistan.

He also wants to see diplomats dying of cirrhosis of the liver. It means they’re talking and drinking and not going to war. Parties are among the great good things in Taleb’s world.

And you and me? Well, the good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures. This insulates you from bad black swans and exposes you to the possibility of good ones. Your smallest investment could go “convex” – explode – and make you rich. High-tech companies are the best. The downside risk is low if you get in at the start and the upside very high. Banks are the worst – all the risk is downside. Don’t be tempted to play the stock market – “If people knew the risks they’d never invest.”

There’s much more to Taleb’s view of the world than that. He is reluctant to talk about matters of human nature, ethics or any of the traditional concerns of philosophy because he says he hasn’t read enough. But, when pressed, he comes alive.

“You have to worry about things you can do something about. I worry about people not being there and I want to make them aware.” We should be mistrustful of knowledge. It is bad for us. Give a bookie 10 pieces of information about a race and he’ll pick his horses. Give him 50 and his picks will be no better, but he will, fatally, be more confident.

We should be ecologically conservative – global warming may or may not be happening but why pollute the planet? – and probablistically conservative. The latter, however, has its limits. Nobody, not even Taleb, can live the sceptical life all the time – “It’s an art, it’s hard work.” So he doesn’t worry about crossing the road and doesn’t lock his front door – “I can’t start getting paranoid about that stuff.” His wife locks it, however.

He believes in aristocratic – though not, he insists, elitist – values: elegance of manner and mind, grace under pressure, which is why you must shave before being executed. He believes in the Mediterranean way of talking and listening. One piece of advice he gives everybody is: go to lots of parties and listen, you might learn something by exposing yourself to black swans.

I ask him what he thinks are the primary human virtues, and eventually he comes up with magnanimity – punish your enemies but don’t bear grudges; compassion – fairness always trumps efficiency; courage – very few people have this; and tenacity – tinker until it works for you.

“Let’s be human the way we are human. Homo sum – I am a man. Don’t accept any Olympian view of man and you will do better in society.”

Above all, accept randomness. Accept that the world is opaque, majestically unknown and unknowable. From its depths emerge the black swans that can destroy us or make us free. Right now they’re killing us, so remember to shave. But we can tinker our way out of it. It’s what we do best. Listen to Taleb, an ancient figure, one of the great Mediterranean minds, when he says: “You find peace by coming to terms with what you don’t know.” Oh, and watch those carbs.

Taleb's top life tips:

1 Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.

2 Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.

3 It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.

4 Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.

5 Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.

6 Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.

7 Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).

8 Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.

9 Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.

10 Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.



12 comments:

Melancholy Korean said...

Same thought exactly. Share similar tastes with Taleb (I mean, come on, he loves Cavafy) but I would love him better and respect him more if he weren't so much in the public eye. Clamoring for attention should be beneath him.

Anonymous said...

you know, this taleb guy sounds like a real jerk to me.

Anonymous said...

Taleb's whole philosophy sounds like a variant of "shit happens."

So why is he so famous? Because Americans have forgotten the obvious?

Musashi said...

The problem I have with Taleb is that every time someone mentions his "black swan" it immediately reminds me of Dostoevsky and his white crow.

To me this makes the whole line of thought suspect of plagiarism.

gaddeswarup said...

See also the Bloomberg article
http://www.fooledbyrandomness.com/bloombergProfile.pdf
which Taleb recommends. Perhaps, Emperica which he ran gives a clue to his attitude:
"The goal was to protect investors against market crashes. Knowing how much they would pay for options, the two guaranteed investors they wouldn't lose more than 13 percent a year.

``Our aim was not to make money,'' Taleb says. ``I make no claims of being able to beat markets.''

Empirica did outperform the market. In 2000, its returns rose by about 60 percent on the back of high volatility and the bursting of the dot-com bubble, Taleb says. The next year, after the Sept. 11 terrorist attacks, nervous investors came flocking. Then volatility dropped as the stock market slowly drifted down, removing the opportunities to profit from wide market swings.

In 2002, Empirica posted its worst year as returns fell about 12 percent, Taleb says, while the Dow Jones Industrial Average dropped 17 percent.

``I knew he was likely to lose money most of the time because it was kind of an insurance,'' says Jean Karoubi, an Empirica investor and chief executive officer of LongChamp Group Inc., the New York-based hedge fund unit of Silvercrest Asset Management Group LLC, which manages about $10 billion."
His general attitude in practice seems to be 'conservative':
``If you are in banking and lending, surprise outcomes are likely to be negative for you,'' Taleb writes. ``Put yourself in situations where favorable consequences are much larger than unfavorable ones.''
Extremes are more likely in finance than in the real world, Taleb says. His attitude to global warming is similar. Generally there seem to some good observations and a good track record.
But apart from being prudence about finance and some emphasis on empirical work, does he have any suggestions about government, planning, interventions etc? I do not know.

scandia said...

The comments about Taleb bring Naomi Klein to mind, specifically her book, "The Shock Doctrine". The financial crises that appear random,out of the blue as black swans are anything but, are white swans that requied intention.
I have a more sinister view of what is called incompetence.

Brian M. said...

The black swan thing isn't plagarism of Dostoevsky. Its been a philosophical cliche in the Anglo tradition since John Stuart Mill's 1843 book A System of Logic. I heard the example used a number of times while I was going though school before this Taleb guy ever wrote his stuff.

CrystalRadio said...

He didn’t understand, they said. A few months later, the full global implications of the sub-prime-driven credit crunch became clear.


ilargi and Stoneleigh, I think you two were well aware in that regard before the event, so it couldn't have been a black swan, but then, since most 'economists' didn't recognize it, for them it couldn't have been a white swan.

Mind if I coin the 'Grey swan of ignore-ance'?

Gee musashi, you take me back to my youth with that Dostoevsky and his white crow. and at the same time show me how badly my memory has fared in the meanwhile. In plainer words ... what is that white crow? Damned if I can remember.

BTW, really, that taleb must be a Black
Genius to make so much out of so little, and the term, 'Black Swan', isn't that such an elegantly marketable image?

Anonymous said...

Chances coin coming up heads in one flip is 50% (or 0.5).
Chances that 41 consecutive flips all coming up heads are 0.5 ^ 41 = 4.5 * 10^-13.

Fat Tony and Dr John are both right, they are just answering different questions.

Musashi said...

CR
Exact same line of reasoning using the opposite image.

Black Swan = 1 / White Crow

Both equally rare birds based on general knowledge at the time of the writings.
Taleb at most colorized the original film.

Brian M said...

No anonymous, the chance of a FAIR coin coming up heads once is (about) 50%.

The odds of a fair coin coming up heads 40 times in a row is in the 10E-12 or 13 range (depending on just how close to fair a "fair" coin is).

What are the odds that a coin that has come up heads 40 times will come up heads the NEXT time? It depends whether the coin is fair or not. In math land, you can stipulate a fair coin, and answer 50%ish, but the math ALSO says that if the coin has already come up heads 40 times in a row that is powerful evidence that the coin ISN't fair.

What are the odds that a coin that has come up heads 40 times in a row is a FAIR coin? Well, Let P(A) be the odds of the coin being fair if we knew nothing else about it (pretty good), and p(A/B) be the odds of it being fair given that it has shown heads 40 times in a row.

According to Bayes Theorem p(A/B) = p(B/A)p(A)/P(B) as long as p(B) is non-zero. Now P(B) is small and hard to estimate, because it is the sum of the odds of a fair coming up heads 40 times, and the odds of someone slipping in an unfair coin. But no way are the odds of slipping a trick coin going to be as low as 10E-13 or even close. So P(B) will be much larger than P(B/A) and thus P(A/B) is going to be very low. That means odds are very high the coin toss is rigged, and thus odds are very high that the next toss will be heads too.

Fat Tony is right and Dr. John is using math he hasn't really understood. Probability theory DOES predict the odds of the 41st toss being heads given that the first 40 have been, as very close to 1 if you do it right, by going through the Bayesian analysis, because you can't assume the events are independent! And exactly this damn Bayesian problem happens all the time in the real world with false positives on drug tests and DNA matches and pregnancy tests and what not. Even when the odds of a false positive are quite low, if the odds of true positive are also quite low, the odds that a given positive is a false one can be quite high.

CrystalRadio said...

Thanks musashi but I guess I should have expressed myself better, what is the Dostoevsky story, that one with the white cow:)

I think you are right about the colourization ...green!