Is there really such a thing as a small one?
Yes.
But that's not the following.
First of all, not to buy lottery tickets;
Secondly, it's not gambling either;
Thirdly, it is not all in for news stocks or Bitcoin.
So what is it exactly?
This article will reveal a secret to you:
Some low-probability events can be superimposed into high-probability events, and the special option that the event has because of the "small probability" will bring the opportunity to make a lot of money.
This secret alone is not enough, but also a guide to the use of the "second order":
A good bet needs the shelter of a convex curve.
The above two items are the so-called "alchemy" with small probabilities.
One
Let's think about it backwards first, and look at an example of a very small probability but a large loss.
Please look at the title.
Surviving blue and white porcelain
Ming blue and white porcelain is very valuable. For example, the blue and white Ruyi Hanging Shoulder Folded Branches and Fruit Plum Vase (36.5 cm high) from the Yongle period of the Ming Dynasty sold for HK$168.66 million in 2011.
Let's assume that the probability of a blue and white disc being broken by mistake within a year is 3%.
If the Ming Dynasty produced 10,000 blue and white unicorn plates during the Zhengde period (about 500 years ago), how likely is it to see such plates now?
(The title comes from "Probability Theory" edited by He Shuyuan)
If you don't calculate, you can estimate casually, how many Zhengde blue and white unicorn plates exist?
Write down your estimates and look at the answers.
The calculation is as follows:
The first step is to calculate the probability that a blue and white disc will not be broken to this day.
In my last article, "Why Are Really Smart People Probability Masters?" (Introduction to Zero Formulas), I introduced how to calculate this kind of problem.
The probability of not being broken in 500 years = (1-0.03) to the power of 500 = 2.43 times 10 to the minus seventh power.
被打破的概率q=1-p=0.999999756
The second step is to calculate the probability that 10,000 blue and white discs have been handed down to this day without being broken.
The probability of 10,000 blue and white discs being broken is q10,000 to the power = 0.99757,
Then the probability that these 10,000 plates are still surviving is 1-0.99757=0.00243.
In other words, today, there is a 2.43 per 1,000 probability that you can still see this kind of blue and white disk.
If 5 million blue and white discs were produced (Zhengde in the Ming Dynasty), how likely is it that they can still be seen today?
The answer is:
The probability that this blue and white disc has been handed down to this day is about 70.48%.
Do you have a sentence in your mind:
What should be broken, sooner or later will be broken.
Isn't this Murphy's Law?
Two
Murphy's Law states: "Whatever can go wrong, it will go wrong."
There are two prerequisites for Murphy's Law to hold:
1. The probability of greater than zero;
2. The time is long enough (that is, the sample is large enough, whether it is time or space).
Just like the blue and white disc example above, the probability of breaking it every year is only 3%, and there are 10,000 of them, but after 500 years, the probability of at least one remaining is only 2.43 in 1,000.
I call this "compound interest of probability".
The original sentence of Murphy's Law is that if there are two or more ways to do something, and one of the choices will lead to disaster, someone must make that choice.
"Murphy's theorem" has four main aspects:
1. Nothing is as simple as it seems;
2. Everything will take longer than you expect;
3. Things that go wrong will always go wrong;
Fourth, if you're worried about something happening, it's more likely to happen.
Murphy's Law seems to be a secular version of the second law of thermodynamics. As one of the three fundamental laws of thermodynamics, the second law of thermodynamics states the irreversibility of thermodynamic processes:
In the same way that isolated systems spontaneously evolve in the direction of thermodynamic equilibrium, the state of maximum entropy, the second type of perpetual motion machine will never be realized.
The 5 million blue and white discs, which have been mostly inevitably broken one by one over the course of 500 years, seem to say that Murphy's law and entropy increase are essentially the same thing.
Interpreted by entropy increase, the plate will go from the current state of order (good plate) to the state of disorder (broken plate).
From an investment perspective, there are also a number of laws derived from this:
- Munger said: What cannot be moved forever will stop sooner or later;
- Warren Buffett said: You have to buy companies that fools can run well, because sooner or later all companies will fall into the hands of fools.
If the transition from order to disorder is "irreversible", why can humans still reproduce and evolve on Earth?
Let's put that aside for a moment and jump to the next section.
Three
Let's rewind the topic again:
Since small probability events cannot be avoided when the sample size is large enough, can we make a lot of money by betting that "the blue and white plate will break sooner or later"?
Is there such a business opportunity in reality?
Yes.
The most vivid example is the true story told in the movie "The Big Short".
In the film, Batman plays Michael Burry, an investment legend who founded the Scion Fund in 2000 and achieved a net return of 489% after fees by 2008.
Over the same period, the S&P 500 returned just 3%.
How did Michael Burry do it?
It is a blue and white porcelain that bets on "sooner or later it will break".
Michael Bury lost an eye as a child and was withdrawn, perhaps better at independent thinking because of this. He was a doctor by profession and started out as an amateur investor.
Let me quickly summarize Michael Burry's investment philosophy and style:
1. At first he was a believer in Graham's "value investing", and later he may still be, but he uses it more freely;
2. Perhaps because of the low starting point, he began to look for opportunities in cheap, unpopular, small-capitalization, and illiquid stocks;
3. His core strategy is to look for grossly undervalued bargains under the principle of 100% compliance with the margin of safety;
4. Don't predict the direction of the market, because the market is always irrational.
In a nutshell, he is a value investor who is more tolerant of probability fluctuations.
Let's talk about the story told in the movie. I've made a brief summary:
The strategy of the big shorts
Time: 2005-2007.
Opportunity: In 2005, it was discovered that the U.S. had a poor mortgage repayment record and a rising default rate.
Bet: Bet on the bursting of the real estate bubble and short subprime mortgages.
Bets: CDS. If you lose, pay 1.5% of the premium per year, and if you win, you will earn 30-50 times the premium payout.
Process: Betting began in 2005, and in 2006 the fund was withdrawn sharply and suffered.
Result: In 2007, the subprime mortgage crisis erupted, making a big profit.
Let's imagine this:
There is a blue and white plate worth 200 million in the Ming Dynasty, which was put in the living room of the house by a local tyrant to show off. Once you went to his house as a guest, and found that there were three bear children in his house, who were fighting every day, often breaking things, and it was useless for parents to scold them.
You think to yourself, despite the owner's care, sooner or later that plate will be ruined by the bear children.
You estimated in your mind:
- The probability of a plate being broken within a year is about 30%;
- So the probability of not being broken in two years is (1-30%) (1-30%) ✖️ = 49%;
- That is, the probability of being broken within two years (1-49%) = 51%.
So, you said to the master: Let's cooperate, I'll pay for your plate to buy insurance, in case something happens, we will pay half of the money.
That's probably what it means (let's not "bar" the plausibility and details of this fake story).
Going back to "The Big Short", even if Michael Bury predicted that the subprime mortgage crisis would happen, who would give him a small amount of leverage?
There really is.
This tool is CDS (Credit Default Swap): it is equivalent to you buying insurance for someone else's house, and if you lose money, it will be yours.
CDS has been likened to "insuring a house that is about to be engulfed by a fire, and the house is someone else's."
It's like the story I made up above to help the local tyrant's blue and white plate buy insurance.
The CDS rate is only 1.5% per annum, and the contract can last up to 30 years.
Using our probability calculations above, this game that looks like gambling has a win rate of close to 100% and a small risk of bursting.
You see, it doesn't look like an outsider's version of the "Russian Carousel Game":
There is a group of people playing a game of Russian turntable, and everyone shoots themselves in the head with a revolver loaded with a bullet.
You sit next to you and bet that you'll make $500,000 if someone gets shot, but you're going to pay a hundred dollars at a time for everyone who shoots themselves but doesn't get shot.
The secret is very simple:
1. No matter how small the probability, as long as you continue to play, someone will definitely get shot;
2. The price you pay is small, and the return you get is great.
You might say, why is there such a pie in the world?
The problem is that when pies appeared, very few people thought it was a pie.
It's the same as Columbus's discovery of the New World.
Let's break it down:
First things first: the first to recognize a pie is actually a very difficult thing.
How did our protagonist, Michael Burry, discover pie?
He had read hundreds of prospectuses of mortgage bonds, each of which had hundreds of pages.
He is said to have been the first person other than a lawyer to actually peruse these complex documents.
Secondly: from the discovery of the pie to the mouth, it is a painful process.
From the time the bet was placed until the blue and white plate was broken, Michael Burry waited three years. In the middle of this, because of the sharp drawdown of the fund in 2006, he was devastated by investors, and ordinary people could not hold on for a long time.
Even if it turned out that he was right, the investors redeemed it early, and did not let him create a greater miracle.
Investment is like this, even if the pie is in front of you, people may not see it clearly.
Four
Doubt 1: Slowly, don't we always hear that we have to bet on high-probability events?
Doubt 2: Shouldn't we stay away from shorting and financial derivatives?
What is the difference between betting on a small probability event and a gambler?
For this problem, it needs to be analyzed from two angles to have a more intuitive perception.
Angle 1: Some events with a small probability will be superimposed into a high-probability event.
Above, we have already done two calculations in this regard.
Angle 2: Overlay (or "time") has a cost.
To put it in a slightly more general way, it is that things with negative expectations can't be added to things with positive expectations.
That's why the harder you work at the casino, the more you lose.
In the example of "The Big Short" above, Michael Burry's cost is a "positive expectation" thing, even if it is superimposed for 10 years, for an expected return of 30-50 times.
And a person spends a few dollars to buy a lottery ticket, it seems that the cost is very low, but over the years, the probability of winning is still very small, and it is still a "negative expectation" thing.
What matters is expectation, not just probability.
Combining the above two perspectives, the secret lies in:
What you have to do is to calculate the cost of time and calculate the expected value of the bet accordingly.
Although the reason is simple, even professional investment professionals often fall into trouble here.
I remember a few years ago, there was a foreign futures master who predicted the trend of gold very accurately. However, before the prophecy came true, he himself had already liquidated.
Even if it seems right, even if it's just a little bit off, it's gambling.
As Keynes said when summing up the lesson of losing money in stock trading:
"The market will continue to be irrational for longer than you can stay bankrupt. ”
In 1965, at the age of 90 with no heirs, Jeanne Calmont signed an agreement that was common in France, selling her apartment to her lawyer at a low price equal to 10 years of living expenses.
Why is the price so low? It turns out that this is a VAM agreement. The lawyer agrees to pay her monthly living expenses until her death, an agreement sometimes called a "reverse loan".
The lawyer was 47 years old.
However, Calman lived for a long time.
The lawyer died of cancer in December 1995 at the age of 78. His widow continued to pay for Calman's living expenses.
It took another two years for the 122-year-old to pass away.
(22-year-old Calman, 1897)
Five
The key words of Taleb in his book "Antifragile" are:
Asymmetry.
- Most of the people who always have to assert their correctness are vulnerable.
- Those who are able to grow stronger from their mistakes are antifragile.
Taleb says his job is to connect the following four elements with a basic asymmetrical structure:
Vulnerability equals losing more than gaining, and disadvantages outweigh advantages, i.e. equals (unfavorable) asymmetry.
Antifragility equals gaining more than losing and more favours than disadvantages, i.e. equals (favourable) asymmetry.
How can this antifragility be achieved?
The solution given by Taleb is:
Barbell (or doublet) strategy.
He jokingly gave an example:
- The wife in monogamy achieves this transformation by marrying an accountant and then having an affair with a rock star.
- A writer writes better if he can do a job during the day that has nothing to do with his writing activities.
To be serious:
If 90% of your funds are held in cash (assuming you are not exposed to inflation) or stored in so-called "store of value", and the remaining 10% is invested in high-risk or extremely high-risk securities, you cannot lose more than 10% and there is no limit to your gains.
Conversely, if a person invests 100% of his or her money in so-called "medium" risk securities, he is likely to be exposed to a devastating risk due to a miscalculation.
Thus, the barbell strategy compensates for the fact that the risk of rare events is immeasurable and susceptible to miscalculations, that is, the maximum loss of the financial barbell strategy is known.
Compared with the serious description, I agree more with Taleb's view of the writer.
It's hard for me to imagine myself being a professional writer, although every time I go back to Canada and I'm asked about my profession, I always say I'm a "Writer" (which saves a lot of time).
Returning to the "small probability" topic of this article, Taleb's barbell structure is actually a bit off topic. Although this structure actually provides a more universal "antifragile" framework.
I'm focusing on the 10% "make a lot of money" part.
Thales' story balances my subject matter with Taleb's assertion.
As a philosopher, Thales faced two worldly pressures, one to prove his wisdom and the other to prove his "ability."
This was not a problem for the philosopher, until one day he got tired of hearing his business partners sarcastically say that "those who have the ability to do business, others study philosophy".
I understand how Thales feels. For someone like me who looks like a useless scholar, in some boring business and social situations, some people want to ask you to show your bank balance.
And at other times, for example, at a public event that I rarely attend, someone asked, "Why did your official account receive an advertisement, and are you short of money?"
If the skeptic had known that I would be pushing away nearly 100 "co-op ads" a month, and the price of each ad, his "other people-only cleanliness demands" might have been even more insane.
The philosopher Thales did something amazing:
He made a down payment and rented the seasonal use of all the olive oil presses near Miletus and Chios at a very low rent.
This strategy is consistent with the previous case in this article, taking advantage of favorable asymmetry.
Thales bought an "option", the right to rent the machine first.
The result: a bumper olive harvest that year, a huge increase in demand for olive oil presses, and he made a fortune by asking the press owner to sublease the machines on the terms he offered.
What if the olive harvest is not good?
If we emphasize that Thales predicts the coming year's climate, it would diminish the value and veracity of the legend.
Why?
1. Even today, the climate is difficult to predict, so it is unreal;
2. It is unpredictable, but it is also possible to bet, which is the meaning of "convexity".
After making a fortune, Thales returned to the world of philosophy.
The advantage of proper wealth is that you can think independently without being dragged down by wealth (which is the key to Stoicism).
Because money itself is fragile.
Six
Asymmetry, is a "nonlinear" form.
"Linear" is easy to understand. If you are doing a stable job, earning 10,000 yuan a month, 60,000 yuan in half a year, and 120,000 yuan a year, this is linear: proportionally expanded, the future is a straight line that seems to be able to look to the end.
For example, if you buy apples by the pound, it is also linear.
There are two types of "nonlinearity":
One is a convex curve at the top and concave at the bottom;
One is a concave curve.
The second type of concave and convex is the "antifragile" curve that we want to pursue.
For example, in the story of the olive oil press mentioned earlier, the curve is as follows:
(This image is from Antifragile)
We always say that we should be friends of time, which sounds very reasonable at first glance, but what is a friend of time?
In fact, most people don't understand what it means.
Following the previous topic, we need to touch on another important concept:
Convexity.
The convexity of the thing is the friend of time.
The so-called "convexity", also known as convexity, is a characteristic of bonds.
Regardless of the type of bond, there is a certain "convexity". For investors, convexity means "more up and less down".
The greater the convexity, the faster it will rise when it rises, and the slower it will fall when it falls. Vice versa.
Therefore, the greater the convexity of the bond chosen, the lower the investment risk will be.
Convexity is antifragile, whereas concave is fragile.
Here's a common example of concaveness:
The process of drinking is as follows:
The more you start drinking, the more refreshing it becomes, and when you reach a certain amount, it reaches its peak. If you drink it again, you will suffer and even be sent to the hospital.
Let's compare the two curves:
The left side is concave and the right side is convex.
Convexity is antifragile. The potential pain is limited, and the benefits can be significant.
The fund managers who short subprime mortgages and the philosophers who go long olive oil in "The Big Short" all use the convex curve on the left side of the chart above.
Drinking, getting along with rotten people, gambling, betting on money you can't afford to lose, for the sake of wealth you can't afford to lose, are all concave and vulnerable.
the convexity on the right side, which can positively take advantage of the black swan event and benefit from it;
The concave on the left side is susceptible to black swan damage, even fatal blows.
On convexity curves, uncertainty is your friend;
On a concave curve, uncertainty is your enemy.
And what about "time" as a friend?
Let's analyze three situations:
1. Linearity: Time is actually neither salty nor light for you;
2. Concave: Time is your enemy;
3. Convexity: Time is your friend.
In convexity, you can't make mistakes much less time, as if by some kind of grace of time. For example, in the three years since Michael Burry made his bet, he seemed to be "making mistakes" most of the time, but once he got it right (which is likely to happen), he still achieved excellent results overall.
Taleb sums it up by saying:
If you have a favorable asymmetry, or positive convexity (the option is the exception), you'll do pretty well in the long run, outperforming the average in uncertain situations.
The greater the uncertainty and the greater the role of selectivity, the better your performance. This attribute is very important in life.
Seven
With regard to "convexity", let's jump into another area:
Entrepreneurship & Venture Capital.
As we all know, entrepreneurship is nine deaths, and venture capital is unstable.
The success of entrepreneurship and venture capital projects is a small probability event.
So how can venture capitalists make a lot of money from it?
In a book about entrepreneurship and venture capital, "Lessons in Entrepreneurship in Silicon Valley," three concepts come up repeatedly:
1, convexity;
2. Grand Slam;
3. Reverse thinking.
What is the secret of entrepreneurship and venture capital?
Not planning, not designing, not being confident, but mimicking the chaos of nature's evolutionary process, capturing the emergence of new species in a random process.
As written in Antifragile:
Nature knows how to be selective, and it shows how selectivity can replace intelligence.
Taleb writes:
This is a trial-and-error mechanism similar to options (the fast failure model), aka convexity free exploration. Under this mechanism, the cost of error is low, the maximum loss is known, and the potential reward is huge (unlimited).
Michael Moritz of Sequoia Capital said that even very powerful companies have a lot of uncertainty at the beginning and the prospects are not clear.
"We like people or projects that aren't favored by everyone, and that's always the way we do business. ”
Why?
The reasons are the same as Michael Burry's investment philosophy:
The success of the venture capital business lies in the convexity of buying mispricing.
Mark Anderson said that the usual thinking about Airbnb used to be:
"When people live in each other's homes, won't they meet killers with axes?"
So, ideas that "don't look like the best in the world" are actually more likely to be convex, because uncertainty is the friend of wise investors.
Without some of the factors that would make a startup's ambition seem a little crazy, the project's potential returns are unlikely to be of the grand slam type, which is the key to investor success.
As Niels Bohr said:
The madness of your theory is an indisputable fact, but the key to our disagreement is whether it is crazy enough to be correct.
The whole point of the art of venture capital is bold breakthrough ideas. The essence of a bold breakthrough idea is that it is difficult to predict.
So what to do?
Howard Marks famously said, "It's hard to predict, but we can be prepared."
Specifically, buy portfolios that contain mispriced convex opportunities, rather than trying to predict an unpredictable future.
Where to find convexity opportunities?
According to investors, the best place to spot convexity is where other investors or company founders have overlooked.
That's why it's important to have a "contrarian mindset".
However, in any case, the three powerful concepts of "convexity, grand slam, and reverse thinking" still need to be put into a traditional cauldron, that is, expected value calculation based on probability.
In a 1993 letter to shareholders, Warren Buffett explained the way to buy a portfolio that included convex opportunities:
"You can consciously invest in projects that involve risk – there is a high probability that there will be loss or damage, but only if you believe that the probability-weighted gains will be much higher than the probability-weighted losses, and that you can invest in several similar but unrelated projects at the same time. ”
Eight
Investing is hard.
Investor Howard Marks once said to Charlie Munger: "It's not easy to make money by investing, and anyone who thinks it's easy is stupid." ”
It was not Michael Burry, the one-eyed stock god mentioned earlier in this article, who made a lot of money during the 2008 subprime mortgage crisis, but John Paulson.
- In 2007, his fund was profitable at $15 billion, and Paulson's personal income was approaching $4 billion.
- From 2008 to early 2009, he again brought in $5 billion for the company and customers, and $2 billion for himself.
- In 2010, Paulson was valued at $12 billion, making him the 45th richest person in the world on Forbes' list.
- Paulson's fund size peaked at $38 billion in 2011.
However, Paulson then seemed unable to return to his 2007 heyday, with his average return falling back to 6.18 percent, including a loss of 9.88 percent in 2011. And it was during the rise of the stock market.
In particular, he made a big bet on the pharmaceutical company Fanlia, which caused huge losses.
Today, Paulson's fund has shrunk to $8.7 billion.
Perhaps Paulson was too eager to prove himself.
He got it right three times in a row: the dot-com bubble, the subprime mortgage crisis, and gold.
Or, he hallucinates about his abilities.
This seems to say one thing:
There is no such thing as alchemy in the investment market.
Of course, we can also say that Murphy's Law has ghostly appeared again.
Since investing is so difficult, can we choose some investment categories with almost no risk?
It's also hard.
Index funds seem to be the only investment targets that Buffett has recommended to the public.
In China, more and more rational investors are no longer picking stocks on their own, but investing in index funds.
And yet (yes, when it comes to foolproof, there will always be a but), and the one-eyed god Michael Bury in front of us has stepped up again.
Not long ago, he thought that another financial product similar to a subprime mortgage could trigger a crash.
He was talking about index funds, ETFs (exchange-traded funds).
Michael Bury analyzes as follows:
The inflow of money into index funds was similar to that of CDOs before the 2008 crisis.
In 2004, the asset size of ETFs was $338 billion, and by mid-2018, it had reached $5,595 billion, 16 times that of the former.
Michael Burry's judgment, based on his fundamental view of index funds:
Index fund models are not robust, and passive investors don't need the security analysis required for true price discovery. And with poor liquidity, fund salespeople are also deceiving themselves.
Could it be that "foolproof" index funds will also collapse?
At this point, we can draw several conclusions about making money:
1. It is very, very difficult to make money;
2. Past performance is not indicative of future performance;
3. The vast majority of stock gods will fall off the altar.
In Maugham's words, all the forces in the universe are bent on spilling milk, smashing blue and white porcelain, and reducing the amount of money in your investment account.
The principle of entropy increase is not only applied to the physical world, but also to making money.
Let's take a look at the pesky Murphy's laws in the world of money:
a. If you choose one of the two stocks, the one you buy will only fall, and the one you don't buy will only rise;
b. Patience is an advantage, but you can't wait for the rooster to lay eggs. Your heavy stock is that rooster;
c. If a person says to you, "It's not a problem with money", then it must be a problem with money;
d. Money is not everything, for example: when there is not enough money.
Nine
If the transition from order to disorder is "irreversible", why can humans still reproduce and evolve on Earth?
Since Murphy's Law has been messing around all the time, why are there still so many people making a lot of money?
If the winners of securities investment are fools who walk randomly, then why are there still so many great entrepreneurs?
Schrödinger gives the answer in his book What is Life:
Negative entropy.
A living organism is constantly producing entropy—or increasing positive entropy—and gradually approaching the dangerous state of maximum entropy, i.e., death.
The only way to get rid of death and live is to constantly draw negative entropy from the environment...... Organisms live on negative entropy...... The essence of metabolism is to enable the organism to successfully eliminate all the entropy that it had to produce while it was alive.
Schrödinger argued:
- The method used by an organism to stabilize itself at a highly ordered (or low-entropy) level is to continuously draw order from its surroundings;
- For example, after higher animals ingest food in an extremely orderly state of matter, what they excrete is a disorderly substance that has been greatly degraded;
- For plants, sunlight is the most powerful supplier of "negative entropy";
- Non-equilibrium (i.e., the flow of matter and energy) can be a source of order.
As Steven Pinker puts it:
Life, thought, and the ultimate goal of human endeavor - to create energy and information, to overcome the tide of entropy, and to open up a shelter conducive to order.
Let's start by looking at the "negative entropy" of startups (from The Silicon Valley Startup Lesson):
1. Find a secret, solve a problem, and deliver a core product value. Even if it's rough and weak.
Renowned CEO Jim Bucksdale always said, "The main thing is to stay focused on the main thing." ”
Every company has a profit engine hidden behind its core values, and if you remove everything that doesn't matter, this engine will be simple.
There should only be one formula for a startup.
This is the core of what I said in "The Algorithm of Life".
2. High-risk, uncertain and ignorant situations are inevitable. Be humble and avoid overconfidence. Only by constantly changing your mind can you have the ability to profit from convexity.
3. "The qualities to look for in a founder include high intelligence, a strong sense of purpose, a relentless pursuit of success, an enterprising and competitive nature, a perfectionist pursuit of high quality, a love of change and disruption, new ideas to do things better, integrity, bringing great people around you, and a passion for creating real value (based on insight)." ”
4. Changes in today's world are unpredictable, and great teams are always able to respond to such a rapidly changing environment. That's why investors spend so much money on startup team building.
A strong team makes the startup itself prominent.
The ability to "navigate" environmental changes is more valuable than the ability to plan for the medium and long term.
5. Then, pursue the opportunity for a Grand Slam and think backwards for that goal.
The above is exactly the "convexity" that venture capitalists dream of.
Ten
Is there really alchemy in this world?
In Taleb's view, the closest thing to the essence of alchemy is the positive return and convex effect.
He describes it this way:
a. The severity of the conflation problem (mistaking the rise in oil prices to geopolitics, or mistaking winning gambles to good forecasts rather than the convex effects of earnings and selectivity).
Why anything with selectivity has a long-term advantage – and how to measure it.
c. Merge the above two points: conflation and optionality.
Although I was only halfway through this article that I had to dig out the unfashionable book "Antifragile" (partly because most of the most basic and important truths are the same, and partly because there are not many smart authors), I found that the two basic formulas involved in my "small probability" are basically the same as "antifragile".
One is expected value.
One is the qin-student inequality.
As for what to expect, it seems as simple as it could be:
The sum of each possible outcome in the trial multiplied by the probability of its outcome.
For example, what is the expected value of each "point" of a fair six-sided die?
The probability of each side appearing is 1/6, so the calculation is as follows:
The result is calculated to be 3.5.
Despite the simplicity of the calculation, the decimal point alone is maddening. That's why in the previous article, why are really smart people probabilistic masters?, and I took the trouble to use the analogy of "parallel universes" in the previous article.
But what was not said in the previous article is that the fat and thin of each parallel universe are different.
In order to end this article early, I will talk about the fat and thin of parallel universes in the next article.
Another formula is the Gensheng inequality (also known as the Jensen inequality), which gives the relationship between the convex value of the integral and the integral value of the convex function.
The inequality is an inequality about convexity. Convexity is a very good property, and in the optimization problem, linearity and nonlinearity are not essential differences, only convexity is. If the optimal function is convex, then the local optimal means the global optimum, otherwise the global optimal cannot be deduced.
There are many inequalities that can be proved with the qinsheng inequality, so that their essence can be reduced to convexity.
So, alchemy is a mix of these two formulas:
On the one hand, whether you are betting on a high-probability event, a low-probability event, or a high-probability event superimposed by a small probability, the first thing you want to bet on is the event with a positive expected value;
On the other hand, the event you bet on is convex.
This way, you don't need to "predict" too much about the future, and you don't have to be afraid of uncertainty, as randomness and time are your friends.
That's right, investing is essentially an exercise in probability. But first, you have to know some of the most basic formulas, so that you can go down to the level of principles, rather than a bunch of truths and illusions.
That's the difference between investing and gambling.
At last
Is there really alchemy in this world?
Yes.
But this alchemy, like everything in the world, is full of randomness.
In this way, can it still be called alchemy?
However, if it is not designed in this way, this alchemy will soon become flooded, and the gold will be worthless.
Murphy's Law is always spilling milk and making people upset, but the direction of time, the meaning of human beings, all depends on the firmness and ruthlessness of the second law of thermodynamics.
If this were not the case, we would not be able to answer Heidegger's opening question in Introduction to Metaphysics:
"Why is the world there and not nothing?"
I liked a speech by Nobel laureate Gell-Mann. He argues:
"The history of the universe is not determined solely by fundamental laws. It depends on the fundamental laws and a long list of coincidences, or chances, beyond that. ”
It seems to me that if we have to pursue our own alchemy, what we are looking for may be those high probabilities disguised as small probabilities, and the basic laws that high probabilities are trying to get closer to.
Gell-Mann put it this way:
The basic theory doesn't contain those probabilities, they're something extra. So it's not a theory of everything.
In fact, a lot of the information that surrounds us in the universe comes from these coincidences, not just fundamental laws.
Nowadays, it is often said that gradually approaching the fundamental law by examining the phenomenon from low energy to high energy to higher energy, or from small scale to smaller scale to smaller scale, is like peeling an onion.
And so on and on, building higher energy accelerators to find elementary particles, so that we can gradually penetrate into the structure of the particles, and along this path, we can gradually get closer to the fundamental laws.
I've always wondered why I exist in the world at this time of the 21st century, and from a physical and biological point of view, the probability of life reproducing on Earth is incredibly small, and even a small change in the moon would have prevented life from appearing in the first place.
I also marveled at how the craftsmanship of the god of nature that Spinoza spoke of was so brilliant and tangible.
Once we are aware of the rare small probabilities of the existence of the "self", we should continue to pray that these inconceivable probabilities continue to work.
These small probabilities, i.e., those known conditions that everyone who exists in this world relies on and ignores, the earth, the sun, the air, the rain, seem to be sheltered by countless convex curves.
Schopenhauer once said:
"There is only one balance in this world, the balance of calamity, suffering, and evil and crime, and nothing else, and the measure of one's happiness is not how much pleasure he has suffered, but how many calamities he has avoided. ”
Even the pursuit of wealth on a secular level cannot be separated from the insights of philosophers from ancient times to the present.
We need to find our own convexity curve (albeit insignificant compared to the existing convexity curves in the universe) and dance with the small probabilities of this uncertain world.