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Dance with Chance: Making Luck Work for You Paperback – October 1, 2010
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From Publishers Weekly
Makridakis, Hogarth and Gaba—business professors and risk management experts—explore the powerful role of luck in our lives. For example, it's commonly accepted that to live a long, healthy life, weight, blood pressure and cholesterol should be controlled and smoking is verboten. However, the authors cite an analysis of mortality rates that suggests that these factors have only a minimal effect on longevity—and in the case of body weight, our common knowledge might be entirely wrong. Early sections reconsider medical and investment advice in the light of the unacknowledged and unstudied role of pure chance, and the authors make surprising recommendations: avoid doctors, seek boring investments and ignore almost everything in business books. The second—and weaker—section of the book offers abstract strategies for living with greater uncertainty. Although lacking in specific practical advice, the book is worthwhile for its provocative thesis and its invitation to readers to relinquish the illusion of control. (May)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to an out of print or unavailable edition of this title.
"Written by true experts. Informative yet so much fun to read!" -- Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable
"Easy-to-digest and highly competent. If everyone were to read this book, the world would become a more enlightened place." -- Gerd Gigerenzer, author of Gut Feelings: The Intelligence of the Unconscious
"An excellent book." -- John Kay, Financial Times columnist and author of The Truth About Markets
"A delightful ballet of novel insights elegantly presented. Bravo! Encore!" -- Robert B. Cialdini, author of Influence: The Psychology of Persuasion
"Absolutely fascinating! A must read!" -- Robert J. Herbold, Executive Vice President and former Chief Operating Officer, Microsoft Corporation
Top customer reviews
The main concept of Dance with Chance is the "illusion of control". It is when you think you control a future event or situation, that is in fact mainly due to chance. This is the opposite of fatalism (when you think you have no control, although you have). The book teaches how to avoid being fooled by this illusion of control. This is a very interesting reading for any data miner, particularly involved with forecasting. The books contains dozens of examples of the limitation of forecasting techniques. For example, it explains the issues of forecasting the stock market and when predictions are due to chance. Authors use a brilliant mix of statistics and psychology to prove their point.
Of course, it is difficult for someone in the field to completely agree with the authors. For example, they often state that no one can predict the future in advance. Formulated this way, one may agree. However, data mining and machine learning techniques are able to predict future situations (based on past data) to a certain extent (probabilities). Another bias of the authors is their tendency to reject complex models simply because...they are complex. Although I know the famous Occam's razor, advanced and complex techniques such as Support Vector Machine (SVM) have proven their efficiency in several applications. To conclude, whether you agree or not with the authors, Dance with Chance open your eyes on the illusion of control and thus on the limitations of predictive algorithms.
To me the most memorable idea (Chapter 12) was their description of decision making as thinking or blinking or sminking. Here thinking means trying to take everything into account (often too difficult); blinking means instant gut reaction (often unreliable); and they invent the word sminking to mean "using some simple explicit rule". They give some cute illustrations (marital happiness, credit scores, ...) and advocate its use more widely. Anyway, to a reader of this review I propose a smink. Read Chapter 12 first; if you enjoy it, read the whole book; if not, forgedaboudit!
Here's their treatment of investment. They tell the story of the collapse of Long Term Capital Management and of hedge funds, they relate forecasts that turned out badly, they emphasize that historically equities have outperformed other instruments in the long term but not necessarily over the next 15 years; that the best way to invest in equities is via index funds with low fees; that most investors do much worse than the index for various reasons they list, and warn of the dangers of relying on emotion rather than following a consistent strategy. This is all stuff -- standard amongst academics -- that every investor needs to know. Indeed it has all been said before, most famously in A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Revised and Updated) (and the reader curious about where a suggested balanced portfolio comes from can consult the more analytical Unconventional Success: A Fundamental Approach to Personal Investment) but it's so vital to have objective voices raised against the self-interested clamor of the financial complex that it's well worth repeating. This book's two chapter account is one of the most convincing I've read.
Now financial markets have a unique feature, that (for instance) buying an individual stock rather than the index is like "betting against the spread" in football -- you are trying to predict the future better than the consensus. But the book doesn't emphasize enough (in my opinion) the point that this feature is special to investing and analogs -- it's one extreme of a spectrum of chance. A different extreme is, say, choosing a spouse, which is similar to investment as regards long-term unpredictability and importance to one's life, but is very different in that one is not competing to do something better than the consensus. For the declared goal of teaching the reader how to think about chance, an exercise of the form: [here are 10 situations, place them on a spectrum from "similar to investment" to "similar to choosing a spouse"] would be more engaging than telling many stories about Wall Street.
More briefly: the chapters on medicine form a plea for evidence-based medicine, making the point that (both historically and currently) many treatments or screenings have been in widespread use without clear evidence of their effectiveness. The chapters on business criticise management theory gurus and applaud the "creative destruction" view of capitalism. They propose that managers should ignore fashionable theories, remember that over the long term prices of standardized goods/services go down relative to wages, which can only be dealt with via (obviously) increasing productivity and via the somewhat vaguer notion (p. 125) "manage people to generate creative destruction". Other chapters describe (in an oddly coy way) the authors' own research on the ineffectiveness of prediction (this research featured prominently in The Black Swan: The Impact of the Highly Improbable), followed by advice on "how to predict, if you must": first look at historic data, then imagine drastically different future scenarios, then ask other people for their 95% confidence intervals, form a consensus of such, and double the length of the interval!
Anyway, the book's conclusions (p. 256) are worth knowing, so here they are. (But don't be misled into thinking the book is full of "complex statistical models", because it isn't).
The future is never exactly like the past.
Complex statistical models fit past data well but don't necessarily predict the future.
Simple models .... predict the future better ...
Both statistical models and people have been unable to capture the full extent of future uncertainty and been surprised by large forecasting errors ....
Expert judgement is typically inferior to simple statistical models
Averaging (whether of models or of expert opinions) usually improves forecasting accuracy.
Felt the last section didn't offer as much to the book.
Overall a good and enlightening read.