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Randomness rules

Marketplace Staff May 28, 2008

Randomness rules

Marketplace Staff May 28, 2008


Kai Ryssdal: This is gonna come as a shock to all the type A personalities out there, but all that control you think you have over your lives? Yeah, not so much.

You can analyze and plan all you want and maybe you can nibble away at the margins of whether your investments will win or lose or whether you’ll get the promotion you think you so richly deserve, but a new book from Caltech physicist Leonard Mlodinow says many things come down to a disturbing degree of chance.

Welcome to the program.

Leonard Mlodinow: Good to be here.

Ryssdal: No pressure, but I’m going to start by splitting a hair here. You ready?

Mlodinow: OK.

Ryssdal: Title of this book is “The Drunkard’s Walk: How Randomness Rules Our Lives.” I thought the thing about randomness was that it was random, there were no rules?

Mlodinow: It is random and it means that there are no patterns, but there are plenty of rules.

Ryssdal: Give me a for instance.

Mlodinow: Well, one of the rules of randomness is that rare things can happen, so even if something is unlikely to happen, if you keep trying long enough, it will eventually happen.

Ryssdal: Like picking stocks?

Mlodinow: Like picking stocks, and in the book I talk about a fellow named Bill Miller, who runs a mutual fund company and was very successful and beat the Standard & Poors for 15 years in a row and there were a lot of articles written about what a great feat that was and how unlikely that was, but if you look at the rules of randomness, you’ll know that unlikely things will eventually happen.

Ryssdal: One of the funny things about that actually is that one of the things you’re taught when you’re thinking about the stock market is prior performance is no indicator of future expectations, right?

Mlodinow: Yeah, and moreover, current performance is not necessarily an indication of the underlying ability of someone. For instance, if you take a sports example: If you look at the World Series or the NBA Championships and two teams are going head-to-head and usually they do a seven game series. Suppose that one team was better than the other — say 55 percent of a time you’d expect them to win; they have a 55 to 45 advantage. If they have a 55 to 45 advantage, mathematics tells you that the lesser team in this case will win a seven game series 40 percent of the time, so it’s almost like flipping a coin. The series doesn’t really tell you much.

Ryssdal: We want, it seems to me, precision. We want to know why something happened with a fair degree of certainty, but you talk a lot in this book about “Well, it’s about this” or “It’s going to be around that” or “The law of probability says it should be this.” I mean, there’s a certain degree of not-knowing that you just have to accept, isn’t there?

Mlodinow: That’s right. When there’s uncertainty involved or randomness involved in something then you can’t say exactly what’s going to happen and that’s hard for people to accept and that’s why people sometimes make errors in judgement.

Ryssdal: Errors in judgement that can frankly be expensive if you’re in the stock market or if you’re investing in a 401(k) or whatever.

Mlodinow: They certainly can be. I’ve made them myself.

Ryssdal: That’s right. Well, let me ask you about that. I mean, when you, who now is a student of the laws of randomness, when you sit down and allocate your 401(k), what do you do?

Mlodinow: Before I wrote this book, I’d look at the past five years and see who did well and the problem is that when you do that, you pay money — as opposed to, say, buying an index fund — you’re paying money for that expertise. But now that I’ve written the book and read the book, I don’t do that anymore.

Ryssdal: I came away from this book thinking a little bit that no matter how hard you try, there are some things you just need to get over that are going to happen whether you control them or not.

Mlodinow: Well, I think one of the lessons of the book is that if you see yourself have a failure or other people have a failure, don’t think that they are a failure, don’t think that you are a failure. As an author, I know that you can write the greatest manuscript like Harry Potter and have it rejected nine times as that was and that that doesn’t mean anything about the book. What you have to always keep in mind is that both success and failure are a combination of your internal qualities and the law of other things that can happen around you.

Ryssdal: Leonard Mlodinow teaches at Caltech. His newest book is called “The Drunkard’s Walk: How Randomness Rules Our Lives.” Leonard, thanks a lot for coming in.

Mlodinow: Thanks for having me. It was fun.

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