The illusion of certainty in investing

Sketchbook of Wisdom: A Handcrafted Manual on the Pursuit of Wealth and the Good Life

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In his compelling book, Fooled by Randomness, Nassim Taleb presents a compelling analogy that sheds light on how we perceive risk and reality. Written by –

First, reality issues a fatal bullet rather rarely, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen attempts, one forgets the existence of the bullet under the numbing false sense of security.

Second, unlike a well-defined precision game like Russian Roulette, where the risks are seen by anyone who can multiply and divide by six, one does not follow the barrel of reality. One is able to unconsciously play Russian Roulette – and call it some alternative “low risk” game.

  • Why it matters: What Taleb has done is compare the rarity of critical life risks to a revolver with hundreds, even thousands of chambers, rather than just six in Russian roulette. His analogy encapsulates a A significant problem in human psychology is our tendency to underestimate risk due to its infrequency, which ultimately leads us to a dangerous false sense of security.

After 20 years in the stock market and several cycles of feeling such false security myself and suffering because of it, I can totally vouch for what Taleb wrote.

you see when we engage in activities or make decisions, such as in the stock market, where the consequences of our decisions will not be felt until years or decades later, we often overlook the possible risks involved. This oversight is not because these risks do not exist, but because they are infrequent.

The rarity of a fatal outcome, such as the rare possibility of firing a bullet from a gun with a thousand rounds, leads us to complacency. As when it comes to investing, after a few years of favorable market conditions, you can become overconfident and forget about the possibility of a sharp or prolonged market decline. Or when it comes to health, you can ignore the risks of a sedentary lifestyle or unhealthy diet because the consequences are not immediate.

The invisible barrel of reality

Taleb also delves deeper into the human psyche. Unlike the clear and present danger in the game of Russian Roulette, where the risks are obvious and quantifiable, the real risks are often hidden or misunderstood.

We can engage in risky behavior without realizing it, thinking we are playing a “low risk” game. This lack of awareness is a critical factor in many bad decisions in a variety of areas, from finances to personal health.

Now, our understanding of probability plays a significant role in how we perceive risk. We are notoriously bad at estimating probabilities, especially when it comes to rare events. We either overestimate the probability of extremely rare events like plane crashes, or we underestimate more common but less sensational risks like market crashes or even traffic accidents. This miscalculation is compounded by the fact that our perception of risk is heavily influenced by personal experience and emotion rather than objective analysis.

The illusion of control

Another factor contributing to a false sense of security is the illusion of control. We tend to believe that we have more control over events than we actually do. This belief leads to an underestimation of risk.

For example, a stock market trader or investor may think that his skill is the main reason for his success in the stock market, ignoring the role of luck and external factors. Similarly, one might believe that one’s good health is solely due to one’s lifestyle, aside from the influence of genetics and environment.

History is full of examples where a false sense of security has led to disastrous results. The financial crises of the last few decades, including the global financial crisis of 2008, are stark reminders of what can happen when risks are underestimated.

In these scenarios, what was perceived as a low-risk environment turned out to be a game of Russian roulette with dire consequences.

Using Taleb’s observations

In order to apply Taleb’s insight to our lives and investing, the first step for us is to recognize and accept our tendency to underestimate risk.

We should also strive to improve our understanding of probabilities and be aware of our psychological biases. This awareness can help us make better decisions that can lead to better long-term results.

A key takeaway from Taleb’s analogy is the importance of acknowledging and preparing for the unlikely. Just because a risk is infrequent doesn’t mean it doesn’t exist.

By recognizing the potential dangers in our decisions and actions, no matter how improbable they may seem, we can better prepare ourselves for life’s uncertainties.

This preparation does not mean living in fear, but rather embracing the unknown with a balanced perspective.

In this way, we can navigate the complexities of the world of investing or otherwise with a more realistic and prudent approach, improve our ability to make informed decisions, and ultimately lead more resilient and fulfilling lives.


I recently announced the acceptance for the January 2024 batch of my most comprehensive value investing course called – Value Investing Blueprint.

This residential course will be held from 11th to 14th January 2024 at FLAME University campus located in Pune. The deadline for submitting an application is December 10, 2023.

Click here to read more information and sign up if you are interested in taking this course.

As this is a classroom course, places are limited.

The course takes you through the process of practicing value investing to identify stocks that create long-term wealth. This includes helping:

  • Get the right approach to value investing and build a behavioral framework that prevents bias and creates a sound investment thought process.
  • Evaluate the quality of the business – separating the good from the awful
  • Analyze financial statements find well-performing businesses
  • Calculate the intrinsic value using different methods
  • Identify competitive rates and whether they are sustainable
  • Build a portfolio of solid wealth-creating businesses

Click here to read more information and sign up if you are interested in participating in this course.


I started working on a series of short videos – titled Inner game – to share my thoughts on investing, decision making, learning and just the practice of living the good life. You can follow them my YouTube channelincluding these recent –

You can also find these and all past sessions at Apple Podcasts, Spotify, Google Podcastsand Amazon.

I hope you enjoy them and find some value. Please let me know your opinions and/or suggestions for improvement. Thank you.


That’s about all from me for today.

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Stay safe.

Regards, Vishal


Sketchbook of Wisdom: A Handcrafted Manual on the Pursuit of Wealth and the Good Life

Buy your book, which Morgan Housel calls “a masterpiece.” It features 50 timeless ideas—from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant—as they apply to our lives today. Click here to buy now.

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