Gerontocracy
Taleb proposes considering a trader’s years of surviving market changes alongside returns. His heuristic treats sustained survival as evidence about exposure to rare events, rather than assuming recent profitability identifies the most resilient trader.
THE IDEA
Gerontocracy
A preference for distilled thinking implies favoring old investors and traders, that is, investors who have been exposed to markets the longest, a matter that is counter to the common Wall Street practice of preferring those that have been the most profitable, and preferring the youngest whenever possible. I toyed with Monte Carlo simulations of heterogeneous populations of traders under a variety of regimes (closely resembling historical ones), and found a significant advantage in selecting aged traders, using as a selection criterion their cumulative years of experience rather than their absolute success (conditional on their having survived without blowing up). “Survival of the fittest,” a term so hackneyed in the investment media, does not seem to be properly understood: Under regime switching, discussed in Chapter 5, it will be unclear who is actually the fittest, and those who will survive are not necessarily those who appear to be the fittest. Curiously, it will be the oldest, simply because older people have been exposed longer to the rare event and can be, convincingly, more resistant to it. I was amused to discover a similar evolutionary argument in mate selection that considers that women prefer (on balance) to mate with healthy older men over healthy younger ones, everything else being equal, as the former provide some evidence of better genes. Gray hair signals an enhanced ability to survive—conditional on having reached the gray hair stage, a man is likely to be more resistant to the vagaries of life. Curiously, life insurers in renaissance Italy reached the same conclusion, by charging the same insurance for a man in his twenties as they did for a man in his fifties, a sign that they had the same life expectancy; once a man crossed the forty-year mark, he had shown that very few ailments could harm him.
When to use it
Portfolio management: select fund managers with long track records of survival rather than recent high returns.
Executive hiring: examine how candidates handled relevant economic cycles and failures, rather than using age alone as a proxy for experience.
Risk assessment: ask how survival-based selection changes the group being observed and what evidence supports the resulting risk estimate.
Evaluating a proposed evolutionary explanation by separating its analogy from the evidence needed to test it.
FROM THEORY TO EVERYDAY LIFE
In practice
Monte Carlo Simulation of Traders
Taleb reports that, in his simulations, selecting traders by years of experience conditional on surviving without blowing up had an advantage over selection by absolute profitability. That result depends on the simulated population and market regimes.
Mate Selection in Evolutionary Psychology
Taleb discusses an evolutionary argument that surviving to an older age in good health could signal robustness to a potential mate. He uses it as an analogy for survival-based selection; the passage does not establish a general preference shared by all women.
Renaissance Life Insurance
Taleb reports that Renaissance Italian insurers charged equal premiums to men in their twenties and fifties. He interprets this as evidence of survival-based selection after age 40. Equal premiums alone do not establish identical remaining life expectancy.
A MOMENT TO REFLECT
Put it to work.
How might gerontocracy apply to your own decision-making in investing or hiring experienced individuals?
Can you think of a situation where favoring older individuals based on survival might backfire?
Why does the Monte Carlo simulation suggest that cumulative experience trumps absolute success under regime switching?
CONTINUE THE CONVERSATION
Source texts
- Fooled by Randomness The Hidden Role of Chance in the Markets and in Life (Nassim Nicholas Taleb)