By contrast, Taleb was confident he knew nothing about the direction of the market. More precisely, he was confident that other people—those considered "experts"—knew less about the direction of the market than they believed they did. As a hedge fund manager, the brilliance of Taleb is that he made his money essentially off of other people's arrogance. The Niederhoffers of the world would confidently sell options with the full belief that their PhD's and back-tested equations allowed them to identify safe bets. Understanding uncertainty and complexity and thus having an appreciation (not shared by Niederhoffer) for unpredictable, random events—a phenomenon not accounted for in the very orderly Niederhoffer approach -- Taleb would buy many of those options.

On most trading days, Niederhoffer would make a small amount of money while Taleb would lose a small amount of money. This had the perverse effect of increasing the unfound confidence of Niederhoffer as each winning day made him more and more sure that he knew what he was doing. Of course, there were those unpredictable events, ones that could not be backtested, that would hit the scene every now and then (think 9/11). When they did, a Niederhoffer investor would "blow up", lose everything at once, while Taleb would not only survive, but thrive.

Niederhoffer was me as a young engineer and then later as a young engineer/planner. I knew what I was doing. I was extremely confident. I had the education, the standards and the theories to demonstrate that I was the expert. I had licenses and accreditations that even gave me initials behind my name. If you were a city and wanted to bet on your future—to invest money to make money—you would have come to me. I was a Victor Niederhoffer in my own professional domain.

And many times, what I recommended worked just fine. Or at least worked long enough where nobody remembered me when it stopped working. I projected population growth, traffic counts, sewage flow and whatever else I needed to do. That was my job and I was an expert. To say I didn't know would not only have been looked at as professional malpractice, it would be been suicide for my career. I was never faced with that dilemma, though, because I believed deep in my heart that I knew the answer. While I could have accepted that I made a mistake in my calculations—I obsessively checked them for that reason—I never paused to consider that my entire approach might be deeply flawed.

The Danger of Overconfidence

I'm re-reading Antifragile by Nassim Taleb, the most important book of the past year. As my mind was disembarking from vacation during the plane ride home yesterday, I read this quote (page 215 of the hard copy):