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Fooled by Randomness: The Hidden Role of…
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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2004)

by Nassim Nicholas Taleb

Other authors: See the other authors section.

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Showing 1-5 of 36 (next | show all)
Fooled by Randomness: The Hidden Role of Chance in Life and the Markets by Nassim Nicholas Taleb. It and its sequel, The Black Swan, have been on the BusinessWeek bestseller list for the past year. This book had a bigger impact on my year than any other, and changed how I view things.

Taleb is a true eccentric. A mathematician/statistician/options trader who fills every page with parenthetical ramblings. "This eccentric and highly personal exploration of the nature of randomness meanders from the court of Croesus and trading rooms in New York and London to Russian roulette, Monte Carlo engines, and the philosophy of Karl Popper." He quotes heavily from ancient Greek and Persian literature, philosophical works, physics research, psychology journals, and studies in statistics. He inspires you to read difficult texts.

(I think) One of his main points is that we ascribe success to those who have done nothing but been on the right side of the odds. There might be 1,000 new bond traders entering the business after college. If they have a 50% annual success rate purely due to random chance, then after 10 years there will be 2 guys that people will clamor to for advice simply because they "must" have some knowledge to allow them to "beat" the market, when it is all due to randomness. There are 998 other guys who have "blown up" or been fired b/c they lost due to the same randomness, and no one is offering a book deal to them.

I've often wondered what it would be like to be Spock and think purely logical and without emotions. Taleb looks at some research and finds that emotions are what actually help us make decisions. There are times in mathematics when you solve an optimization problem and come up with multiple solutions that would all be equally good. A purely logical person would be unable to decide between the options and would be stuck forever, like a computer program stuck in a loop. Emotions are important.

He gives several real-life examples to illustrate these phenomena. He also delves into the psychology of how successful people in the right circumstances feel inferior and unsuccessful.
He gives examples of firms who bet heavily on a probable outcome, but don't take insurance against the improbable and lose billions (like in our current market troubles).

A question to ask yourself:
Would you play Russian roulette if there was only a 1/6 chance of dying, but a 5/6 chance of winning $1 million for every time you survived? It's pretty good odds. If enough people play then chances are that someone is going to play a lot and end up with several million dollars. But, the vast majority will eventually lose everything. So it is in business when what looks like a good bet might ignore the (sometimes very slim) chance that something will go wrong.

Taleb is also quite critical of modern-day economics, claiming that economists are trying to camouflage their inability to explain things in mathematics that are too limited to do what economists need it to do. I found those criticisms highly interesting.

He is also critical of regression analysis, particularly time-series models because of the problem of stationarity. Over time, there are countless unobserved things that could change, therefore it becomes less likely to learn what you want do by doing a long time series.

I give this book 4.5 stars out of 5. It is a difficult read because of all the parenthetical ramblings, but the points the way the book stretches the mind is definitely outstanding. I'm very eager to read The Black Swan. ( )
  justindtapp | Jun 3, 2015 |
appears that we are not so much fooled by randomness as that we refuse to recognize it; really like his ideas, but his presentation is often difficult to get through; his anecdotes don't always support (or even relate to) his point but are just stories that he likes to tell
  FKarr | Oct 11, 2014 |
I didn't find any novel ideas in this book. It's more for people who trust numbers without understanding where or how they were formed. I agree with Taleb on many points, but wish the book were more coherent and organized. He writes like a monkey at a typewriter. It was an interesting read that I would recommend to those who enjoy decision making and statistics. ( )
  CassandraT | Oct 10, 2014 |
I read Nassim Taleb's "The Black Swan" a couple of years ago, and now I got around to reading his previous book, "Fooled by Randomness". This is the book that made Taleb famous for his theory about the role of chance in markets. Taleb says that humans tend to explain away random events by rationalising them, instead of accepting that life has an element of randomness in it. He examines biases such as causality, "survivorship" (learning only from winners) and skewed distributions. Fortune magazine named "Fooled" as one of the smartest books of all time. I'm not so sure. While I share Taleb's contempt for the inhabitants of Wall Street, I feel the pendulum has swung too much in the opposite direction. True, not everything can be explained and rationalised; but not everything in life is down to Lady Fortuna either. ( )
  ashergabbay | Jul 8, 2013 |
An excellent book that explains clearly how probability and statistics affects everyone, or rather how not understanding randomness causes most people to over or under-estimate the likelihood of events.

In particular he demonstrates how irrational human beings are when it comes to understanding:
- black swan (rare) events and planning for them,
- that events with (seemingly) positive correlations do not necessarily mean that one causes the other, and,
- that randomness and uncertainty (i.e. luck) have a greater influence on the outcomes of human activities than most people, even those who think they act rationally, care to believe.

While written fairly clearly, I will admit that I had to read some sections more than once before I understood exactly what the author was saying, even though I have, or thought I had, a better than average understanding of probability and statistics.

Now at least I have a good understanding of why I act irrationally even when I know the true probability of success in some activities, such as when buying lottery tickets. ( )
  Davros-10 | Apr 13, 2013 |
Showing 1-5 of 36 (next | show all)
The lesson here for investors is powerful and frightening. How much can you rely on the track records of investment advisers, mutual fund managers, newspaper columnists, or even the market as a whole in making decisions about your investment portfolio? Not nearly as much as you probably think.

 

» Add other authors (10 possible)

Author nameRoleType of authorWork?Status
Nassim Nicholas Talebprimary authorall editionsconfirmed
Sergio, ChristopherCover designersecondary authorsome editionsconfirmed
Welch, ChrisDesignersecondary authorsome editionsconfirmed
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To my mother, Minerva Ghosn Taleb
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This book is the synthesis of, on one hand, the no-nonsense practitioner of uncertainty who spent his professional life trying to resist being fooled by randomness and trick the emotions associated with probabilistic outcomes and, on the other, the aesthetically obsessed, literature-loving human being willing to be fooled by any form of nonsense that is polished, refined, original, and tasteful.
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Table of Contents from Worldcat:

Preface -- Acknowledgments for the updated second edition -- Chapter summaries -- Prologue -- pt. I. Solon's warning : skewness, asymmetry, induction -- 1. If you're so rich, why aren't you so smart? -- Nero Tulip -- Hit by lightning -- Temporary sanity -- Modus operandi -- No work ethics -- There are always secrets -- John the high-yield trader -- An overpaid hick -- The red-hot summer -- Serotonin and randomness -- You dentist is rich, very rich -- 2. A bizarre accounting method -- Alternative history -- Russian roulette -- Possible worlds -- An even more vicious roulette -- Smooth peer relations -- Salvation via aeroflot -- Solon visits Regine's nightclub -- George Will is no Solon : on counterintuitive truths -- Humiliated in debates -- A different kind of earthquake -- Proverbs galore -- Risk managers -- Epiphenomena -- 3. A mathematical mediation on history -- Europlayboy mathematics -- The tools -- Monte Carlo mathematics -- Fun in my attic -- Making history -- Zorglubs crowding the attic -- Denigration of history -- The stove is hot -- Skills in predicting past history -- My Solon -- Distilled thinking on your PalmPilot -- Breaking news -- Shiller redux -- Gerontocracy -- Philostratus in Monte Carlo : on the difference between noise and information -- 4. Randomness, nonsense, and the scientific intellectual -- Randomness and the verb -- Reverse turing test -- The father of all pseudothinkers -- Monte Carlo poetry -- 5. Survival of the least fit, can evolution be fooled by randomness? -- Carlos the emerging-markets wizard -- The good years -- Averaging down -- Lines in the sand -- John the high-yield trader -- The quant who knew computers and equations -- The traits they shared -- A review of market fools of randomness constants -- Naive evolutionary theories -- Can evolution be fooled by randomness? -- 6. Skewness and asymmetry -- The median is not the message -- Bull and bear zoology -- An arrogant twenty-nine-year-old son -- Rare events -- Symmetry and science -- Almost everybody is above average -- The rare-event fallacy -- The mother of all deceptions -- Why don't statisticians detect rare events? -- A mischievous child replaces the black balls -- 7. The problem of induction -- From Bacon to Hume -- Cygnus Stratus -- Nordhoff's -- Sir Karl's promoting agent -- Location, location -- Popper's answer -- Open society -- Nobody is perfect -- Induction and memory -- Pascal's wager -- Thank you, Solon -- pt. II. Monkeys on typewriters : survivorship and other biases -- It depends on the number of monkeys -- Vicious real life -- This section -- 8. Too many millionaires next door -- How to stop the sting of failure -- Somewhat happy -- Too much work -- You're a failure -- Double survivorship biases -- More experts -- Visibility winners -- It's a bull market -- A guru's opinion -- 9. It is easier to buy and sell than fry an egg -- Fooled by numbers -- Placebo investors -- Nobody has to be competent -- Regression to the mean -- Ergodicity -- Life is coincidental -- The mysterious letter -- An interrupted tennis game -- Reverse survivors -- The birthday paradox -- It's a small world! -- Data mining, statistics, and charlatanism -- The best book I have ever read! -- The backtester -- A more unsettling extension -- The earnings season : fooled by the results -- Comparative luck -- Cancer cures -- Professor Pearson goes to Monte Carlo (literally) : randomness does not look random! -- The dog that did not bark : on biases in scientific knowledge -- I have no conclusion -- 10. Loser takes all, on the nonlinearities of life -- The sandpile effect -- Enter randomness -- Learning to type -- Mathematics inside and outside the real world -- The science of networks -- Our brain -- Buridan's donkey or the good side of randomness -- When it rains, it pours -- 11. Randomness and our mind : we are probability blind -- Paris or the Bahamas? -- Some architectural considerations -- Beware the philosopher bureaucrat -- Satisficing -- Flawed, not just imperfect -- Kahneman and Tversky -- Where is Napoleon when we need him? -- "I'm as good as my last trade" and other heuristics -- Degree in a fortune cookie -- Two systems of reasoning -- Why we don't marry the first date -- Our natural habitat -- Fast and frugal -- Neurobiologists too -- Kafka in a courtroom -- An absurd world -- Examples of biases in understanding probability -- We are option blind -- Probabilities and the media (more journalists) -- CNBC at lunchtime -- You should be dead by now -- The Bloomberg explanations -- Filtering methods -- We do not understand confidence levels -- An admission -- pt. III. Wax in my ears : living with randomitis -- I am not so intelligent -- Wittgenstein's ruler -- The Odyssean mute command -- 12. Gamblers' ticks and pigeons in a box -- Taxi-cab English and causality -- The Skinner pigeon experiment -- Philostratus redux -- 13. Carneades comes to Rome : on probability and skepticism -- Carneades comes to Rome -- Probability, the child of skepticism -- Monsieur de Norpois' opinions -- Path dependence of beliefs -- Computing instead of thinking -- From funeral to funeral -- 14. Bacchus abandons Antony -- Notes on Jackie O.'s funeral -- Randomness and personal elegance -- Epilogue. Solon told you so -- Beware the London traffic jams -- Postscript. Three afterthoughts in the shower -- First thought : the inverse skills problem -- Second though : on some additional benefits of randomness -- Uncertainty and happiness -- The scrambling of messages -- Third thought : standing on one leg -- Acknowledgments for the first edition -- A trip to the library : notes and reading recommendations -- Notes -- References -- Index.
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Amazon.com Amazon.com Review (ISBN 0812975219, Paperback)

If the prescriptions for getting rich that are outlined in books such as The Millionaire Next Door and Rich Dad Poor Dad are successful enough to make the books bestsellers, then one must ask, Why aren't there more millionaires? In Fooled by Randomness, Nassim Nicholas Taleb, a professional trader and mathematics professor, examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill. This eccentric and highly personal exploration of the nature of randomness meanders from the court of Croesus and trading rooms in New York and London to Russian roulette, Monte Carlo engines, and the philosophy of Karl Popper. Part of what makes this book so good is Taleb's ability to make seemingly arcane mathematical concepts (at least to this reviewer) entirely relevant in evaluating and understanding everything from the stock market to the success of those millionaires cited in the aforementioned bestsellers. Here's an articulate, wise, and humorous meditation on the nature of success and failure that anyone who wants a little more of the former would do well to consider. Highly recommended. --Harry C. Edwards

(retrieved from Amazon Mon, 30 Sep 2013 13:18:54 -0400)

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Contends that randomness and probability have a large impact on life, claims that people regularly fail to recognize that role, and tells how to differentiate between randomness in general and the financial markets in particular.

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