Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Like The Black Swan, this is a book by/about a self-evidently nasty man with a message to send. We aren’t good at assessing risks, and we fool ourselves that we are. Though he doesn’t use the term “value at risk,” the concept that helped overleverage and then explode the economy, he viciously and presciently critiques the mentality that led to greater and greater risks for smaller and smaller percentages of return. Though published earlier, this book is shorter and contains less inside baseball score-settling than The Black Swan, though I might recommend just reading a couple of things from his website instead of either, especially if you’re already familiar with behavioral economics and the various heuristics that distort our show more decisionmaking. show less

I actually agree with the central thesis - that randomness is a strong influence that's not taken seriously and how we attempt to explain it away with fanciful mythologies for outliers. It's what drives me absolutely bananas about the business centered biographies - written as if it has a recipe for success for someone who fell from one success into the next, with little relevance given to failures or how many contemporaries ate shit.

But that point is made over and over again, in a manner that echoes something like The Richest Man in Babylon (do you remember the 10%?). Despite a foreword saying this is misunderstood as a book about trading (when it applies to so much more), it's constantly swimming in the pool of traders as examples and show more counter-examples.

Most annoyingly a large part of the book could be read in the voice of Zapp Brannigan to great effect - the author being so enlightened by his own superiority, it's making essentially the exact same pitfall of those ignorant rubes who think we can predict success (which of course our options trading author also proceeds to say is possible in his chosen corner of economics). A lot of strong opinions are proffered in areas from sciences to literature, with little justification other than smugness. The occasional comment about also being prone to be 'fooled by randomness' doesn't really paper over this persistent tone.

It's also worth noting this is an old book, being first published 2001. It therefore makes a lot of references to 80s and 90s stock market realities that are tragically dated.

Alternatives: A lot is made out of Kahneman's research on the two-system brain; Thinking, Fast and Slow, and presumably even more relevant is his book on Noise: A Flaw in Human Judgment. show less

I think I picked this up from our building's swap shelves. It's an advance uncorrected proof, and wow does it need corrections. I hope a copy editor and/or the author got hold of this in galley and fixed the grammar, typos, etc. and made sure the charts showed up!

Talib, of course, wrote [The Black Swan] to describe the same theme of randomness, or the impact of the improbable, and he makes his living trading derivatives with just that in mind. This book is almost a screed against what he sees as the refusal of economists and traders to see the folly of their quest for patterns, even in the face of financial disaster. It's a little like getting into an Uber with someone determined to convert you to his religion. I felt at once mesmerized show more and battered.

Of course, it is true that people don't understand statistics, and don't see how their biases and emotions make it hard to understand true risk. Talib is searching for a scientific appreciation of risk to balance those biases and emotions. Going back to the image of a black swan, he explains that just because no European had seen a black swan did not make the statement 'All swans are white' true. Understanding that rules must be refutable goes hand in hand with his emphasis on randomness, on clarity between correlation and causation, sorely lacking today.

I read it fast, which is probably not the ideal approach. We learn a lot about Talib, at least what he wants us to learn, from his own perspective, and a lot about how snarky, insulting, and uncompromising he can be when randomness is discounted. Some of it is even fun. show less

Interesting idea badly executed. So badly, in fact, I was left wondering who it was written for; it was neither coherent enough for an academic audience nor clear enough for a general one. The book is suffused with trivial errors of fact and usage, to the point where no statement (trivial or otherwise) retains any credibility. It is filled with the most glaring contradictions: the author will condemn an act on one page and commit it on the next, without any appreciable shred of self-awareness. This bizarrely paradoxical presentation is further exacerbated by the author's own explicit claims to possess the very self-awareness which is no where in evidence.

Lastly, I should note that this is a claim about the text, not the author. He may show more very well be a genius-wizard of the highest of high orders. Whether this is or is not the case, this book conceals it very well. His fans, however, are demonstrably fools. They admire the book based not on its contents, but on the author's own financial successes, while the book itself makes precisely the opposite point
--that admiring people who happen to be successful without regard to their underlying thinking is itself foolish.

Ug, business majors.... show less

Probability and chance fascinate me. Many people believe in fate, or argue over the role of chance in the course they have taken in their lives. Those of us who operate in the world of financial speculation find ourselves at the 'cutting edge' of randomness, chance and the un-knowable future in a very tangible way day by day. It is odd then that humans seem to be poorly programmed to win at the probability game. In fact in most situations we usually make the mathematically irrational choice, often choosing a poorer but certain outcome rather than one which mathematically generates a better expected return or outcome.

This important book highlights the centrality of probabilistic outcome in almost everything we do. It emphasises our show more exaggerated tendency to claim or allocate credit to people (e.g. CEOs of successful or unsuccessful companies) on the basis of ability rather than luck. This tendency is not only myopic, it is also dangerous. Taleb particularly highlights the false sense of security that exists in distorted situations where a highly likely beneficial scenario is paired with an unlikely, but extremely dangerous outcome. The classic example is in the market, where naked option sellers are able to pursue a 'reliable' strategy with steady small profits, but place themselves in a situation where extreme market movements can erase years of profits in days. These 'hidden risks' are explored in more depth in Taleb's later book The Black Swan which was especially prescient as it was published immediately before the 2007-08 financial crisis. The Black Swan revealed massive hidden risks concealed behind commonly accepted but flawed risk calculation models such as VAR.

Taleb writes in a conversational style that at times is a little indulgent. It is a very personal book with many asides regarding artistic preferences, and which invokes some of his pet subjects such as philosophy and poetry. I enjoyed this however others might feel this detracts from the central argument. It is a very personal argument as well, with examples that appear to be based on individuals known by Taleb and largely based on his expertise in the financial markets. It will provoke contemplation about both the source of our own success and also about the risks that we may not have considered. As an example it would have been (and may still be) valuable for instance to many who have highly leveraged themselves in purchasing property but who have not thought through the consequences of unemployment.

Action on these ideas will encourage a more robust investment strategy, and indeed life in general. Perhaps Taleb could have given a few more 'real world' examples from outside the world of finance to help people considering these ideas in a wider sense. Certainly he has written an eloquent and colourful account highlighting important concepts which may influence philosophical thought in years to come, and will hopefully have a practical impact on risk management and regulation in financial markets. show less

A THOUGHT-PROVOKING AND WITTY CRITIQUE OF HOW HUMANS TEND TO OVERESTIMATE SKILL AND UNDERESTIMATE LUCK. TALEB DRAWS ON PHILOSOPHY, FINANCE, AND PERSONAL ANECDOTES TO EXPLORE HOW RANDOMNESS SHAPES OUR WORLD — ESPECIALLY IN MARKETS AND DECISION-MAKING. A MUST-READ FOR ANYONE NAVIGATING UNCERTAINTY

Never boring, but sometimes a bit obtuse. I got the impression that he admits in this book that he does want to enlighten but not to enlighten everybody. In this book I do enjoy his comment that math is for meditation not for computation.