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Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life / Edition 1

Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life / Edition 1

4.0 4
by Nassim Nicholas Taleb, Nassim Nicholas Taleb

ISBN-10: 1587990717

ISBN-13: 9781587990717

Pub. Date: 10/01/2001

Publisher: Cengage Learning

This book is about luck -- or more precisely how we perceive and deal with luck in business and life. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill -- the world of trading -- Fooled by Randomness is a captivating insight into one of the least understood factors in all our lives. Writing in an entertaining and narrative


This book is about luck -- or more precisely how we perceive and deal with luck in business and life. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill -- the world of trading -- Fooled by Randomness is a captivating insight into one of the least understood factors in all our lives. Writing in an entertaining and narrative style, the author succeeds in tackling and explaining three major intellectual issues: the problem of induction, the survivorship biases, and our genetic unfitness to the modern world.

The book is populated with an array of characters, some of whom have grasped, in their own way, the significance of chance: Yogi Berra, the baseball legend; Karl Popper, the philosopher of knowledge; Solon, the Ancient World's wisest man; the modern financier George Soros; and the Greek voyager Ulysses. In addition we meet the fictional Nero, who seems to understand the role of randomness in his trading life, but who also falls victim to his own superstitious foolishness.

But the most recognizable character of all remains unnamed -- the lucky fool in the right place at the right time. The embodiment of the "Survival of the Least Fit." Such individuals attract devoted followers who believe in their guru's insights and methods. But no one can replicate what is obtained through chance. A monkey banging on a keyboard may eventually produce the Iliad, but would you sign him to write the sequel? Are we capable of distinguishing the fortunate charlatan from the genuine visionary? Must we always try to uncover non-existent messages in random events? It may be impossible to guard ourselves against the vagaries of the Goddess Fortuna, but after reading Fooled by Randomness we can be a little better prepared.

Product Details

Cengage Learning
Publication date:
Incerto Series
Edition description:
Older Edition
Product dimensions:
6.26(w) x 9.14(h) x 0.89(d)

Table of Contents

Preface and Acknowledgmentsxiii
Chapter Summariesxvii
Mosques in the Clouds1
Part ISolon's Warning - Skewness, Asymmetry, Induction7
1If You're So Rich Why Aren't You So Smart?11
Nero Tulip11
Hit by Lightning11
Temporary Sanity12
Modus Operandi14
No Work Ethics16
There Are Always Secrets17
John the High-Yield Trader17
An Overpaid Hick19
The Red-Hot Summer21
Serotonin and Randomness22
Your Dentist Is Rich, Very Rich24
2A Bizarre Accounting Method26
Alternative History26
Russian Roulette27
An Even More Vicious Roulette28
Smooth Peer Relations29
Salvation Via Aeroflot30
Solon Visits Regine's Night Club32
George Will Is No Solon: On Counterintuitive Truths34
Humiliated in Debates37
Risk Managers38
3A Mathematical Meditation on History40
Europlayboy Mathematics40
The Tools41
Monte Carlo Mathematics43
Fun in My Attic45
Making History45
Zorglubs Crowding the Attic46
Denigration of History47
The Stove Is Hot48
My Solon50
Distilled Thinking on Your PalmPilot51
Breaking News51
Shiller Redux53
Philostratus in Monte Carlo: On the Difference Between Noise and Information56
4Randomness, Nonsense, and the Scientific Intellectual60
Randomness and the Verb60
Reverse Turing Test62
The Father of All Pseudothinkers64
Monte Carlo Poetry64
5Survival of the Least Fit - Can Evolution Be Fooled by Randomness?68
Carlos the Emerging Markets Wizard68
The Good Years71
Averaging Down72
Lines in the Sand72
John the High-Yield Trader74
The Quant Who Knew Computers and Equations75
The Traits They Shared78
A Review of Market Fools of Randomness Constants78
Naive Evolutionary Theories81
Can Evolution be Fooled by Randomness?82
6Skewness and Asymmetry84
The Median Is Not the Message84
Bull and Bear Zoology86
An Arrogant 29-Year-Old Son88
Rare Events89
Symmetry and Science90
The Rare Event Fallacy93
The Mother of All Deceptions93
Why Don't Statisticians Rare Events?96
A Mischievous Child Replaces the Black Balls97
7The Problem of Induction99
From Bacon to Hume99
Cygnus Atratus100
Niederhoffer, Victorian Gentleman100
Sir Karl's Promoting Agent103
Location, Location105
Popper's Answer106
Open Society108
Nobody Is Perfect108
Pascal's Wager109
Thank You Solon110
Part IIMonkeys on Typewriters - Survivorship and Other Biases111
It Depends On the Number of Monkeys114
Vicious Real Life115
This Section115
8Too Many Millionaires Next Door117
How To Stop the Sting of Failure117
Somewhat Happy117
Too Much Work118
You're a Failure119
Double Survivorship Biases120
More Experts120
Visibility Winners122
It's a Bull Market122
A Guru's Opinion123
9It Is Easier To Buy and Sell Than Fry an Egg125
Fooled by Numbers127
Placebo Investors127
Nobody Has To Be Competent128
Life Is Coincidental131
The Mysterious Letter131
An Interrupted Tennis Game132
The Birthday Paradox132
It's a Small World!132
Data Mining, Statistics, and Charlatanism133
The Best Book I Have Ever Read!134
The Backtester134
A More Unsettling Extension136
The Earnings Season: Fooled by the Results136
Cancer Cures137
Professor Pearson Goes to Monte Carlo (Literally): Randomness Does Not Look Random!139
The Dog That Did Not Bark: On Biases in Scientific Knowledge140
I Have No Conclusion141
10Loser Takes All - On the Nonlinearities of Life142
The Sandpile Effect142
Enter Randomness144
Learning to Type144
Mathematics Inside and Outside the Real World146
Buridan's Donkey or the Good Side of Randomness147
When It Rains, It Pours148
11Randomness and Our Brain: We Are Probability Blind149
Paris or the Bahamas?149
Some Architectural Considerations150
From Psychology to Neurobiology152
Our Natural Habitat153
Kafka in a Courtroom154
An Absurd World156
Kahneman and Tversky157
Examples of Biases in Understanding Probability159
We Are Option Blind160
Probabilities and the Media (More Journalists)162
CNBC at Lunch Time163
You Should Be Dead by Now163
The Bloomberg Explanations164
Filtering Methods166
We Do Not Understand Confidence Levels168
An Admission168
Part IIIWax in my Ears - Living With Randomitis169
I Am Not So Intelligent172
The Odyssean Mute Command173
12Gamblers' Ticks and Pigeons in a Box175
Taxi-Cab English and Causality175
The Skinner Pigeon Experiment178
Philostratus Redux179
13Carneades Comes to Rome: On Probability and Skepticism182
Carneades Comes to Rome183
Probability the Child of Skepticism184
Monsieur de Norpois's Opinions185
Path Dependence of Beliefs187
Computing Instead of Thinking188
From Funeral to Funeral190
14Bacchus Abandons Antony191
Notes on Jackie O.'s Funeral192
Randomness and Personal Elegance194
Epilogue: Solon Told You So196
Beware the London Traffic Jams196
About TEXERE204

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Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life 4 out of 5 based on 0 ratings. 4 reviews.
Guest More than 1 year ago
This book is a complete waste to read. The analysis and arguments are extremely dull and elementary and are written in a very pedantic style. It is more one man's personal insults to all those who have far exceeded him in trading the markets. There is nothing of value in this book.
Guest More than 1 year ago
Taleb doesn't put as much math in the book as I'd like, or expected, but the point he gets across is awesome. Seemingly anecdotal, at times, he incorporates lots of stories which range from Roman rulers to traders on the exchange floor. Absolutely excellent.
Guest More than 1 year ago
The narrator may come across as having a big ego, but he is absolutely charming. He lulls you into his world with a totally different logic. He sees randomness where you suspect none and convinces you.
Guest More than 1 year ago
Every person who is interested in investing should read this book! In investing, few can tell the difference between being lucky and smart. Being successful in the short term can come from either source. If it is coming from unrecognized sources of luck, however, the behavior that the investor associates with success can sink the ship. The cautionary tale of Long-Term Capital Management is cited in the book as an example of this point. ¿If you¿re so rich, why aren¿t you smart?¿ is the wonderful reversal here on the old saw. I see this effect all the time in my consulting practice with helping companies understand how their decisions affect their stock price. A large percentage of people feel that they know all the answers when their stock price is rising. They keep doing the same things when the stocks are falling. Few survive to still have top jobs when the cycle shifts again. Then a new group of self-confident people take over who often don¿t know any more than those who preceded them. It¿s just that their track records look better. Fooled by Randomness will help make you more knowledgeably humble about what you can expect to accomplish with investments. Not only do fewer than one percent outperform the market averages over long time periods, the ones who do are probably often being aided by luck as well. ¿Get thee to the index funds as soon as possible¿ is the message that most should take away from this book. Better yet, buy them when multiples are low! The book¿s fundamental point is that there is tremendous volatility in any investment. Ignore that volatility to your peril. At the same time, you should be cautious about how well you understand the volatility. Stocks at their lows can still go to zero. There are all kinds of events that can happen, that have not done so yet. When they do, throw out all the old rules of investing. The terrorist attacks on the United States last week are probably an example of this. So each investment must be made as though you could be totally wrong. This means that you have to manage your risk exposure to events you don¿t even know how to expect. I loved his example of the joint probabilities of having a rare disease if you get a positive result on a test for that disease. Even most doctors apparently don¿t know how to evaluate that one. If even well educated people cannot quantify two known risks occurring simultaneously in their own field, how can investors be expected to make good decisions? Dr. Taleb has some very good advice for how to handle the psychology of being able to do this. He upholds the Stoic ideal -- ¿the attempt by man to get even with probability¿ which encourages ¿wisdom, upright dealing, and courage.¿ This means not chasing the latest investment fad or fashion, not looking at your investments very often, and being open to both sides of any idea (it could go wrong as well as right --what are the consequences of both?). I especially liked his idea of watching CNBC with the sound off so that the ¿experts¿ seem humorous and you are less likely to hear and follow their advice. Even more poignant was his advice not to live on Park Avenue where living with all of the arrogant, temporarily lucky can make you feel small. Instead, live somewhere that the results of your cautious approach will cause you to be the envy of all. Dr. Taleb impressed me with his willingness to tell stories on himself about how quickly he can become superstitious when things are going well, take on excess risks, and start looking too short term. After all, we are only human! The importance of this book can only be appreciated if you go back and think about your biggest investing successes. How much was luck versus skill? A good way to test is to see if the same approach has continued to work for you whenever you use it. Another good test is to see how often it would have backfired in the past. In my research on good decision mak