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

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

by Nassim Nicholas Taleb

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Overview

Fooled by Randomness is a standalone book in Nassim Nicholas Taleb’s landmark Incerto series, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don’t understand. The other books in the series are The Black Swan, Antifragile, Skin in the Game, and The Bed of Procrustes.

Fooled by Randomness is the word-of-mouth sensation that will change the way you think about business and the world. Nassim Nicholas Taleb–veteran trader, renowned risk expert, polymathic scholar, erudite raconteur, and New York Times bestselling author of The Black Swan–has written a modern classic that turns on its head what we believe about luck and skill.

This book is about luck–or more precisely, about how we perceive and deal with luck in life and business. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill–the world of trading–Fooled by Randomness provides captivating insight into one of the least understood factors in all our lives. Writing in an entertaining narrative style, the author tackles major intellectual issues related to the underestimation of the influence of happenstance on our lives.

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

However, the most recognizable character of all remains unnamed–the lucky fool who happens to be in the right place at the right time–he embodies 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 by chance.

Are we capable of distinguishing the fortunate charlatan from the genuine visionary? Must we always try to uncover nonexistent 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.

Named by Fortune One of the Smartest Books of All Time

A Financial Times Best Business Book of the Year

Product Details

ISBN-13: 9780812975215
Publisher: Random House Publishing Group
Publication date: 08/23/2005
Series: Incerto Series , #1
Edition description: Updated
Pages: 368
Sales rank: 76,403
Product dimensions: 5.16(w) x 8.00(h) x 0.75(d)

About the Author

Nassim Nicholas Taleb has devoted his life to problems of uncertainty, probability, and knowledge. He spent nearly two decades as a businessman and quantitative trader before becoming a full-time philosophical essayist and academic researcher in 2006. Although he spends most of his time in the intense seclusion of his study, or as a flâneur meditating in cafés, he is currently Distinguished Professor of Risk Engineering at New York University’s Polytechnic Institute. His main subject matter is “decision making under opacity”—that is, a map and a protocol on how we should live in a world we don’t understand.
 
Taleb’s books have been published in thirty-three languages.

Read an Excerpt

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


By Nassim Nicholas Taleb
Random House
Copyright © 2008 Nassim Nicholas Taleb
All right reserved.

ISBN: 9781400067930


Chapter 1

Croesus, King of Lydia, was considered the richest man of his time. To this day Romance languages use the expression “rich as Croesus” to describe a person of excessive wealth. He was said to be visited by Solon, the Greek legislator known for his dignity, reserve, upright morals, humility, frugality, wisdom, intelligence, and courage. Solon did not display the smallest surprise at the wealth and splendor surrounding his host, nor the tiniest admiration for their owner. Croesus was so irked by the manifest lack of impression on the part of this illustrious visitor that he attempted to extract from him some acknowledgment. He asked him if he had known a happier man than him. Solon cited the life of a man who led a noble existence and died while in battle. Prodded for more, he gave similar examples of heroic but terminated lives, until Croesus, irate, asked him point-blank if he was not to be considered the happiest man of all. Solon answered: “The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, incourse of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.”

The modern equivalent has been no less eloquently voiced by the baseball coach Yogi Berra, who seems to have translated Solon’s outburst from the pure Attic Greek into no less pure Brooklyn English with “it ain’t over until it’s over,” or, in a less dignified manner, with “it ain’t over until the fat lady sings.” In addition, aside from his use of the vernacular, the Yogi Berra quote presents an advantage of being true, while the meeting between Croesus and Solon was one of those historical facts that benefited from the imagination of the chroniclers, as it was chronologically impossible for the two men to have been in the same location.

Part I is concerned with the degree to which a situation may yet, in the course of time, suffer change. For we can be tricked by situations involving mostly the activities of the goddess Fortuna—Jupiter’s firstborn daughter. Solon was wise enough to get the following point; that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness. Solon also had the intuition of a problem that has obsessed science for the past three centuries. It is called the problem of induction. I call it in this book the black swan or the rare event. Solon even understood another linked problem, which I call the skewness issue; it does not matter how frequently something succeeds if failure is too costly to bear.

Yet the story of Croesus has another twist. Having lost a battle to the redoubtable Persian king Cyrus, he was about to be burned alive when he called Solon’s name and shouted (something like) “Solon, you were right” (again this is legend). Cyrus asked about the nature of such unusual invocations, and he told him about Solon’s warning. This impressed Cyrus so much that he decided to spare Croesus’ life, as he reflected on the possibilities as far as his own fate was concerned. People were thoughtful at that time.

If You’re So Rich, Why Aren’t You So Smart?

An illustration of the effect of randomness on social pecking order and jealousy, through two characters of opposite attitudes. On the concealed rare event. How things in modern life may change rather rapidly, except, perhaps, in dentistry.

Nero Tulip

Hit by Lightning

Nero Tulip became obsessed with trading after witnessing a strange scene one spring day as he was visiting the Chicago Mercantile Exchange. A red convertible Porsche, driven at several times the city speed limit, abruptly stopped in front of the entrance, its tires emitting the sound of pigs being slaughtered. A visibly demented athletic man in his thirties, his face flushed red, emerged and ran up the steps as if he were chased by a tiger. He left the car double-parked, its engine running, provoking an angry fanfare of horns. After a long minute, a bored young man clad in a yellow jacket (yellow was the color reserved for clerks) came down the steps, visibly untroubled by the traffic commotion. He drove the car into the underground parking garage—perfunctorily, as if it were his daily chore.

That day Nero Tulip was hit with what the French call a coup de foudre, a sudden intense (and obsessive) infatuation that strikes like lightning. “This is for me!” he screamed enthusiastically—he could not help comparing the life of a trader to the alternative lives that could present themselves to him. Academia conjured up the image of a silent university office with rude secretaries; business, the image of a quiet office staffed with slow thinkers and semislow thinkers who express themselves in full sentences.

Temporary Sanity

Unlike a coup de foudre, the infatuation triggered by the Chicago scene has not left him more than a decade and a half after the incident. For Nero swears that no other lawful profession in our times could be as devoid of boredom as that of the trader. Furthermore, although he has not yet practiced the profession of high-sea piracy, he is now convinced that even that occupation would present more dull moments than that of the trader.

Nero could best be described as someone who randomly (and abruptly) swings between the deportment and speech manners of a church historian and the verbally abusive intensity of a Chicago pit trader. He can commit hundreds of millions of dollars in a transaction without a blink or a shadow of a second thought, yet agonize between two appetizers on the menu, changing his mind back and forth and wearing out the most patient of waiters.

Nero holds an undergraduate degree in ancient literature and mathematics from Cambridge University. He enrolled in a Ph.D. program in statistics at the University of Chicago but, after completing the prerequisite coursework, as well as the bulk of his doctoral research, he switched to the philosophy department. He called the switch “a moment of temporary sanity,” adding to the consternation of his thesis director, who warned him against philosophers and predicted his return back to the fold. He finished writing his thesis in philosophy. But not the Derrida continental style of incomprehensible philosophy (that is, incomprehensible to anyone outside of their ranks, like myself). It was quite the opposite; his thesis was on the methodology of statistical inference in its application to the social sciences. In fact, his thesis was indistinguishable from a thesis in mathematical statistics—it was just a bit more thoughtful (and twice as long).

It is often said that philosophy cannot feed its man—but that was not the reason Nero left. He left because philosophy cannot entertain its man. At first, it started looking futile; he recalled his statistics thesis director’s warnings. Then, suddenly, it started to look like work. As he became tired of writing papers on some arcane details of his earlier papers, he gave up the academy. The academic debates bored him to tears, particularly when minute points (invisible to the noninitiated) were at stake. Action was what Nero required. The problem, however, was that he selected the academy in the first place in order to kill what he detected was the flatness and tempered submission of employment life.

After witnessing the scene of the trader chased by a tiger, Nero found a trainee spot on the Chicago Mercantile Exchange, the large exchange where traders transact by shouting and gesticulating frenetically. There he worked for a prestigious (but eccentric) local, who trained him in the Chicago style, in return for Nero solving his mathematical equations. The energy in the air proved motivating to Nero. He rapidly graduated to the rank of self-employed trader. Then, when he got tired of standing on his feet in the crowd, and straining his vocal cords, he decided to seek employment “upstairs,” that is, trading from a desk. He moved to the New York area and took a position with an investment house.

Nero specialized in quantitative financial products, in which he had an early moment of glory, became famous and in demand. Many investment houses in New York and London flashed huge guaranteed bonuses at him. Nero spent a couple of years shuttling between the two cities, attending important “meetings” and wearing expensive suits. But soon Nero went into hiding; he rapidly pulled back to anonymity—the Wall Street stardom track did not quite fit his temperament. To stay a “hot trader” requires some organizational ambitions and a power hunger that he feels lucky not to possess. He was only in it for the fun—and his idea of fun does not include administrative and managerial work. He is susceptible to conference room boredom and is incapable of talking to businessmen, particularly the run-of-the-mill variety. Nero is allergic to the vocabulary of business talk, not just on plain aesthetic grounds. Phrases like “game plan,” “bottom line,” “how to get there from here,” “we provide our clients with solutions,” “our mission,” and other hackneyed expressions that dominate meetings lack both the precision and the coloration that he prefers to hear. Whether people populate silence with hollow sentences, or if such meetings present any true merit, he does not know; at any rate he did not want to be part of it. Indeed Nero’s extensive social life includes almost no businesspeople. But unlike me (I can be extremely humiliating when someone rubs me the wrong way with inelegant pompousness), Nero handles himself with gentle aloofness in these circumstances.

So, Nero switched careers to what is called proprietary trading. Traders are set up as independent entities, internal funds with their own allocation of capital. They are left alone to do as they please, provided of course that their results satisfy the executives. The name proprietary comes from the fact that they trade the company’s own capital. At the end of the year they receive between 7% and 12% of the profits generated. The proprietary trader has all the benefits of self-employment, and none of the burdens of running the mundane details of his own business. He can work any hours he likes, travel at a whim, and engage in all manner of personal pursuits. It is paradise for an intellectual like Nero who dislikes manual work and values unscheduled meditation. He has been doing that for the past ten years, in the employment of two different trading firms.

Modus Operandi

A word on Nero’s methods. He is as conservative a trader as one can be in such a business. In the past he has had good years and less than good years—but virtually no truly “bad” years. Over these years he has slowly built for himself a stable nest egg, thanks to an income ranging between $300,000 and (at the peak) $2.5 million. On average, he manages to accumulate $500,000 a year in after-tax money (from an average income of about $1 million); this goes straight into his savings account. In 1993, he had a bad year and was made to feel uncomfortable in his company. Other traders made out much better, so the capital at his disposal was severely reduced, and he was made to feel undesirable at the institution. He then went to get an identical job, down to an identically designed workspace, but in a different firm that was friendlier. In the fall of 1994 the traders who had been competing for the great performance award blew up in unison during the worldwide bond market crash that resulted from the random tightening by the Federal Reserve Bank of the United States. They are all currently out of the market, performing a variety of tasks. This business has a high mortality rate.

Why isn’t Nero more affluent? Because of his trading style—or perhaps his personality. His risk aversion is extreme. Nero’s objective is not to maximize his profits, so much as it is to avoid having this entertaining machine called trading taken away from him. Blowing up would mean returning to the tedium of the university or the nontrading life. Every time his risks increase, he conjures up the image of the quiet hallway at the university, the long mornings at his desk spent in revising a paper, kept awake by bad coffee. No, he does not want to have to face the solemn university library where he was bored to tears. “I am shooting for longevity,” he is wont to say.

Nero has seen many traders blow up, and does not want to get into that situation. Blow up in the lingo has a precise meaning; it does not just mean to lose money; it means to lose more money than one ever expected, to the point of being thrown out of the business (the equivalent of a doctor losing his license to practice or a lawyer being disbarred). Nero rapidly exits trades after a predetermined loss. He never sells “naked options” (a strategy that would leave him exposed to large possible losses). He never puts himself in a situation where he can lose more than, say, $1 million—regardless of the probability of such an event. That amount has always been variable; it depends on his accumulated profits for the year. This risk aversion prevented him from making as much money as the other traders on Wall Street who are often called “Masters of the Universe.” The firms he has worked for generally allocate more money to traders with a different style from Nero, like John, whom we will encounter soon.

Nero’s temperament is such that he does not mind losing small change. “I love taking small losses,” he says. “I just need my winners to be large.” In no circumstances does he want to be exposed to those rare events, like panics and sudden crashes, that wipe a trader out in a flash. To the contrary, he wants to benefit from them. When people ask him why he does not hold on to losers, he invariably answers that he was trained by “the most chicken of them all,” the Chicago trader Stevo who taught him the business. This is not true; the real reason is his training in probability and his innate skepticism.


From the Trade Paperback edition.

Continues...

Excerpted from Fooled by Randomness by Nassim Nicholas Taleb Copyright © 2008 by Nassim Nicholas Taleb. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

Acknowledgments for the Second Editionxv
Prefacexix
Chapter Summariesxxix
Prologue1
Mosques in the Clouds1
Part ISolon's Warning - Skewness, Asymmetry, Induction9
1If You're So Rich Why Aren't You So Smart?13
Nero Tulip13
Hit by Lightning13
Temporary Sanity14
Modus Operandi16
No Work Ethics18
There Are Always Secrets19
John the High-Yield Trader20
An Overpaid Hick21
The Red-Hot Summer23
Serotonin and Randomness24
Your Dentist Is Rich, Very Rich26
2A Bizarre Accounting Method28
Alternative History28
Russian Roulette29
Possible Worlds30
An Even More Vicious Roulette31
Smooth Peer Relations32
Salvation Via Aeroflot34
Solon Visits Regine's Night Club36
George Will Is No Solon: On Counterintuitive Truths38
Humiliated in Debates40
A Different Kind of Earthquake41
Proverbs Galore43
Risk Managers44
Epiphenomena45
3A Mathematical Meditation on History46
Europlayboy Mathematics46
The Tools47
Monte Carlo Mathematics49
Fun In My Attic51
Making History51
Zorglubs Crowding the Attic52
Denigration of History53
The Stove Is Hot54
Skills in Predicting Past History56
My Solon58
Distilled Thinking on Your PalmPilot59
Breaking News59
Shiller Redux62
Gerontocracy63
Philostratus in Monte Carlo: On the Difference Between Noise and Information64
4Randomness, Nonsense, and the Scientific Intellectual69
Randomness and the Verb69
Reverse Turing Test71
The Father of All Pseudothinkers73
Monte Carlo Poetry73
5Survival of the Least Fit - Can Evolution Be Fooled by Randomness?77
Carlos the Emerging Markets Wizard77
The Good Years80
Averaging Down81
Lines in the Sand81
John the High-Yield Trader83
The Quant Who Knew Computers and Equations84
The Traits They Shared87
A Review of Market Fools of Randomness Constants88
Naive Evolutionary Theories90
Can Evolution be Fooled by Randomness?92
6Skewness and Asymmetry93
The Median Is Not the Message93
Bull and Bear Zoology95
An Arrogant 29-Year-Old Son97
Rare Events98
Symmetry and Science99
Almost Everybody is Above Average100
The Rare Event Fallacy103
The Mother of All Deceptions103
Why Don't Statisticians Detect Rare Events?106
A Mischievous Child Replaces the Black Balls107
7The Problem of Induction109
From Bacon to Hume109
Cygnus Atratus110
Niederhoffer, Victorian Gentleman110
Sir Karl's Promoting Agent113
Location, Location116
Popper's Answer117
Open Society119
Nobody Is Perfect119
Induction and Memory120
Pascal's Wager121
Thank You Solon121
Part IIMonkeys On Typewriters - Survivorship and Other Survivorship and Other Biases123
It Depends On the Number of Monkeys126
Vicious Real Life127
This Section127
8Too Many Millionaires Next Door129
How To Stop the Sting of Failure129
Somewhat Happy129
Too Much Work130
You're a Failure131
Double Survivorship Biases133
More Experts133
Visibility Winners134
It's a Bull Market134
A Guru's Opinion136
9It Is Easier To Buy and Sell Than Fry an Egg138
Fooled by Numbers140
Placebo Investors140
Nobody Has To Be Competent142
Regression to the Mean143
Ergodicity144
Life Is Coincidental145
The Mysterious Letter145
An Interrupted Tennis Game146
Reverse Survivors146
The Birthday Paradox147
It's a Small World!147
Data Mining, Statistics, and Charlatanism148
The Best Book I Have Ever Read!149
The Backtester149
A More Unsettling Extension151
The Earnings Season: Fooled by the Results151
Comparative Luck153
Cancer Cures153
Professor Pearson Goes to Monte Carlo (Literally): Randomness Does Not Look Random!155
The Dog That Did Not Bark: On Biases in Scientific Knowledge156
I Have No Conclusion157
10Loser Takes All - On the Nonlinearities of Life159
The Sandpile Effect159
Enter Randomness161
Learning to Type161
Mathematics Inside and Outside the Real World163
The Science of Networks164
Our Brain165
Buridan's Donkey or the Good Side of Randomness166
When It Rains, It Pours167
11Randomness and Our Brain: We Are Probability Blind168
Paris or the Bahamas?168
Some Architectural Considerations169
Beware the Philosopher Bureaucrat171
Satisficing172
Flawed, not Just Imperfect173
Kahneman and Tversky173
Where is Napoleon When We Need Him?175
"I'm As Good As My Last Trade" and Other Heuristics176
Degree in a Fortune Cookie179
Two Systems of Reasoning181
Why We Don't Marry the First Date181
Our Natural Habitat182
Fast and Frugal184
Neurobiologists Too185
Kafka in a Courtroom187
An Absurd World189
Examples of Biases in Understanding Probability190
We Are Option Blind191
Probabilities and the Media (More Journalists)193
CNBC at Lunch Time194
You Should Be Dead by Now195
The Bloomberg Explanations195
Filtering Methods198
We Do Not Understand Confidence Levels199
An Admission200
Part IIIWax in my Ears - Living With Randomitis201
I Am Not So Intelligent204
Wittgenstein's Ruler205
The Odyssean Mute Command206
12Gamblers' Ticks and Pigeons in a Box209
Taxi-Cab English and Causality209
The Skinner Pigeon Experiment212
Philostratus Redux213
13Carneades Comes to Rome: On Probability and Skepticism216
Carneades Comes to Rome216
Probability the Child of Skepticism218
Monsieur de Norpois's Opinions219
Path Dependence of Beliefs221
Computing Instead of Thinking222
From Funeral to Funeral225
14Bacchus Abandons Antony226
Notes on Jackie O.'s Funeral227
Randomness and Personal Elegance229
Epilogue: Solon Told You So231
Beware the London Traffic Jams231
A Trip to the Library: Notes and Reading Recommendations232
References251
Acknowledgments for the First Edition265
Index267
About the Author278
Colophon279

What People are Saying About This

From the Publisher

"[Taleb is] Wall Street’s principal dissident. . . . [Fooled By Randomness] is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-nine theses were to the Catholic Church.”
Malcolm Gladwell, The New Yorker

“Fascinating . . . Taleb will grab you.”
Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk

“Recalls the best of scientist/essayists like Richard Dawkins . . . and Stephen Jay Gould.”
Michael Schrage, author of Serious Play

“We need a book like this . . . fun to read, refreshingly independent-minded.”
Robert J. Shiller, author of Irrational Exuberance

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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets 3.8 out of 5 based on 0 ratings. 52 reviews.
Guest More than 1 year ago
We are experiencing a dramatic shift in America where individuals are assuming greater risks. The old defined retirement benefits plans are being replaced by defined contribution plans (i.e. 401k plans). Under these contribution plans, it is the employee who makes the investments decisions and faces a loss in retirement wealth when these investments sour. Job security is not what it once was. Our future well being is becoming increasingly dependent on random events. This makes the topic in Taleb¿s ¿Fooled by Randomness¿ very timely. In order to make good decisions, we need to be both financially and statistically literate. Taleb¿s book gets us off to a good start. All too often we mistake random events with deterministic ones particularly when judging a person¿s past performance. If this book is worth buying it is because of the Table P.1 that summarizes how we can make faulty judgments by ¿being fooled by randomness.¿ After this, it deteriorates. He does not explain important concepts correctly, and he tries to give the impression that nobody accounts for randomness. He criticizes mathematicians for ignoring randomness, even though there is an entire field in mathematics devoted to understanding randomness. Taleb is confused. Risk adverse individuals attempt to avoid the potential ill effects of randomness however, this does not mean that they avoid the understanding of randomness. Randomness can be synonymous with vulnerability. The book is filled with contradictions where he says one thing and a few pages later reverses himself. For a PhD he has an amazingly poor grasp of probability theory. No wonder he does not like mathematicians, he does not understand the discipline. Although he claims that financial markets are unpredictable, he claims to have a trading strategy that guarantees him positive profits. Go figure. No where in his book does he discuss the concept of conditional expectation. His fictional characters are not convincing. The ¿risk averse¿ Nero is supposedly buying Treasuries when he could get a higher and equally safe after tax return with buying municipal bonds. The worst part of this book is the moral implications. All of life is uncontrolled randomness. Our decisions and our efforts do not matter and there is no role for personal responsibility. People who do try to explain randomness or who try to take responsibility are personally attacked. After writing this book, Taleb appeared on CNBC TV. He told the announcer that if a person comes into your office and uses the word ¿standard deviation¿, you should throw him out. The announcer asked Taleb why this should be done. And Taleb responded, ¿Because everything is not normally distributed.¿ Do I need to say anything more?
Guest More than 1 year ago
The author has his own ax to grind. His personal view is that markets are random. The more accepted view is that markets are chaotic. The difference, while subtle, is rewarding, both mathematically and financially. Taleb manages one or more funds which, as I understand it, are based on his view of the market. I have heard assorted reports as to the success of said funds. The short version is that his avowed approach requires huge amounts of patience and very large capitalization. That said, mathematically, his approach is sensible... in the long term. But as Keyens said, in the long run, we are all dead.
Lenny3 More than 1 year ago
What a great book! For all of us hard decision makers out there, this book really helps the psyche and will to "just do it." If you are looking for a book that will help you lose control and gain mental health, this is a good one. http://www.netvibes.com/lenny3
In_The_Shadows More than 1 year ago
I would recommend those books for investors, who are above the beginning stage. This books emphasizes the role of planning for the unpredictable in your portfolio. This books could have more examples of the historical application of his view. Also, the author does come off conceited throughout the book, even though he admits that he does have his flaws later.
Guest More than 1 year ago
If you can get past the first half of the book, where the author comes off as a very conceited and know-it-all type person, the book is well worth the time and money. I am an avid trader in stocks, currencies and futures, as well as an enthusiastic poker player. It addresses a lot of crucial ideas that people (most notably investors) today rarely have an understanding of, especially when it comes to probability.
Guest More than 1 year ago
What are some of the book¿s good points ? It communicates our deep flaws as decision-makers in a thoughtful and humane manner. It amusingly discusses `Risk Managers¿ as being clueless concerning randomness. The story of `Solon¿ is priceless in that it communicates true foundations for people who want to be risk managers regardless of its proximity to their business cards. Wittgenstein¿s Ruler story will change the way you think about econometrics, if you ever thought about it at all. It succinctly communicates the essence of why Karl Popper is worth understanding ¿. and does the same for simulation using the Russian roulette story. It inspired at least one entrepreneur.
stevetempo on LibraryThing More than 1 year ago
A most enlightening and entertaining reading experience. The author provides a collection of mini-essays (musings if you will) that collectively expanded my world view. Mr. Taleb is now a favorite auther.
jonsey17 on LibraryThing More than 1 year ago
One of the most insightful books that I have ever read about human behavior, statistics, and investments
annbury on LibraryThing More than 1 year ago
Interesting read about the unpredictability of events, and hence of markets. Market events that are supposed to be "Multiple Sigma" -- ie, less than once in several lifetimes -- have in fact occured several times within the lifetime of current market participants. The assumption that they happen less often than, in fact, they do, explains much of the instability of markets -- and much of our current economic pain.
Periodista on LibraryThing More than 1 year ago
Interesting stuff, particularly re how the findings from the risk analysis aspects of behavioral economics (that people don't behave and perceive in the rational manner economists have traditionally said they so) can be applied to investing. But what an obnoxious man. Who would want to meet him in person? If he's smarter then everyone else in the universe, why does he have to keep insisting on it?And for all his huffing and puffing, he barely addressed how to apply this knowledge to the market. OK, so he's betting against the odds, knowing such and such is actually much more like than most traders think and so on. But how does he know what the odds are? Vegas? Off-track-betting?I don't I would have understood this at all if I hadn't just read Michael Lewis's The Big Short. Taleb must have made a killing there (though it seems to me he would have nosed his way into Lewis's book somehow if he did, despite his revulsion re journalists and journalism). But that was a pretty rare case in which, if you were willing to listen and read, the odds of the subprime mortgage bonds collapsing were readily apparent. But even the guys that Lewis profiled who did make the winning bets don't usually invest that way. They generally want to go long and look for solid companies that will grow. Taleb doesn't seem to ever look at companies that.
nbmars on LibraryThing More than 1 year ago
Taleb's principal thesis is that humans in general, and financial journalists in particular, are remarkably blind to the random element in most events. They overemphasize results over process. They attribute great ability to great success. Taleb argues that success tends to be very non-linear: large successes often flow from slight differences, some of which are merely random. Many human activities, particularly market-oriented businesses, are subject to much random fluctuation. Because of this, much success in such activities can be attributed only to luck. Taleb contrasts such businesses with dentistry, which has little or no random element to its successful practice.People overemphasize frequency at the expense of total outcome. They prefer being right often, for small gain, than being occasionally very right about rare events ["black swans," in Taleb's shorthand] that allow very large gains. Maximizing the probability of winning [a little] does not maximizing the expectation from the game when one's strategy may include skewedness.One of the greatest barriers to valid or even effective inference is survivorship bias. We tend to infer properties of an entire distribution of events [who made money; who didn't] from those left over after a shakeout process has eliminated some of the members of the distribution. The shape of our inferences can thereby be markedly different from that warranted by the original distribution.Taleb's intellectual heroes include: 1. Solon--beware, King Croesus, your good fortune may not last; 2. Robert Shiller--financial markets overreact to late news; 3. Charles Pierce--infallibility is impossible; 4. George Soros--be aware of your own fallibility; 5. Karl Popper--real science consists in formulating principals that are inherently falsifiable: thus, it is invalid to infer the truth of any proposition from the fact it was correct any limited number of times; we can only infer its falsity [from one occurence]; history can not be not real science; 6. Daniel Kahneman and Amos Tversky--peoples' perceptions are distorted by immediate facts that inhibit them from making rational generalizations; and 7. David Hume--great rigor in drawing inferences from data. His bete noires include (1) journalists in general and George Will in particular, who infer much too general ideas from much too small samples and (2) mathematical economists, who believe their models genuinely mirror reality.A trader's mental construction should direct him to do what other people do not do. He is acutely aware of egodicity, i.e., that very long random sample paths wind up resembling each other. Thus even though some high risk strategies prove radically successful in the short run, they may eventually "blow up" in the long run. Taleb himself has made a good living as a commodities option trader by being aware of the randomness of market moves, and trading to protect his positions in regard to that randomness. He does not say explicitly what kinds of trades or techniques he uses; he only talks about his general philosophy.A very interesting debunking of some commonly held business lore. (JAB)
cjjy999 on LibraryThing More than 1 year ago
Taleb tells as is in the markets and life in general. You can tell he has absolutely no tolerance for pretenders. I like the fact that he looks at things at a deeper level, at least he tries to but his style can be very blunt and sound arrogant at times.
jjmcgaffey on LibraryThing More than 1 year ago
Interesting but somehow not satisfying. I kept talking about it while I was reading it - this or that would remind me of something Taleb said - but by the time I was finished I was tired of it. Partly, I think, because he determinedly is not 'explaining' anything or giving any reasons or paths to follow; partly because my empirical experiences conflict with his; and partly because of the style of his writing and choice of illustrative incidents. A lot of the book is about how we, humans in general, are ill-equipped to properly consider probabilities - things like, we tend to be more worried about things we hear a lot about than less-publicized matters. So people are afraid of flying and not of driving, though in terms of miles traveled per death driving is several hundred times as dangerous (that's not one of Taleb's illustrations, it's one I've seen elsewhere). Taleb tends to use the stock market for his illustrations, which is another reason I found his book unsatisfying - I know very little about the stock market, and especially about the fancy variations of the stock market (selling short, selling and buying options, etc) that make up his life and to which he refers easily and with (apparent) full understanding. He does explain, a little, but few of his explanations conveyed much to me. Interesting book, and I want to read the Black Swan one too, but less fun to read than Stephen Jay Gould (who I started out thinking his style resembled).
AmagiTDL on LibraryThing More than 1 year ago
Very insightful book. Condenses a lot of philosophical and mathematical knowledge into an easily readable book. It goes against modern financial conventions, yet is aimed at a broader audience and is not intended as a book on finance or the markets (and is not a book on either, although they play a prominent role.)
Anome on LibraryThing More than 1 year ago
I got hold of this book (at a great deal of effort and expense) because of an interview with Taleb in New Scientist. I found reference to the concept of "Black Swans" fascinating. However, I couldn't find anything on the web explaining exactly what he meant by the term, or even whether he knew that black swans (as in melanistic forms of the swan) existed.From the book, he does point out the existence of actual black swans, but I think this doesn't quite fit in his usage of the term to mean statistical outliers.The black swan issue is by no means the only content of the book, there are some interesting ideas relating to risk management, that are applicable beyond trading. Still, there is something in his approach that doesn't quite sit right with me.
piefuchs on LibraryThing More than 1 year ago
By no means a well written book and a definately a poorly organized one - "Fooled by Randomness" presents a necessary thesis - that much of what is promoted in the business world as genius is actually random and, hence, irreproducible. Finally - an honest book in the busniess section.
dickmanikowski on LibraryThing More than 1 year ago
Though this was highly recommended by some bloggers I read, I found it to be pointless and meandering. I kept getting the feeling that the author had something to say . . . BUT HE JUST WOULDN'T GET AROUND TO SAYING IT. I gave up after 50 pages or so.
sthitha_pragjna on LibraryThing More than 1 year ago
Sometimes fascinating and sometimes annoying, as one gets the feeling the famous author is a bit too full of himself.
Anonymous More than 1 year ago
Fascinating!
Anonymous More than 1 year ago
This is a great book
Anonymous More than 1 year ago
Great book
Anonymous More than 1 year ago
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Anonymous More than 1 year ago
Nassim Taleb brings out some of the most interesting and insightful ideas and observations that I've seen in a long time. If you read this book and "The Black Swan" it will change the way you look at the world around you and help you protect yourself from the vagaries of our unpredictable markets. It sheds light on why unpredictable events are so unpredictable, but also on why, at the same time, we are addicted to predictions and explanations, even though they are useless and impossible.
Anonymous More than 1 year ago