Fooled by Randomness

I’ve just finished reading Fooled by Randomness by Nassim Nicholas Taleb (2nd edition). Its a good book which makes some great points, but also has plenty of stuff that is annoying in it. The style as he describes it is not mathematical but literary-philosophical, which I don’t have issue with but I did find the author’s sneering and arrogance sometimes a little overwhelming.

The book is structured as a series of essays about the nature of probability and randomness, and how people can deal with it. Taleb is a derivatives trader who worked on Wall Street for many years and now runs a hedge fund of his own. As the heading quote on his website states:

My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the guts to sometimes say: I don’t know….

and much of the book is just this, mocking all those who make predictions, well beyond their knowledge. Journalists and others who ascribe causal relationships to random outcomes also get considerable attention. He makes much of the way that survivor bias distorts our opinions on things. We look at someone who had been extraordinarily successful in some activity and assume it relates to skill without asking how many people who did something similar failed. Are they good and we have something to learn from them, or are they just the lucky 1-in-32 who got five heads in a row? Without knowing how many people started in the endeavour and whether the successes have survived longer than we would expect in a random environment is the only way of having some confidence.

More than anything else Taleb’s focus is on what he calls “Black Swans”, the rare occurrences that inductive reasoning will never tell you about. His points are coloured particularly by two experiences. Growing up in Lebanon in the early 80’s war and by his experience of highly successful traders who, after years of success, lost everything they had made and much more in less than one month including their jobs by the Russian default in 1998. In the aftermath many would claim that such an event was completely unusual and unexpected, Taleb argues that our past experience will never be a good guide to such things and we will always run into these outlier events.

In the world of market traders the successful hotshots of one era are typically wiped out after the most recent Black Swan event, and a new breed with little knowledge of the long term history take over and the process begins again with the new set of hotshot traders adapting to the “normal” market conditions until the next Black Swan comes along and again wipes them out.

The chapters/essays on these topics are excellent, and the discussion of how we may not be well evolved to deal with randomness was also interesting. The studies of heuristics by Kahneman and Tversky and how they guide much of our decision making rather than rational calculation were also enlightening at least for me who had not read much on the area before.

The final few chapters however are a little disappointing, and I had the feeling of the book drifting away rather than coming to a conclusion. Still a worthwhile read.

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4 Responses to Fooled by Randomness

  1. JC says:

    Steve
    I read the book a while ago, as I worked in the same firm and knew of him. I thought he was a little too stuck up and tooottttaaallyy full of himself- in the book that is. It was funny how he criticized the south American scions working in emerging market departments, yet he was a middle eastern one… how ironic.

    I’m not sure where the book fits other than him telling us how wonderful he is compared to others. It isn’t too “mathy” as there is hardly any in there even the “verbalized variety. It isn’t a trading book because he doesn’t tell us much other than using stop losses. He could have delved far more into the area of money management which is really 95% of trading I think.

    I thought it was a disappointing books in a lot of respects…. finding it quite shallow.

    The one thing he did help me with inadvertently…. his sucking up to George Soros. He described how Uncle George is so totally unbiased as a trader. That advice is always good as a reminder.

    My take on he book is that it more of a marketing tool for the dude. In other words he can always show clients what a thoughtful, clever fellow he is for writing a book.

  2. Steve says:

    JC,

    I agree that from a trading perspective it tells you little practical advice. I think he makes good arguments about why its important not to be sucked in to believing that sucess in the markets (particularly over short timescales) is a good basis for belief in skill. I kind of knew to be cautious of this already, but it is certainly true that bonus structures etc. I also think the stuff about some of the behabiour finance was interesting although certainly not new it effectively mixed in with the rest of his arguments.

    As for sucking up to Soros, he certainly does. I can only imagine its because they are both fans of Popper.

  3. hc says:

    I’ve read it through my interests in gambling. People are fooled by randomness and see themselves as controlling processes that involve indepent trials. I think Taleb provides the basis for an explanation of problem gambling.

    I found it a simple inytoduction to important issues in understanding heuristics and personal rules.

  4. […] One of the topics discussed in Fooled by Randomness was the tendency of people in general, but journalists and business economists in particular, to attempt to spin any random series of events into some sort of coherent story. Rather than being content to report an event in its own right there is a compulsion to explain even if the link is tenuous. […]

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