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.