Fooled by Randomness

Book Title: Fooled by Randomness: The Hidden Role of Chance in the Markets and Life
Author(s): Nassim Nicholas Taleb
Rating: $$$$



Review:
Key Words: Dentist, Mongolia, Monte Carlo, Swan (both black and white), Probability and also Randomness.

Taleb could have saved hundred of trees and reader’s time, had he avoided much of his intellectual babbling and unnecessary drifting to areas, alien to the theme of the book. The book is pretty erratic, too simple and boring to start with but catches the reader with surprise in the later chapters of the book.

Most refreshing about the book is that Taleb, true to his grain, has shown his irreverence for one and all. To me this comes as the most striking message from the author (can’t say he intended it) as we have developed an unfailing habit of creating Gods out of mortals (of course with great help from the media). For instance, I know many fellow analysts (Buffett worshippers) who refuse to analyze tech stocks as it falls outside their “circle of competence”, even though their understanding of computers and things close to it is awe inspiring (yours truly is also a Buffett follower, but vis-à-vis those mentioned above, I am still at odds to figure out difference between software and application). Taleb has shown courage in being critical to what he don’t subscribe to and will certainly help us if we can follow suit.

Taleb has spent lot of effort in putting Probability in the right perspective and very effectively demonstrates some common flaws (they look pretty obvious in hindsight) in our interpretation of probability and statistics results.

The book also introduces the reader to the assumption of “rational expectation” in normative science and the challenge it faces from behavioral economics / finance, an offshoot of positive science.

Somewhere lost in all these is the main theme of the book which is all about uncertainties and probabilities associated with it. He has used randomness as (read “luck”) an argument to claim that most (read “all”) managers’ (read “money managers”) success is attributed chance / luck, rather than their skills (and no, he doesn’t believe in efficient markets or modern finance theory either). However, to the disappointment of the readers, he doesn’t provide any hard tools to figure out randomness in a manager’s success.

I think what “Fooled by Randomness” gives you is a fresh perspective and the motivation to think critically and unbiased, as Taleb very effectively crushes much cherished and conventional wisdom, ideas, icons and institutions.

Also relevant are:

Do not pay attention to noises in the market
Do not get fooled by randomness (Do not attribute all of your success to your skills and failure to chance)
Emotions plays a large role in decision making, not rationality