Nassim Taleb - Fooled by Randomness

It may sound corny to say, but I felt more fooled by the randomness of this book than by anything else. The author is quite unashamedly annoying and arrogant. I don't have to worry about hurting his feelings though as he claims he won't read any reviews. (p. 173)

Taleb claims to love science. From his examples in this book, however, he seems to love anecdotes and strawmen even more. He paints with a broad brush, sweeping everyone into narrowly defined groups and making generalities when such statements can't accurately be made. All MBAs (except himself) are bad, as is anyone in academia. The list could go on and on. Here is another example:

...during the middle ages, Arabs were critical thinkers... when Christian thought was dogmatic, then after the renaissance, the roles mysteriously reversed. (p. 185)
He states this as if all Christians, or even the bulk of them, today and for the past few hundred years are and were critical thinkers or as if all Arabs, today, have their head buried in the sand.

As hinted at in the first sentence, above, Fooled by Randomness suffers from a serious lack of flow. Many of the vignettes seemed, to me anyway, to have nothing to do with the topic. If they did, Taleb certainly didn't explain how or otherwise pull them into some sort of tight framework. He claims Stephen Jay Gould was his role model (p. 84), but this work is no Stephen Jay Gould--not by a long shot.

My final critique is with his misuse of statistics and probabilities--the item he thinks all others don't understand and use correctly. First, he focuses on individual managers rather than markets which is a mistake, especially for those of us who invest in markets and not managers. Second, in his examples he distorts the real world picture (again something he hypocritically claims economists ignore with their calculations) by assuming that managers/investors have a 50% chance of losing all their money and a 50% chance of doubling their money. This simply isn't the case in the vast majority of instances. Other factors, such as more money entering markets than leaving them (or vice versa), investors pulling their money out before losing it all or doubling their initial investment, and the markets trend during the period in question all come into play. Everything isn't a random 50/50 chance.

With the above critiques out of the way, I should also state that the book is not wholly worthless. There are occasional gems to be found. Skepticism is important. Pure chance, (market "noise") and the like, certainly do play a role. And probabilities are frequently ignored, misunderstood, or discounted more than they should be by some investors. In addition, the media and information obtained should be scrutinized (rather than completely ignored for the most part as Taleb suggests in many instances). The markets certainly aren't efficient, especially in the short run. So there is much I can agree with Taleb on. These ideas aren't exactly new, though, and you can find them in a more tolerable format and with more skilled prose elsewhere.

from the publisher:
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 form 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.

"Intelligent, honest, and revealing. There exists a distinct Taleb way of thinking and it is contagious." -- Marco Avellaneda, Professor of Mathematical Finance, New York University

"I really liked this book. We need a book like this, that helps us deal with our hard-wired human tendency to underestimate randomness. It is fun to read, refreshingly independently-minded and at the same time playful." -- Robert J. Shiller, Cowles Foundation for Research in Economics, Yale University, author of Irrational Exuberance

"Taleb's book is mathematically sound as well as entertaining and informative for the general public, which's quite an achievement. Everybody knows that mathematics is 'important'. But once in a while there is a book -- for instance about genetics, medicine, quantum physics, or markets -- which actually shows why, and renders mathematics exciting for non-specialists. This is such a book." -- Donald Geman, Professor of Probability Theory, Johns Hopkins University

"Whether you agree with Mr. Taleb or not, his book will leave you with many suggestive queries." -- Victory Niederhoffer, author of The Education of a Speculator

"A blast of common sense. From classical to modern philosophers, via cab drivers, businessmen, and dentists, Taleb doesn't take any prisoners. If you are a trader, a scientist, or a lawyer from Harvard, you must read this book." -- Paul Wilmott, author of Derivatives: The Theory and Practice of Financial Engineering

"The book is, in a word, fascinating. Stick with it: Taleb will grab you. As a non-random consequence, your understanding of life (and your money) will expand exponentially." -- Peter L. Bernstein, President, Peter L. Bernstein Inc. and author of Against the Gods: The Remarkable Story of Risk

Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a crisis-hunting hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame.

Taleb received an M.B.A. from the Wharton School and a Ph.D. from the University of Paris Dauphine. He is the author of Dynamic Hedging: Managing Vanilla and Exotic Options.