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

by Nassim Nicholas Taleb (Author) "Nero Tulip became obsessed with trading after witnessing a strange scene one spring day as he was visiting the Chicago Mercantile Exchange..." (more)
Key Phrases: Monte Carlo, New York, Wall Street (more...)

Editorial Reviews

Amazon.com Review
If the prescriptions for getting rich that are outlined in books such as The Millionaire Next Door and Rich Dad Poor Dad are successful enough to make the books bestsellers, then one must ask, Why aren't there more millionaires? In Fooled by Randomness, Nassim Nicholas Taleb, a professional trader and mathematics professor, examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill. This eccentric and highly personal exploration of the nature of randomness meanders from the court of Croesus and trading rooms in New York and London to Russian roulette, Monte Carlo engines, and the philosophy of Karl Popper. Part of what makes this book so good is Taleb's ability to make seemingly arcane mathematical concepts (at least to this reviewer) entirely relevant in evaluating and understanding everything from the stock market to the success of those millionaires cited in the aforementioned bestsellers. Here's an articulate, wise, and humorous meditation on the nature of success and failure that anyone who wants a little more of the former would do well to consider. Highly recommended. --Harry C. Edwards --This text refers to an out of print or unavailable edition of this title.

From Publishers Weekly
In this look at financial luck, hedge fund manager Taleb (Dynamic Hedging) addresses the apparently irrational movement of money markets around the world. Using his own investing experience and examples of others' successes and disappointments, he discusses theories like Monte Carlo math (easy; considered cheating by purists) and the concept of Russian roulette. Taleb tells interesting, well-wrought stories about individual behavior: "While Nero has succeeded beyond his wildest dreams, both personally and intellectually, he is starting to consider himself as having missed a chance somewhere." While serious investors and mathematics enthusiasts will be intrigued, readers looking for practical investment strategies will be disappointed by this rambling intellectual discourse. Tables. 40,000-copy first printing; $150,000 marketing budget.

Copyright 2001 Cahners Business Information, Inc.

--This text refers to an out of print or unavailable edition of this title.

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Product Details

• Hardcover: 312 pages
• Publisher: Texere; 2 edition (April 16, 2004)
• Language: English
• ISBN-10: 158799190X
• ISBN-13: 978-1587991905
• Product Dimensions: 9 x 5.9 x 1.3 inches
• Shipping Weight: 1.2 pounds
• Average Customer Review: 3.8 out of 5 stars See all reviews (424 customer reviews)
• Amazon.com Sales Rank: #522,123 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

138 of 151 people found the following review helpful:

4.0 out of 5 stars Critical review from a trader, October 26, 2001

By	"crankcase" (West New York, NJ United States) - See all my reviews

This review is from: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, First Edition (Hardcover)

I picked up this book because I read Mr. Taleb's quantitative derivatives book, Dynamic Hedging. Dynamic Hedging was an extremely insightful and intuitive foray into vanilla and exotic options. It was enhanced by Mr. Taleb's occasional commentary on life in the markets. I imagined that an entire book containing Mr. Taleb's viewpoints on probability would be compelling.

It was indeed compelling. But I did not wholly agree with him. I suppose that is my right.

At risk of great oversimplification, Taleb argues quite articulately that extreme occurrences in a distribution happen a lot more frequently than humans are prone to believe. Ergo, in derivatives trading, it makes no sense for one to be "frontspread" (short gamma/vega). Ever.

My experience is in equity derivatives. Mr. Taleb's is presumably in fixed income and FX. Without knowing much about the world of FX options, I can assert that in the equity listed options markets, downdrafts in volatility can be almost as deadly as explosions in volatility. The vol crush of the summer of 2000 wiped out as many traders as the Russian debt default of 1998. Out of the money options are never cheap; lots of people buy them for the protection that Taleb seeks. Sometimes even they are too expensive to own.

Going further, I found Mr. Taleb's insights on the role of luck in human performance to be EXTREMELY unsettling. He talks at length about the rich idiot trader and the vastly more competent but underpaid trader (presumably himself). He goes on to ascribe most of those who are wildly successful in life to LUCK, and that individuals ascribe way too much of their own success to their own ability and hard work (which he scorns).

I find this to be frightening. I'm sure Mr. Taleb would find this reaction entirely predictable. The implications are most frightening, from a political standpoint: if most wealth is undeserved, then therefore it can be rightfully taxed (expropriated) and redistributed to those are not so lucky. Furthermore, most individuals who despise hard work do so not because they are brilliant, but because they are lazy. Evaluation of a particular person's work ethic is an imperfect but reasonably good indicator of performance.

Many of the MBAs he derides as being shallow thinkers and pluggers, while may not be (ahem) the intellectual giant that Taleb is, are no slouches themselves. They do not represent the legions of clueless option sellers that Mr. Taleb has somehow encountered throughout his career. Most young associates do have the luxury of telling their boss they did not read the Wall Street Journal in the morning because it represents nothing but random noise.

As you can tell from this review, I enjoyed the book. Otherwise I wouldn't be so critical of it. I couldn't put it down. You probably won't agree with all of it, but it will cause you to think about things in a very different way for a long time.

81 of 92 people found the following review helpful:

5.0 out of 5 stars Essential for understanding the workings of the world, March 11, 2002

By A Customer

This review is from: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, First Edition (Hardcover)

Anyone who holds any doubts in regards to the validity of this book must read Edward Chancellor's 'Devil Take the Hindmost,' which provides a history of financial markets from the dawn of the Roman Empire up to now. After reading such a sweeping historical account, one sees the financial markets for exactly what they have always been: one vast bubble machine where people have even invested in, according to Chancellor, a company that refused to explain anything about what it did but simply assured the investors that it had a great idea for making money. Sounds rather similar to some of the dot coms in recent years. Through a compliation of both antecdotes and thoughts, Taleb provides an explanation as to why the markets work in this way, why so many fail to realize this, and how these issues are mirrored in our everyday lives. He addresses many issues that everyone should understand in order to view the world in a realistic manner. Evolution is not a one way road to nirvana but rather the process through which those adapted to the current situation fare better, and they may not be best adopted when things change. When judging the validity of any strategy in business or in life one must consider that the winners write the history books; you can only talk to survivors of war but that certainly doesn't mean that everyone survives it. When deducing anything from viewing a sample you must consider the forces that created that sample: should you consider yourself unintelligent because you're behind your classmates at a top law school? Are a good outcome and a good decision the same thing, and likewise for a bad outcome and a bad decision? And the list goes on.

While Taleb does not fully dive into this issue until later in the book, the primary conjecture of the piece is that human beings are psychologically prone to misinterpret random events. We need to explain things, whether it be in the social sciences, art and literature, or the natural sciences, so we find ways to explain them. Considering the infinite quantities of data at our disposal, no statistician denies that extremely powerful correlations will occur simply out of chance. Certain aspects of an author's life will be almost identical to passages in his or her novels, certains stocks will share perfect correlations, and we are creatures in need of explanation, and whole industries have been created to mine the data and tell us why things occur.

Prior to this book, Taleb had already written 'Dynamic Hedging,' considered by many, including myself, to be one of the best books ever written on exotic and vanilla options. That book is not for anyone who has not spent years studying (or preferably practicing) options, but in 'Fooled by Randomness' he illustrates his ideas in terms that anyone could understand. In 'Dynamic Hedging' he provides more insights into his trading strategies than he would have done had he been solely profit motivated, and likewise, as the boss of a fund that profits from other people's misconceptions of probability, he cannot have any reason to try to increase people's awareness of how the world really works other than a genuine desire to play the role of the teacher. Many have attacked the book as arrogant, but it must be remembered that anyone who goes against the common ways of thinking is essentially suggesting that he or she understands things better than do most people and therefore cannot help but come off as arrogant. Several times in the book Taleb specifically states that he falls victim to the tendencies that he condemns, and that the main difference that he sees between himself and others is that he is at least aware of it.

Considering the fact that Taleb blatantly argues that many who consider themselves the rulers of the universe were in fact a group of lucky fools, it is inevitable that many will come away from it with a sense of anger and a refusal to believe it. I am therefore almost surprised that the book has not drawn harsher reviews than it has, for Taleb was certainly not seeking to make friends through the publication of it. I suspect that those who rate the book as poor fall into two general categories: those who were troubled by the thought that a considerable portion of their success may have resulted from luck, and those who are attached to their current views on the workings of the markets and are hostile to any new views on them. These two categories naturally overlap quite often. An important thing to remember is that even if you work very hard, not only are the outcomes of your projects the result, to varying extents, of chance, but chance also played a role in getting you to the position where you can work hard and actaully see it pay off. Considering the complexity of the world we live in, and the infinite forces that push and pull on our lives, this book is critical to anyone who desires an objective veiw of how things come to be...

32 of 35 people found the following review helpful:

3.0 out of 5 stars Intiguing but ultimately unsatisfying, April 30, 2002

By	David Amann (Redwood City, CA USA) - See all my reviews (REAL NAME)

This review is from: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, First Edition (Hardcover)

I bought FOOLED BY RANDOMNESS after reading the Malcolm Gladwell profile on Nassim Nicholas Taleb in the April issue of the New Yorker. Like others who have reviewed this book, I found that Gladwell captured the most important details of Taleb's thoughts in a shorter, more entertaining way. However, I thought that this book can be a worthwhile read for those with a passion for this type of book.

FOOLED BY RANDOMNESS is an introduction to the difficulties human beings have at reasoning around probability. Taleb argues that human beings are genetically hardwired to misattribute the results of human endeavors to skill and knowledge that are, in fact, just coincidental, random events. Taleb discusses the results of this embedded flaw in human reasoning in three areas.

In part 1, Taleb discusses impacts of `rare events' on both financial markets and on human history. Taleb argues we should beware seemingly successful strategies if they are not proven by the test of history. In particular, we should examine human history in the long term for general trends and treat skeptically claims that humanity has reached `the end of history' or `a new economic model' where the old, proven rules do not apply.

In part 2, Taleb discusses the `survivor effect', or mistaking success based on luck for success based on skill. In particular, Taleb warns against judging a strategy by its actual results. Instead, we should judge strategies based upon a sum of all possible outcomes.

In part 3, Taleb briefly discusses `tricks' he has developed to try and derail his flawed, ingrained, statistical reasoning and live a rational and, to a great degree, classical life based upon a good understanding of the effect of randomness on our lives.

The book is peppered with classical references to ancient philosophers and literature, as well as humorous anecdotes to Taleb's own experience in the world of Wall Street. Unfortunately, interesting nuggets and provocative thoughts throughout the book are rarely fully explored. While I was entertained and intrigued, when I got to an end of a chapter or section, I often felt dissatisfied, as if I was trying to wrap my arms around some meaty ideas and came away with empty air.

Unlike other reviewers, however, I did not find Taleb particularly pretentious. In fact, I often felt that Taleb was more than open with his own particular foibles and failings. His only source of pride seemed to be in realizing that he had these failings. Ironically, Taleb attributes this understanding to the experiences suffered in his own personal, contingent history.

Overall, I found the book to be like a good Chinese dinner: entertaining at the time of reading, but left hungry an hour later.

Dav's Rating System:
5 stars - Loved it, and kept it on my bookshelf.
4 stars - Liked it, and gave it to a friend.
3 stars - OK, finished it and gave it to the library.
2 stars - Not good, finished it, but felt guilty and/or cheated by it.
1 star - I want my hour back! Didn't finish the book