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9 of 9 people found the following review helpful:
3.0 out of 5 stars
Amusing but Random Mutterings, December 8, 2008
Here is the trader Nassim Nicholas Taleb's market philosphy: because humans aren't engineered to think abstractly they discount the role of randomness in their lives, and thus the probability of an unlikely event (what he calls a "black swan") is greatly underpriced by the market. That's why Mr. Taleb is betting hard that a "black swan" will occur, and his first book "Fooled by Randomness" draws on personal anecdotes, finance, mathematics, Greek poetry, psychology, and Yogi Berra to explain and to justify his career choice.
The book is divided into three parts. The first is about how society discounts randomness, the second about how society explains away randomness, and the last part is about how to deal with randomness: when luck turns against you, Mr. Taleb advises, "behave with dignity" like a stoic or a Victorian gentleman.
But the structure doesn't really contain Mr. Taleb, and he muses freely, expansively, and circuitously. He's so obviously upset by how humans can't appreciate the role of luck in their lives that he feels compelled to inflate the importance of randomness: "No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word."
This may or may be true in the financial markets, and we can infer that Mr. Taleb makes this controversial conclusion because he has seen enough idiots strike it ridiculously rich whereas he is merely wealthier than 99 percent of humanity. The problem is that he applies this observation to other aspects of society. Thus, he argues that great literature can sometimes be products of randomness (an infinite number of monkeys on typewriters can produce "The Illiad"). And we celebrate Julius Caesar and Alexander the Great as heroes but there could have been thousands of others whom randomness has struck down to obscurity. Even good basketball: the "hot hand of basketball" is perhaps a random sequence being misinterpreted.
As for literature and philosophy and heroes Mr. Taleb makes the mistake of believing in objective standards. Is "Illiad" just good literature, or is it a useful cultural artifact for society to define and defend its norms and worldview? Was Caesar really a hero, or is it merely useful for society to believe he was? As for Mr. Taleb's point about basketball psychologists would argue that when a player plays well he becomes more confident which makes him more skillful -- when a basketball player is on fire he really is on fire.
The ultimate problem with this book is that it takes a principle that's probably true in one area, and holds it to be manifestly true everywhere else. (This is called induction or inference, and ironically Mr. Taleb spends a chapter complaining about its misuse.) Now that he has his framework Mr. Taleb must ensure that everything fits into it. According to Mr. Taleb Bill Gates is not a cunning and cutthroat monopolist but rather someone who just happens to find himself in the lucky position that a critical mass use his software, and thus all subsequent consumers must buy his software.
Mr. Taleb is a mathematician by training, and if he faults others for thinking too concretely perhaps he thinks too numerically. What exactly does randomness have to do with the 1998 Russian bond default, which caused the collapse of Long Term Capital Management and almost the international financial system? Financiers assumed that sovereign states did not default on loans, and then quantified their assumption into a very low probability to justify their actions. It wasn't luck -- it was a useful bad assumption, and sometimes it's bad luck but many other times it's greed and stupidity. How would Mr. Taleb characterize this current financial crisis? Is it a "black swan" event? Or is it bad government policies that permitted powerful financiers to over-leverage themselves and make bad decisions and construct pyramid schemes believing there would be no consequences? Reading Mr. Taleb's book would lead us to conclude this was a low probability event -- and I don't think that's the right answer.
Mr. Taleb could have simply written a treatise on how the market is random but that's been written before. He could have argued that humans should adopt probabilistic thinking (like how weather is reported) over cause-and-effect thinking (like how history is written) because randomness is a constant part of our lives. Instead he chooses to bet hard, and argues a controversial but ultimately indefensible theory that randomness rules our lives and the world.
Judging from book reviews and sales of "Fooled by Randomness" Mr. Taleb has won his bet. And this book will become more successful and influential over time because this book -- like "Democracy in America" and "The Communist Manifesto" -- is written to be misread and misunderstood. Read it piece-meal, and each part is infinitely sensible. Read it cursorily, and this book is genius. Read it carefully, and this book is wild inference and speculation on top of incoherence and inconsistency. What's the probability of any book being read carefully and painstakingly if read at all? About the same as a "black swan."
"Fooled by Randomness" is -- as Mr. Taleb accuses Hegel's writing -- random mutterings. And so perhaps Mr. Taleb, who is obviously an intelligent and well-read man, is playing a metaphysical joke: if this book becomes a best-seller it can only be because we are too easily fooled by randomness. And right now Mr. Taleb is laughing all the way to the bank.
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3 of 3 people found the following review helpful:
5.0 out of 5 stars
Fooled by Probabilities, November 22, 2008
The ideas in this book have created more controversy than they deserve, and it might have something to do with the title of the book. Given the number of people who equate "random" with "equiprobable", "Fooled by Probabilities" would have been a more appropriate title for the book, though not as provocative as "Fooled by Randomness". There is a finite chance that there is a black cat in every dark room, but when you switch the light on, there is no black cat in the room. Both are correct statements - mathematically and practically. This book must be read in the same light.
It seems to me that the transition from an average to good investor (probabilistically speaking) happens as soon as you internalize the concept of expected values and invest by it. My favorite story from the book is where Taleb is asked which way the market is expected to go next week, and he says slightly up with a high probability (70%). Then someone intervened that Taleb had just made a big bet on the S&P going down next week, and he said that indeed he did. The one lesson this book teaches is that the two statements are not inconsistent with each other. 70% chance of a +1% change and 30% chance of a -10% change sums upto -2.3, a strongly negative expected value. Good investors always shadow the expected value (trend and magnitude), although market sentiments are always driven by either the expected trend of upward or downward movement, or expected magnitude of upward and downward movement.
Four key insights that I received from the book about how we all get fooled by probabilities in our everyday lives are the firehouse effect, survivorship bias, endowment effect and Wittgenstein's ruler. Firehouse effect is characterized by a clique of people with much downtime (firemen) who end up strongly agreeing with each other about things that would seem incorrect to any rational observer - something that many investors suffer from. The survivorship bias talks about exclusion of failures from "objective" after-the-fact performance studies - something that many business books suffer from. Endowment effect suggests that people value something more after they own it or get familiar with it - something that many businesses suffer from. Wittgenstein's ruler says that when an unreliable ruler is used to measure a table, the table is measuring the ruler and not the other way around. Reliability of the ruler determines what is being measured - something that consumer reviews and stock recommendations suffer from. For these and many such, read Fooled by Randomness.
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4.0 out of 5 stars
Better than "Black Swan", May 5, 2009
This book was written before Black Swan, the book that made Taleb famous. It is based on his experience on Wall Street as well as his education in statistics and the math of randomness. It taught me. It has some flaws in its writing, including repetiveness and lack of thorough editing, but it is well worth reading. A very good introduction to the application of a formal understanding of randomness to life.
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