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Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life Hardcover – October 1, 2001
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- Print length220 pages
- LanguageEnglish
- PublisherW. W. Norton
- Publication dateOctober 1, 2001
- Dimensions6.25 x 1 x 9.25 inches
- ISBN-101587990717
- ISBN-13978-1587990717
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Editorial Reviews
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Copyright 2001 Cahners Business Information, Inc.
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"A blast of common sense. From classical to modern philosophers, via cab drivers, businessmen, and dentists . . ." -- Paul Wilmott, author of Derivatives: The Theory and Practice of Financial Engineering
"I really liked this book. . . 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
"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
"Taleb's book is mathematically sound as well as entertaining and informative for the general public, which is quite an achievement . . ." -- 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
About the Author
Product details
- Publisher : W. W. Norton; First Edition (October 1, 2001)
- Language : English
- Hardcover : 220 pages
- ISBN-10 : 1587990717
- ISBN-13 : 978-1587990717
- Item Weight : 1.03 pounds
- Dimensions : 6.25 x 1 x 9.25 inches
- Best Sellers Rank: #1,658,974 in Books (See Top 100 in Books)
- #1,605 in Adult & Continuing Education (Books)
- #5,019 in Job Hunting & Career Guides
- #11,151 in Investing (Books)
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About the author

Nassim Nicholas Taleb spent more than two decades as a risk taker before becoming a full-time essayist and scholar focusing on practical, philosophical, and mathematical problems with chance, luck, and probability. His focus in on how different systems handle disorder.
He now spends most of his time in the intense seclusion of his study, or as a flâneur meditating in cafés. In addition to his life as a trader he spent several years as an academic researcher (12 years as Distinguished Professor at New York University's School of Engineering, Dean's Professor at U. Mass Amherst).
He is the author of the Incerto (latin for uncertainty), accessible in any order (Skin in the Game, Antifragile, The Black Swan, The Bed of Procrustes, and Fooled by Randomness) plus a technical version, The Technical Incerto (Statistical Consequences of Fat Tails). Taleb has also published close to 55 academic and scholarly papers as a backup, technical footnotes to the Incerto in topics ranging from Statistical Physics and Quantitative Finance to Genetics and International affairs. The Incerto has more than 200 translations in 41 languages.
Taleb believes that prizes, honorary degrees, awards, and ceremonialism debase knowledge by turning it into a spectator sport.
""Imagine someone with the erudition of Pico de la Mirandola, the skepticism of Montaigne, solid mathematical training, a restless globetrotter, polyglot, enjoyer of fine wines, specialist of financial derivatives, irrepressible reader, and irascible to the point of readily slapping a disciple." La Tribune (Paris)
A giant of Mediterranean thought ... Now the hottest thinker in the world", London Times
"The most prophetic voice of all" GQ
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I think I first read "Fooled By Randomness" circa 2006. Recently, I felt a longing to reread Taleb's first non-technical book again. Wow, what a wise decision that was! I actually digested more from the rereading than I did from the initial reading (and I digested quite a bit from the first reading). Both times, I focused on reading the book very, very slowly. Obviously, the fact that I spent the time to reread this book is indicative of how valuable I think it is.
Known for his great wit, the baseball pitcher Vernon Louis "Lefty" Gomez was fond of saying that, "I'd rather be lucky than good." This phrase, in essence, is one of the central themes of the book. Although it sounds like a hackneyed platitude, Gomez, understood the role of randomness in our lives. However, due to myriad biases, we humans often tend to attribute our successes to our skill and blame bad luck for our failures. Is your rich neighbor or your boss really as skilled as she thinks she is?
Parts of the book are also about the hindsight bias and the narrative fallacy. We humans are great at fabricating post hoc narratives about our world. It's how we understand (and misunderstand) the world, but we must remember not to take our stories too seriously. "A mistake is not something to be determined after the fact," writes Taleb, "but in the light of the information until that point."
One of Taleb's favorite philosophers is Karl Popper. However, Taleb wasn't always enthralled with the man who espoused the beauty of empirical falsification. Prior to rediscovering the great philosopher, Taleb went through a self identified anti-intellectual phase early in his career as a trader. He feared becoming a corporate slave with "work ethics" (a term which he interprets to mean inefficient mediocrity). "Philosophy, to me," Taleb writes, "became something rhetorical people did when they had plenty of time on their hands; it was an activity reserved for those who were not well versed in quantitative methods and other productive things. It was a pastime that should be limited to late hours, in bars around the campuses, when one had a few drinks and a light schedule -- provided one forgot the garrulous episode as early as the next day. Too much of it can get a man in trouble, perhaps turn one into a Marxist ideologue." As they say, the dose determines the poison.
Speaking of poison, another interesting idea that Taleb espouses is that being too attached your beliefs is poisonous. As he puts it: "Loyality to ideas is not a good thing for traders, scientists, -- or anyone". I like to think about it this way, there are times we shouldn't trust experts precisely because they are experts. This is because they are no incentives to be brutally critical of your own ideas. A scientist or a preacher who has built their career on a certain idea obviously has a lot invested in that idea. How likely are they to be critical of their own position when their livelihood depends on it being accepted? What if they are putting out pseudo-scientific nutritional guidelines that cause harm, but help them keep their job?
According to Popper there are only two types of theories:
1) Theories that are known to be wrong, as they were tested and adequately rejected (he calls them falsified).
2) Theories that have not yet been known to be wrong, not falsified yet, but are exposed to be proved wrong.
If you accept Popper's epistemology, like I also do, you can never claim that you know a theory to be true. In other words, we can only gain knowledge through proving that things are false. For instance, when I accidentally find myself in a theistic debate, people often challenge me to tell them how the universe came into existence. When I say `I don't know', they become infuriated. How dare I have the gall to dismiss some of their religion's claims as not true without projecting my own claim to reality? Yet, that's exactly the point. I gain knowledge through knowing what's wrong, not through making claims about what I think is right.
So what should we make of Taleb's extreme and obsessive Popperism in a more practical sense? How does he recommend we apply to it our lives? I think it can be summarized in the following passage:
I speculate in all of my activities on theories that represent some vision of the world, but with the following stipulation: No rare event should harm me. In fact, I would like all conceivable rare events to help me. My idea of science diverges with that of the people around me walking around calling themselves scientists. Science is mere speculation, mere formulation of conjecture.
The following thought experiment really helped me internalize this message. Assume you participate in a gambling game that has 999/1000 chance of winning $1 [Event A] and a 1/1000 chance of winning $10,000 [Event B]. Using some straightforward calculations the expectation of a loss is roughly $9 (multiply the probabilities by the outcome for each event and then sum them) Which event would you bet on? I suspect that most people consider the frequency or probability in their decision, but this is totally irrelevant. According to Taleb, even people like MBAs and economists with some statistical training fail to understand this point. The magnitude of the outcome should be the only relevant factor in the decision. Think of a trader who focuses on event B, sure, he is likely to bleed slowly for long periods of time, but when the rare event happens the payoff is astronomical compared to the losses. Most of us, however, are schooled in environments that focus on games with symmetrical outcomes (e.g., a coin toss). The great psychologist and father of behavioral economics, Daniel Kahneman, also reminds us that we are loss averse and psychologically struggle with idea of bleeding out small losses for extended periods of time, even if there is eventually the opportunity for a huge payday.
Once you realize that life is full of scenarios with asymmetrical payoffs, you're thinking (if you're anything like me anyway) will be permanently altered. In fields like, say, writing, the outcomes are asymmetrical. In other words, there is not a linear relationship with the number of hours spent writing and the amount of income one makes. One may spend a long time writing for free and then finally catch a huge book deal. For me, this is somewhat of a moot point because I'd write for free without any other justification other than the fact that it's fun and makes me happy. However, if all other things were equal, and I could also make money doing something I love, I would be very happy.
Here's another piece of practical wisdom that I really enjoyed: "stay away from people of a competitive nature, as they have a tendency to commoditize and reduce the world to categories, like how many papers they publish in a given year, or how they rank in the league tables." These are the same kinds of people who think that their GPA reflects their intelligence. Or that the number of hours they spend running on a treadmill reflects their fitness. Or that their inherited wealth says something about their genetic fitness. Or that their expensive clothes make them beautiful. I could continue on and on, but I think you get the point.
I often hear those around me complaining about how life will be better when they achieve "X". Alas, I'm human and guilty of making claims like this on occasion too. The trouble is that, for most of us anyway, we won't really experience long-term improvements in our happiness when we achieve "X". Throughout the book, Taleb devotes a fair amount of time alerting readers of what the literature in behavioral economics tells us about our irrational tendencies and biases.
For example, there's the social treadmill effect: you get rich, move to rich neighborhoods, then become poor again once you compare yourself to your new peers. Then, you may work your ass off and get rich again, only to repeat the cycle. If you want to feel worse about yourself, then the best piece of positive advice I know of is to hang around people who are wealthier than you. I often try to remind myself that I'm living a life that is materially better than 99.9% of all humans that have ever existed and yet I still have the audacity to claim that I don't have enough sometimes. Pathetic.
At one point in the book, Taleb writes: "I see no special heroism in accumulating money, particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from wealth (aside from the pleasure of regularly counting the beans)". In other words, money is only valuable if you use it as a tool to extract enjoyment from life.
If it isn't clear, I think he is making reference to the likes of Warren Buffett, whom people tend to see as being virtuous simply for the fact that he has been able to accumulate hordes of money. What I think many people fail to understand is that there is nothing virtuous about having money just for the sake of having it. How someone earned what they have tells you a lot more about them than how much they have. We generally tend to think that having money signals other traits about a person, but I'll remind you that there is a lot of noise in those signals (think inheritance). Having money doesn't necessarily signal any superior traits.
Those who want to make a lot of money are greedy and shouldn't try to deny that motivation. Greed, however, is not necessarily a bad thing. As Adam Smith taught us, another mans' greed can create more wealth for society as a whole (provided the individual's wealth is ethically obtained).
Do cigarette smokers understand probabilities? If so, how can they rationally understand the ills of cigarettes and yet be foolish enough to smoke them anyway? When I go for walks near hospitals I'm always surprised by the number of people in scrubs (perhaps some of whom are doctors and nurses) who I assume are well aware of how harmful cigarettes are, but smoke them anyway. Apparently, intellectually understanding something and being able to put it into practice are two different things.
One thing Taleb also writes about is the selection bias in blogging and book reviewing. The cover of my edition of Fooled By Randomness has an excerpt praising Taleb as one of the "hottest thinkers" in the world. While I certainly agree, I couldn't help but smirk after reading that line -- can you say selection bias?
Any book that is worth reading twice is worth reading more than twice. When you love a writer, you want to hear his opinion on just about everything.
- See more at: [...]
Overall the book was interesting for a novice reader but definitely not an easy to follow book. There were many parts of the book where I had to stop and read twice or thrice to understand what the author is trying to say. It definitely shows you a different mindset of the Type A personality investment bankers and traders.
The book walks through various phases of how randomness and probability affect people from all walks of life. It is well divided into three major parts, each explaining different angles in which people view probability and randomness in their lives and how they deal with it on an individual level. The author explains well how perception and biases are responsible for people making wrong decisions. He talks about the fact that even though we cannot completely ignore emotions, we cannot as well completely remove probability and randomness while evaluating decisions and risks. The author also explains about the Monte Carlos simulators and how they should always be used to predict outcomes in the future rather than just relying on data from the past. The author also has strong views about denigrate history suggesting that people feel that things that happen to others might not happen to them. Nassim has given a lot of examples to show the reader the various angles in which randomness and probability is perceived, used and interpreted by people. The author also draws light upon the fact that too much information might end up doing more harm than good as it blurs your decision and your ability to choose the right information. Nassim also strongly emphasizes on the fact that any individual should never get completely loyal to his position as it hinders him from looking at different points of views. This in turns affects his decision making and ability to adapt to the changes that come with the position. The author has given examples of people from his life, famous people throughout history as well as people from various field of work to prove his point in several occasions. The author finally suggests that it is inevitable to be affected by randomness as he himself has been affected by it. However whatever the effects of randomness in anyone's life, they never should blame anyone or get angry but just learn to deal with and change is always inevitable.
The book has been written in a very personal format where it feels as if the author is trying to convey a message through a personal talk. Talking about experiences in his life and sharing his emotions definitely helps build that connection with the author. The author's style seems very straight and blunt as well. It feels like he has no qualms about how he has experienced life or what he has thought about some people who he has met in life. This is clearly seen in way he expresses feelings about some of his neighbors, coworkers or even people he has heard about. It gives a sort of raw understanding into the mind of the author. In doing so he has been able to sort of organize his book in to the various aspects of randomness, its effects and biases that come with it and finally how several people deal with it. This sort of structure helps in understanding the complex message that the author is trying to convey.
There are quite a few quotes that got me thinking, some of which are: "Mild success can be explainable by skills and labor. Wild success is attributable to variance.", "Heroes are heroes because they are heroic in behavior, not because they won or lost.", "A mistake is not something to be determined after the fact, but in the light of the information until that point.", "The only article Lady Fortuna has no control over is your behavior.". However my most favorite line from the book is "No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion." I love it because it made me think and realize that this applies to so many things in life. Your reputation that you build upon for so many years can all come crashing down with a major mistake. Nassim explains this with an example of a successful banker who earned millions for a bank however a single mistake that cost him millions got him fired and forgotten of the things he had done in the past.
After reading through the entire book you have a sense of confusion mainly due to the fact that it does stay close to its name that there is a lot of talk about randomness that exists in the world and the market. However Nassims ability to convince the author is promising. He himself believes that he was fooled by randomness and consciously tries to make certain decision that help him in making the sound decision.
Overall this book has great things to offer from head scratching content to knowledge to even humor at times and is definitely worth a read. It helped me step out of my comfort reading zone and challenge me in my thoughts and opinions that I had about various aspects in life.
Top reviews from other countries
In another instance, Nassim criticises an interviewer for pointing out to an expert that his ideas if followed would have caused a loss. Nassim doesn't explain why this objection is invalid.
On the plus side, there are some interesting ideas here:
- We're good at understanding even bets, where there's a 50% chance in your favor, not skewed bets, where the chance is more on one side.
- A 20% chance of making 1 crore is not the same as a 10% chance of making 2 crores, though both have the same expected value of 20 lac. Expected value is not the only factor in analysing bets.
- The human mind is poor at understanding probabilistic thinking, because it's counter-intuitive.
- When Nassim was asked on one instance whether he thinks the market will go up or down, he said that it's likely to go up but he bet that it went down. Why? Because if it goes up, it goes up only a little, but if it goes down, it's expected to go down a lot, so the expected value is negative.
- The more often you check your portfolio, the more likely you'll find dips, which will make you feel bad. A negative event isn't counter-balanced by a positive event — it requires roughly two positive events to counter-balance it. So Nassim, aware of his own irrational mind, checks his portfolio rarely. And so should we.
- Randomness plays a big part in outcomes, and most people take credit for good luck but blame bad luck on things beyond their control. Plus there's so much ego involved.
- A family earning half a million dollars a year and staying in fashionable Park Avenue in New York, where they're the poorest in their apartment building, will be happier if they move to a middle-class area, where people will look up to, not down at, them.
- A person who repeatedly takes bets and is proven right for a decade can still be wrong, and gives us the example of a trader who was right for two decades, and then went bankrupt. If you bet that rare things won't happen, it may take a decade or two for luck to catch up with you.
- Everyone assumes rare things won't happen, while Nassim bets that they will. Nassim loses money every day for years, and finally earns a lot to make up for all the losses, though it's emotionally draining to see money go out every day. Nassim knows his worst-case scenario, while others don't.
- Wall St banks have bad incentives and will never behave properly. Bad behavior is ignored as long as it produces a profit.
- "Stochastic" means a process consisting of a sequence of random events. Not one event.
- Monte Carlo techniques are computer programs that simulate thousands of scenarios, all random, and give you a conclusion like: 20% of the time, you go bankrupt. 30% of the time, you make a million dollars. The rest of the time, you earn a modest return of 10-20% on your investment. This is a much better way of analysing things than a single number, like: what is the probability that this investment technique produces a 15% profit?
- Monte Carlo techniques are the only option when the equations to model things are too complex. Monte Carlo is brute force, and works.
- Survivorship bias means that the average fund manager has a high return because the rest are out of business. If you count them, the average return is low.
- Nassim is an intellectual and prefers thinking to working.
Avoid this empty piece of fluff and go read "thinking fast and slow".
This was my first Nassim Taleb book I've read, so I can't compare to his two main books Anti-fragile & The Black Swan, although I will be reading those next.
"The Black Swan" taught me about something I sort of intuitively knew about, but couldn't quite articulate, and doubted myself when I tried: the importance of very unlikely, but very costly risks ("'black swan' events"). But this earlier work seems a better place to start. While Taleb writes well, it's not an easy read. He keeps saying that people misrepresent him for a reason: it's very easy to do. The digested NN Taleb is that success is *partly* down to luck (and the "*partly*" gets omitted by a lot of people). This isn't the place to summarise why he thinks that. Read the damn book.
Coda: this book covered a lot of material that was in my undergraduate degree and quite a lot that should have been. If you're an undergraduate in *any* of the sciences, this book will at the least, do you no harm, and may come in useful at some unexpected moment. If you've got a degree, you should have read this book, so if you haven't, make good that omission now. If you have the sense not to have a degree, well, this book is for you too.
Is it only for numberphiles? No, it probably is too basic for the ‘initiated’; even though they still might enjoy the examples and life stories.
Everything is well explained in a simple manner; probably also because Taleb is not as brilliant as he thinks.
The outcome is a practical theory, exciting, and filled with anecdotes of an unusual character.
Lets put it this way, this book makes a dry theory entertaining and accessible to everyone. That should be applauded.














