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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto) Hardcover – October 14, 2008
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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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Top Customer Reviews
I've read all four of Taleb's books and Fooled By Randomness still stands out as my favorite. Although Black Swan is still the most popular, and most controversial, Fooled in many ways is the most practical, as it's the most general and therefore most widely applicable. Everyone should deeply understand the survivorship and hindsight biases, as well as the difference between conditional and unconditional probability.
That being said, it's often hard to determine whether the heart of the book is the ideas (which to someone such as myself who has only a Stats 101 background in probability are almost always revelation-inducing) or the author. I can't stress how much I learned from this book that has nothing to do with probability or statistics, just random asides from an erudite and meandering mind. Regardless of your background (or even your interest in probability) you will probable learn some fascinating and/or useful tidbit from Fooled, and probably a whole lot more.
Before I delve too deep into the review of this book, I feel it's important to know who the reader is. For instance, financial structures and markets are far from my comfort zone. I am not an overly-active reader with an obnoxiously expansive vocabulary. I am an engineering student (mediocre at best...) who decided to read this book in order to gain an understanding of how randomness intertwines with the market. If you are someone of great intelligence in regards to stocks and the markets, this review is probably going to be irrelevant to you. Otherwise, this review is written from the standpoint of an average guy.
The first thing to know before reading this novel is the structure of the book itself. There are fourteen chapters in which Taleb does a good job hammering the point home - borderline beating a dead horse. The chapters themselves are well-written but seem to have no particular order to the book as a whole. For instance, if you were to read the book backwards (chapter 14 on down), I don't think you would ever noticed you were reading it in reverse - though the overall point and theme would have been received just as well. I'm not sure if that's a sign of an incredibly well-written book or a unorganized collection of thoughts and stories. Also, Taleb has a tendency to use 13 words to describe a 2 word event. Albeit very descriptive, every sentence could probably be reduced by half. Taleb is clearly the intellectually superior between he and I, for I have to look up every third word he writes.
Initially, this book grabbed my attention. All of the facts were interesting and really got me thinking about the role randomness not only in the markets, but in our everyday lives.
The opening chapters compared two brokers with two different personal as well as professional approaches towards life. One being high-risk and high-reward while the other was conservative and consistent. My emotional side liked the high-risk trader, while my logical side related to the conservative trader. After all, Hollywood has done such a good job painting such a skewed perception of high-risk traders. We often see the rewards people (actors) reap after risking almost everything - high stakes, high adrenaline, last minute decisions - but it all pays off in the end, right? Wrong. Hollywood doesn't show the aftermath of the 99.5% of those people who lose. Thus, my logical side relating to the conservative trader. Taleb creates some of the best analogies I have ever read. As a matter of fact, if it weren't for his analogies, I probably wouldn't understand the book. Once again, I'm not sure if that is a good or bad thing...
The most important concept that I took from this book was the notion of Survivorship Bias. We all have it (most to a large extent), yet we hardly ever acknowledge it. In a nutshell (and without spoiling any of his original details/theories), survivor bias is the thought process of `oh that will never happen to me'. It's the notion that we are exempt from certain undesirable outcomes. When buying a lottery ticket, we all envision the most rewarding although lease likely outcome - winning big. In reality, it's quite the opposite. Taleb references this often unaccounted-for bias quite often - each time making the stakes a little more interesting. Second behind survivorship bias, I thought his perception of induction was also informative. We, as humans, tend to induce information that can't be induced. Some systems would rather have wrong data than no data at all - this is a very dangerous method. Some information is just not meant to be induced.
Taleb spends a good amount of time (about two and a half chapters) criticizing other wealthy people. He likes to use his Monte Carlo simulator analogy a lot, and with that, he starts to pick apart other people's wealth. If we were to run the course of the people's lives one million times, what are the chances they would still be millionaires? For most of them, the number would be minute. Although I understand his point, I can't help but to notice an undertone of envy and/or anger towards these `lucky' few.
All of these stories convey one message: randomness can - and will (more often than not) - appear when it is least convenience. It is always important try to acknowledge obscure events, or at least leave room for error in their cause. In one section of the book, Taleb informs us everything is subject to randomness - including evolution. According to Taleb, there are 6 characteristics that make a person a fool to randomness:
1. An overestimation of the accuracy of their beliefs
2. A tendency to get married to positions
3. The tendency to change their story
4. No precise game plan ahead of time as to what to do in negative events
5. Absence of critical thinking
In chapter 5, he explains his reasoning for each of these traits and why they make one a fool to randomness. I agree with his reasoning and in my opinion, most of these traits make a person a fool in general...
In conclusion, Taleb does a great job informing the reader on just how much randomness is actually in our lives. We should always try to recognize that randomness attributes mostly to success. Most people spend a lifetime trying to be successful, when in reality, we need to spend that time trying to minimize the variability of the outcomes of our situations. We should also try to analyze most important decision logically as opposed to emotionally. We need to set goals and not pay attention to the surrounding `noise'. As Taleb says, remember that your personal behavior is the only thing randomness can't control.
Somewhat personal lifestyle story but serious warnings like those of George E P Box that "all models are wrong, but some are useful." But Taleb adds that modern derivatives and options that lose most of the time but win big infrequently are a great strategy for those with means and patience while crashes wipe out the rest of the naked speculators big time. Enjoyed the ideas and stories. Academics will appreciate the well selected references and explanations of why only are a few have "useful models" in the big human-centric gambling casino that is Wall Street. Economics in general is a fuzzy world to model compared to more deterministic factory machines. So don't stop using statistical methods in that latter world. But protect yourself from human factors in the financial world.
Most Recent Customer Reviews
I read this book because I had no understanding of randomness. Well, not a good understanding of statistics and the world.Read more