on September 13, 2005
REVIEW: This book tends to elicit very strong opinions about its quality (both very good and very bad) so it is important to know which camp you are in before you purchase it or you may be very disappointed. I found that both the very bullish and the very bearish reviews have significant merit. On the plus side Taleb aggressively addresses a topic that many readers will be interested in - randomness in our daily lives. He discusses many important concepts that are not known or at least not very well understood by the general public and experts alike. These include: 1) that uncertainty and luck play a large role in the outcomes of human activities (much more than most people think); 2) that a correlation between two types of events does not necessarily mean that one causes the other; 3) that statistics and the rare random event are poorly understood by almost everyone; 4) that small differences in performance and ability can cause very large differences in the rewards or difficulties that people obtain in life; and 5) that humans are very irrational beings and are not very good at thinking probabilistically and understanding the probabilities of even everyday events rationally. All of these are important points that I commend Taleb for bringing to our attention.
However, there are significant drawbacks to this book, which to some readers will make the book significantly unenjoyable or even impossible to read. While it did not significantly bother me, Taleb does have an attitude or style which at times tends to the snobbish. The author repeatedly reminds readers that he is well traveled, is a "voracious" reader, pursues his exercise routines "assiduously", and is from upper class Mediterranean roots. Further, at some points in the book, he writes from a bitterness and contempt (which he admits) for journalists, economics, others in his profession, and generally those who are not "literate persons". In general, I would have preferred that Taleb left most of these personal issues out of the book and that he have written it with a little more rigor. But in fairness Taleb clearly warns the reader that his book is a personal memoir and not a treatise. Unfortunately, I believe this is mostly a cop-out to avoid addressing his critics on the merits. The book has the look and feel of a treatise, and I was hoping for a treatise, but it doesn't deliver.
STRENGTHS: Addresses an important topic not well understood and not written about enough; most people will benefit from a better understanding of the major concepts brought out in this book; the author is well read and not afraid to offend and pursue the material aggressively
WEAKNESSES: I hate to say it because I find the author likeable in many ways, but too much of the author's personality comes through and what it suggests to me is that he may have significant insecurities and passive aggressive issues that may even be pathological; many readers will have a hard time getting past the author's aggressive style or perceived "bad attitude", some readers may even see the book as political; the book is "a personal memoir and not a treatise" and thus lacks the rigor that many would expect; the author takes great pains to try to avoid addressing any substantial criticism (this is the first book I've read where the author feels the need to attack the credibility of Amazon reviewers calling them "unqualified" to comment on his book)
on September 18, 2002
This is an tough book to review. I give it 3 stars because the points he makes are valid and should be more widely understood. Unfortunately you must wade through much rambling to find them. He seems more interested in proving that he's as arrogant as people expect him to be than in discussing the key points at any length. With a fairly strong background in probablility assessment and risk evaluation I was able to follow his arguments reasonably well but I suspect anyone who does not already understand probabilities and Monte Carlo modeling will not understand the points he is trying to make. This is because the explanatory points are almost always one sentence buried in a rambling paragraph. Our society would be better off if every citizen understood his points but I don't think this book will enlighten many people. On a side note - I don't know what book several of the other reviewers read but it wasn't this one. Nowhere does this book discuss specific trading strategies or approaches or taxes. Several reviewers also clearly didn't follow the discussion. The point of survivorship bias is not that it proves LUCK is responsible for a given individuals success in any of the many areas where it holds. The point is that you don't KNOW the source (luck or skill) and you can't PREDICT future results.
on March 11, 2002
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...
on April 30, 2002
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
on October 26, 2001
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.
on March 11, 2002
I am a trader myself, and ran into this book as, ironically, a lucky coincidence: I happened to read the emerging markets chapter as a draft that was getting emailed around the office, and enjoyed it so much i purchased the rest of the book...
I found the book to be well written, opinionated and with some great ideas that frankly are hard to argue against. His book, at the core, is about the problem of induction. Statistics, for how useful they may be day to day, certainly do not solve this problem, and indeed, luck and skill are hard to differentiate in the markets.
He exposes a problem of a philosophical nature, and he is certainly not suggesting to drop all induced laws and redefine a day to day life full of uncertainty and incapable of establishing practical rules.
This book is not meant to be a textbook so i am not sure why Taleb's flair as a writer is getting attacked so repeatedly here. I think his writing style is elegant, amusing and smooth. This book is about opinion, so accusing him of having an opinion seems a misplaced objection. Also, i believe his writing is being somewhat misinterpreted. While there is an undertone of arrogance, it is self mocking. He does not claim to know better. His only, somewhat socratic claim is that he at least knows he does not know...I am surrounded by arrogance at work, and i can tell you, Taleb's ain't so!
on 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.
on August 8, 2013
Using his trademark aphoristic bent, Friedrich Nietzsche wrote: "Arrogance in persons of merit affronts us more than arrogance in those without merit: merit itself is an affront". I've come to realize that some people find Nassim Taleb's arrogance quite repugnant, but, personally, I find it rather charming. I suspect that the same people who find Taleb's arrogance off-putting are the people who wish they possessed a shred of his erudition. Nietzsche was certainly on to something; it's hard to avoid being offended by your betters.
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: [...]
on December 31, 2002
I'm very much of two minds about this book. There's little need to offer further comment on:
1. The author's ego (in one paragraph on page 59, he uses the perpendicular pronoun 7 times; the possessive first person another 5); or his hyperbolistic writing style: this might be too easily dismissed as an ad hominem attack.
2. The many glaring contradictions in this book: they appear so often (sometimes in the next sentence), they can hardly be viewed as a random event: this would take too long, and any intelligent reader can spot them.
3. The superfluous material: with so much impertinent opinion found between the covers, this would take too much effort.
4. The missed opportunities: another author can capitalize on this.
5. The delicious irony between the thesis and the content: this is for the discerning reader to perceive and enjoy.
If people wanted to be as nasty as Taleb is in dismissing those he disagrees with, they could use a subject line like "Clearly, not a Swan Song," or "A Highly Masturbatory Essay" or "This book is as fat as the argument is thin".
While there is much to complain about in this nauseatingly self-centered book, so filled with noise and so little signal (seriously estimated at 85:15), such comments would miss the point: this is actually a highly original work and is certainly thought-provoking. Although I give it only 2 stars, it's still worth reading, if only to argue against. A three-paragraph summary of his 200 pages follows:
1. Thesis: Today's virtual world measures success without sufficiently discerning luck from skill. Intelligence alone is deemed the necessary condition for wealth.
2. Antithesis: Too much of what is widely held to be worldly success should actually be attributed to luck; i.e., results hidden inside the vicissitudes of random variation. This "common sense" approach is naïve because it fails to establish the link between cause and effect and ignores the effect of variation, which, in one of its tails, can produce extraordinary results. Taleb explores the problem of induction and confronts the non-linearity of regret.
3. Synthesis: The trick is, of course, to determine post facto, what was random and what was skill, and more critically, to assess the nature of risk going into a decision. Mistakes in these areas can be extremely costly. Beware of the tails, especially if they are fat. If you want to be probabilistic, don't bet more than you can happily afford to lose. Question everything. Be humble. Accept adversity with good grace.
This is an interesting thesis; too bad Taleb doesn't focus on examining the evidence instead of talking about himself and offering unsupported opinions. He dabbles with epistemology, but equivocates on whether knowledge is arrived at by rational or empirical means. Despite frequent and inappropriate abuse of the word "clearly," he doesn't clarify the ontological considerations that lie at the heart of this book: sufficient cause and non-contradiction. Though he's personally fond of the Monte Carlo technique, many of us could be spared much of that bother by answering a few simple questions:
1. What is the worst-case scenario?
2. What is the best-case scenario?
3. What is the most likely scenario?
4. How confident am I in the assessments?
5. What can I afford to lose?
The author raises the work of Kahneman and Tversky, but hardly surveys it; the work of other key economic thinkers is ignored: Thaler and Arrow come to mind immediately; many others should appear but do not. No wonder Japanese librarians classify this work as literature: it's little more than an essay, largely devoid of footnotes or a meaningful bibliography.
Being unlettered in mathematical sciences, I ought to be cautious about questioning his math, as simple as it is, but must nonetheless question both Taleb's assumptions and his logic in the few examples he provides. He rails against "pseudo-science" but dabbles happily in many disciplines in which he lacks formal qualifications, jumping from lily-pad to lily-pad, seemingly unaware that his dilettantism is evident to even the fellow layperson. Despite his professed aversion for "borrowed wisdom," it abounds in this tome. Taleb's editor took a vacation, especially towards the end of the book, where there are many errors of punctuation.
Incidentally, in one of many delicious ironies of this book, Taleb uses the very Hegelian logic he rails against to make his point. It would be interesting to see John Horgan (he of The End of Science fame) interview Taleb. The ultimate irony is that Taleb has actually co-written a concise account of his thesis in 26 pages at his own web page.
Intriguingly, in some of the interviews also linked to his web page, he comes across as being lucid and pithy, and also a polished and gracious reviewer. Some of his other writings show a keen insight into human and abstract sensibilities. Sadly, the same cannot be said of this book, which appears to be more a transcript of a session with his psychoanalyst. This is an opportunity lost. A severe edit of this book could likely bring it up to the level (5 stars) for which it has the potential. But it's nowhere near there, yet.
Every person who is interested in investing should read this book!
In investing, few can tell the difference between being lucky and smart. Being successful in the short term can come from either source. If it is coming from unrecognized sources of luck, however, the behavior that the investor associates with success can sink the ship. The cautionary tale of Long Term Capital Management is cited in the book as an example of this point. �If you�re so rich, why aren�t you smart?� is the wonderful reversal here on the old saw.
I see this effect all the time in my consulting practice with helping companies understand how their decisions affect their stock price. A large percentage of people feel that they know all the answers when their stock price is rising. They keep doing the same things when the stocks are falling. Few survive to still have top jobs when the cycle shifts again. Then a new group of self-confident people take over who often don�t know any more than those who preceded them. It�s just that their track records look better.
Fooled by Randomness will help make you more knowledgeably humble about what you can expect to accomplish with investments. Not only do fewer than one percent outperform the market averages over long time periods, the ones who do are probably often being aided by luck as well. �Get thee to the index funds as soon as possible� is the message that most should take away from this book. Better yet, buy them when multiples are low!
The book�s fundamental point is that there is tremendous volatility in any investment. Ignore that volatility to your peril.
At the same time, you should be cautious about how well you understand the volatility. Stocks at their lows can still go to zero. There are all kinds of events that can happen, that have not done so yet. When they do, throw out all the old rules of investing. The terrorist attacks on the United States last week are probably an example of this. So each investment must be made as though you could be totally wrong. This means that you have to manage your risk exposure to events you don�t even know how to expect.
I loved his example of the joint probabilities of having a rare disease if you get a positive result on a test for that disease. Even most doctors apparently don�t know how to evaluate that one. If even well educated people cannot quantify two known risks occurring simultaneously in their own field, how can investors be expected to make good decisions?
Dr. Taleb has some very good advice for how to handle the psychology of being able to do this. He upholds the Stoic ideal -- �the attempt by man to get even with probability� which encourages �wisdom, upright dealing, and courage.� This means not chasing the latest investment fad or fashion, not looking at your investments very often, and being open to both sides of any idea (it could go wrong as well as right --what are the consequences of both?). I especially liked his idea of watching CNBC with the sound off so that the �experts� seem humorous and you are less likely to hear and follow their advice. Even more poignant was his advice not to live on Park Avenue where living with all of the arrogant, temporarily lucky can make you feel small. Instead, live somewhere that the results of your cautious approach will cause you to be the envy of all.
Dr. Taleb impressed me with his willingness to tell stories on himself about how quickly he can become superstitious when things are going well, take on excess risks, and start looking too short term. After all, we are only human!
The importance of this book can only be appreciated if you go back and think about your biggest investing successes. How much was luck versus skill? A good way to test is to see if the same approach has continued to work for you whenever you use it. Another good test is to see how often it would have backfired in the past.
In my research on good decision making, I find that those who guard the downside first make the most money in the long run. They are able to find ways to get the best of both worlds!
Remember that the two-edged sword can cut in either direction!