Fooled by Randomness: The Hidden Role of Change in the Markets and in Life

by Nassim Nicholas Taleb

Book Overview

Just as coincidence can be confused with causality, so the lucky idiot can be confused with the skilled investor. The realities of randomness and probability almost guarantee that, out of a large pool... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 1587990717
• ISBN13: 9781587990717
• Release Date: October 2001
• Publisher: Cengage Learning
• Length: 256 Pages
• Weight: 1.10 lbs.
• Dimensions: 0.9" x 6.3" x 9.1"

Customer Reviews

Like putting on glasses to clearly see the world.

This book will make it clearer to you how poor the quality of much journalism and science is these days. It has made it easier for me to just "let it go", or stop worrying about things upon which I have zero control, and spend more time doing productive things that make me happier. Thank you for sharing your knowledge Mr. Taleb.

...like giving or getting Galileo's book on the solar system as a Christmas gift in 1632

My professional work involves evaluating money managers and trying to "understand" a manager's skill vs luck and where the manager might fit in an overall portfolio. So I have spent 30+ years slashing my way through the jungle made by academics who think they can put markets and reality into nice, predictable models; and worse, listening to the sales pitches of money managers and other financial salesmen who want you to believe they are predictably worth paying very high fees and subjecting your money to untold risks. It is fabulously refreshing that Taleb has razed a small piece of that jungle and raised those important questions that few in the academic, financial, or political establishment dare. If he comes across as insufferably arrogant, so what! Some of the negative reviews herein are a bit feeble - if you want to learn something about this very rich topic, do you really want your freshman economics professor spoon-feeding you strained pablum to make you feel comfortable your first time away from home? Buck up! This books gives the reader plenty of amunition to take on the many people who are maliciously or inadvertently fooling you - stock brokers making more commissions than your investment returns; politicians pounding the table that their Social Security plan will have in 30 years, $1.00 more than their opponent's; or whatever your position on the war in Iraq, you have to admit that there was no planning for random outcomes. The public is just too uncomfortable with the truth about how random the world can be. And if you don't want to read this book like a textbook on randomness or to make your own polemical points in the world, read it for the philosophical, hysterical and entertaining romp through reality that it is. Taleb has obviously traveled and lived around the world; the fact that he has personally and professionally experienced a lot of complexity and randomness and is sharing it in this book, is quite fun. Finally, I know some very smart and rather daring financial advisors who have given this book to their clients as mandatory reading - kind of like giving or getting Galileo's book on the solar system as a Christmas gift in 1632.

Rare, useful advice

This is a book about probability and the way we misunderstand it. Author Taleb introduces the concept of the `lucky fool', and reflects on how we (wrongly) ascribe positive characteristics to the schmuck who succeeds purely as the result of luck.Taleb's domain (and that of the book) is the world of finance. He is quite rightfully scornful of financial journalism, which attempts to fit rationales to the most insignificant movements in asset prices. According to Taleb, most of this price activity is purely random, pointless to predict and futile to explain. The flip side is the tendency of markets (and natural phenomena) to exhibit extreme, unusual behaviour that confounds conventional theory. The occurrence of this skewed behaviour (referred to as the `Black Swan' problem) has plenty of precedents in financial markets and has bankrupted numerous traders and former experts.As a general rule, practical advice on financial speculation is almost always useless. If Taleb has a core belief, it is that `I may be a fool, but my edge is that I know I am'. This recognition is not an exercise in humility; it is a prerequisite for success in a world where we are continually fooled by uncertainty and causation. Taleb's book is a convincing, entertaining lecture on probability and human nature. His written style is little difficult to digest, possibly because of his classical influences. His insights are fantastic, though. Anyone who trades or invests should read this book, and reread it until the message sinks in.

Brilliant

This book presents a highly entertaining and informative view of the role of probability in the markets as well as in daily situations, and Taleb will often force you to crack an amused smile and nod with agreement at the same time. The book explores the idea that human beings are not wired to think rationally, and how we therefore misinterpret many events in life. I am no less than shocked that the book has received so many harsh reviews; and I ask anyone who considers not purchasing it to consider that the following points no doubt apply to many of the people who gave it any less than 4 stars.1) If you want a technical work on finance, read Taleb's 'Dynamic Hedging.' In 'Fooled by Randomness' he intentionally writes so that people outside of the fields of finance and math can understand it. These reviews that attack it for diluting certain points are therefore ridiculous and miss the very point of the book.2) Since this book's thesis states that many people who think they rose to power or wealth actually did so out of pure luck, of course many people are going to react with hostility and will not want you to read it. Any scathing reviews are no doubt therefore people who don't want you to realize the truth about them.3) The book is not arrogant. I have trouble seeing how so many can describe it as egotistical when one of Taleb's main points is that he knows nothing about how the markets will act, and that the only thing that seperates him from most people is that he realizes this lack of knowledge, and designs his strategies accordingly. My contention is that it is inevitable that anyone who goes against the common theories will be labeled as arrogant, which is why so many view Taleb as so.4) Taleb is right. September 11th, the Russian collapse, the interent bubble; the markets are ruled by sudden rare events and you ignore them at your own risk. I therefore implore you to not listen to all this silly reviews that attack it for entirely groundless reasons. Taleb is one of just a few members of the derivatives theory hall of fame; other members include Nobel Prize winners Robert Merton and Myron Scholes, who derived the famous Black-Scholes formula. What he has to say is worth listening to.

Essential for understanding the workings of the world

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 profi