Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Now in a striking new hardcover edition, Fooled by Randomness is the word-of-mouth sensation that will change the way you think about business and the world. Nassim Nicholas Taleb–veteran trader, renowned risk expert, polymathic scholar, erudite raconteur, and New York Times bestselling author of The Black Swan–has written a modern classic that turns on its head what we believe about luck and skill.
This book is about luck–or more precisely, about how we perceive and deal with luck in life and business. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill–the world of trading–Fooled by Randomness provides captivating insight into one of the least understood factors in all our lives. Writing in an entertaining narrative style, the author tackles major intellectual issues related to the underestimation of the influence of happenstance on our lives.
The book is populated with an array of characters, some of whom have grasped, in their own way, the significance of chance: the baseball legend Yogi Berra; the philosopher of knowledge Karl Popper; the ancient world’s wisest man, Solon; the modern financier George Soros; and the Greek voyager Odysseus. We also meet the fictional Nero, who seems to understand the role of randomness in his professional life but falls victim to his own superstitious foolishness.
However, the most recognizable character of all remains unnamed–the lucky fool who happens to be in the right place at the right time–he embodies the “survival of the least fit.” Such individuals attract devoted followers who believe in their guru’s insights and methods. But no one can replicate what is obtained by chance.
Are we capable of distinguishing the fortunate charlatan from the genuine visionary? Must we always try to uncover nonexistent messages in random events? It may be impossible to guard ourselves against the vagaries of the goddess Fortuna, but after reading Fooled by Randomness we can be a little better prepared.
PRAISE FOR FOOLED BY RANDOMNESS:
Named by Fortune One of the Smartest Books of All Time
A Financial Times Best Business Book of the Year
“[Fooled by Randomness] is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-five theses were to the Catholic Church.”
–Malcolm Gladwell, author of Blink
“The book that rolled down Wall Street like a hand grenade.”
–Maggie Mahar, author of Bull! A History of the Boom, 1982—1999
“Fascinating . . . Taleb will grab you.”
–Peter L. Bernstein, author of Capital Ideas Evolving
“Recalls the best of scientist/essayists like Richard Dawkins . . . and Stephen Jay Gould.”
–Michael Schrage, author of Serious Play: How the World’s Best Companies Simulate to Innovate
“We need a book like this. . . . Fun to read, refreshingly independent-minded.”
–Robert J. Shiller, author of Irrational Exuberance
“Powerful . . . loaded with crackling little insights [and] extreme brilliance.”
–National Review
“If asked to name the five best books written about markets, Fooled by Randomness would be on my list.”
–Jack D. Schwager, author of Market Wizards: Interviews with Top Traders
“Excellent and thought-provoking . . . an entertaining book.”
–Financial TimesIf 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
User Ratings and Reviews
3 Stars Shadows of what was to come in “Black Swan.”
This book has a lot of overlap with the other book, “Black Swan” in more ways that one.
1. It is necessary to fish through the book to find the author’s points. The whole book could have been written in just over 1/2 the space that it actually took to write it.
2. The author’s ego came through on every page. Every single page. Every single, solitary page. Has there ever been a book in which “I” was used more often?
3. In a continuation of the first point, the author chose some very strange subtitles for each chapter. For example: “Wax in My Ears” went off on a story about someone who was tied to a mast and had wax put in his sailors ears so as to have them be able to avoid the Sirens’ song. And can you imagine that it took all that just to say that the author does not listen to readers comments?
4. The book started off easily enough to read and then seemed to get exponentially harder as time went on. By the time I got to the last 50 pages or so, it was dragging along enough for me to read it.
Taleb’s “….more on that later” was REALLY annoying. What would have been the problem with addressing a point from start to finish? It seems like he used that phrase 10 or 15 times in the book.
On the good side:
1. The author did make some good points (that had actually been made before) such as the difference between the Utopian Vision and the Tragic Vision.
2. There were some definitions of finance terms that I had not heard before, and the book was useful in that sense.
In summary:
1. Interestingness: Great topic, but verbose presentation.
2. Ease of Reading: Not as good as it might have been
3. Coherence: Fair. The whole structure of the book would have been helped by a glossary and subtitles that clearly pointed to the topic
4. Value of Information/ unit of time: Fair. As before, if the book had gotten to the point, the value of information gathered per unit of time could have gotten much better.
2 Stars A valid point, but the book is unreadable
I should start by admitting that I could not finish the book (I was gratified to see that it was not just me) — it is a ramble, and the point is completely obscured. The point, however, is very simple, and can be made in one paragraph, as below:
Consider the “grand martingale” gambling strategy: every day, come to a casino, bet a dollar on red. If you win — walk away. If you lose — double your bet, and continue until you win. With this strategy, if you have $1000 in the bank, you will make a 25% a year return, with a sharpe ratio of infinity, for four years (approximately). After which you will lose all of your money. The point is that this is precisely the sort of strategies incentivized by the current wall street compensation structure, and it is easy to look like a genius while the strategy is running (if you run a hedge fund, this strategy will make YOU a lot of money, but not your investors, or if you are leverage, it will make you and your investors money, but will screw the bank lending you the money. Welcome to 2008).
3 Stars Entertaining but fundamental misuse of probability theory
The book is entertaining and peppered with anecdotes and generally a good read. The authors basic premise is that in markets it is hard to tell the difference between luck and skill, and that given a large enough initial population, there will always be a handful of ‘lucky idiots’ who make it big for a given period of time. He uses probability theory to justify this - e.g., given 10,000 money managers and a 50% chance of being successful each year, there will be a couple of hundred left after five years who survived just by random luck. This is fundamentally incorrect because, unlike coin flips, the behaviour of those 10,000 managers is not independent of each other. More accurately, given 10,000 managers there might be a 100 trading strategies that are truly independent of each other, and even then when you throw in factors like leverage, margin calls, interest rates, political events and human behaviour, there are a lot fewer ‘degrees of freedom’ in the market. In fact, if everybody pursued trading strategies that were truly independent there would be far volatility in the market than we see today. When it comes to judging companies, the author is even further off the mark. Here, past performance is a pretty strong indicator of future performance. I would rather invest in a company with a 10 year track record of delivering strong profits in a manner that I can understand than the newest, flashiest kid on the block - then again I’m an investor not a ‘trader’, and I’ve ridden out highs and lows for the last 10 years with a moderate degree of success.
I agree with a few things he says - like the fact that daily ‘news’ is corrosive to the human brain, especially to the investor and that there are ‘black swan’ events that catch people off guard. However I couldn’t help but think of Donald Rumsfeld’s humorous “known unknows” and “unknown unknowns” comment as I read about black swans. As the author appropriately quotes, “There is nothing new under the sun”.
5 Stars advantage
Reading Fooled by randomness and The black swan gives you insight into Nassims extraordinary clear-sightedness, blended with his experience as a trader makes it hard not to recommend them for anyone interested in any sort of trading, whether its stocks or crops. He will in one way or another twist your thinking permanently. I reread parts of the books after approx a year. Its a clear buy 
// Jens Miltorp
4 Stars Difficult but worthwhile
Nassim Taleb is a professional money manager and mathematics professor. In this book he examines the nature of chance and the fact that humans inevitably confuse dumb luck with skill, and how our need to put explanations to everything tends to lead us to misinterpret random events as meaningful. He uses personal anecdotes from his investing experience as well as numerous references to great philosophy and literature through the ages. There is no practical investing advice in this dense and sometimes difficult book, but if you can get into Taleb’s intellectual theories, you probably will not look at the world in quite the same way again.
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