Product Description

“[Taleb is] Wall Street’s principal dissident. . . . [Fooled By Randomness] is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-nine theses were to the Catholic Church.”
–Malcolm Gladwell, The New Yorker

Finally in paperback, the word-of-mouth sensation that will change the way you think about the markets and the world.This book is about luck: more precisely how we perceive luck in our personal and professional experiences.

Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill–the world of business–Fooled by Randomness is an irreverent, iconoclastic, eye-opening, and endlessly entertaining exploration of one of the least understood forces in all of our lives.

Product Details

• Amazon Sales Rank: #1077 in Books
• Published on: 2005-08-23
• Released on: 2005-08-23
• Original language: English
• Number of items: 1
• Binding: Paperback
• 368 pages

Amazon.com
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

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.

From Booklist
Taleb is a "quant," or mathematical trader, and an expert on financial derivatives who has made a name for himself in investing circles as a voluble critic of popular theories and conventional wisdom. He is also the author of Dynamic Hedging: Managing Vanilla and Exotic Options (1996). Taleb is fluent in seven languages and a reader of classical literature, an avocation that readily manifests itself in this meandering discourse on the roles of probability, luck, and risk in the markets and in life. Taleb examines how and why the attempt to determine cause and effect is continually hampered by random occurrences and our emotional responses to them. He freely shares his ideas and opinions, finding insights in the funeral of Jackie Onassis, B. F. Skinner's experiments on pigeons, Solon's warning, Karl Popper's work, George Soros, Darwinism, the O. J. Simpson trial, Pascal's wager, the collapse of Long Term Capital Management, the trading floor of the Chicago Mercantile Exchange, birthdays, taxicabs, and especially the works of ancient Greek philosophers. David Rouse
Copyright © American Library Association. All rights reserved

Customer Reviews

An insightful view of life
Some years ago, I had a colleague who organized a Mark 6 pool among friends. They had a database of previous Mark 6 results and from it derived that some numbers were more easily drawn than others. They then collectively bet on such numbers which they believed would have a higher probability of winning. I asked him the basis of his action. He explained that the fact some numbers appeared more frequently was real as proven by the statistics. The reason could be the material of the paint of different colour, the difference in the shape of the numbers painted, or their different position before drawing. Although the factors would be too complex to compute, the results shown in the statistics were sufficient to show the bias. By the time I left the department, the pool was still losing money.

It is not a coincident that the essence of the book is exactly on the same thinking. Taleb points out that human beings always overestimate causality, and we tend to view the world as more explainable than it really is. An example used in the book is the performance of stock and option investors. These investors use sophisticated statistical methods to analyze the performance of the market in the past and predict the future. The information they derived from analyzing the past may adequately explained what happened. However, the performance of the market on the following day has no relevance to the past. It is a Brownian movement which only depends on the factors at present. It is actually more random than expected.

For that matter, people always confuse between randomness and causality. The book gives an illustration on the two corresponding sides of such thoughts:
Randomness v Determinism
Probability v Certainty
Belief v Knowledge
Coincident v Law
Forecast v Prophecy
Lucky idiot v Skilled investor
Survivorship bias v Market out-performance
Stochastic variable v Deterministic variable
Noise v Signal

It is not surprising that such thinking would attract objection from the skilled investors. There are a lot of comments on this book defending the reliability and almost certainty of statistical analysis and prediction of market movements. However, from the market performance in recent months, I tend to believe that the market is much more random than we thought.

Since human being developed self-consciousness, or the soul if one likes to call it, we always wonder why things happened. This quest for reasons has also developed into the religion delusion. This innate property of the human mind makes it easy for us to attach reasons, whatever they are, to nearly everything. Thus we are easily fooled by the randomness of nature, which is now beginning to be recognized in modern science such as evolution biology and quantum physics. For the ordinary people, it is useful to reflect on the randomness misconceptions discussed in the book.

There is a survivorship bias in many statistical data we gather. We see the winners and try to learn from them, while forgetting the huge number of losers. The case study used in the book is the survey of the earning ability of the stock and option traders. While a lot of data on the traders in business can be gathered, the survey is actually gathering only the data from the survivors. Data on many traders who lost money and dropped out in the previous years are all ignored. Thus the statistics is unreliable. Let's say we want to survey among government executive officers on how the university graduates adapt to government work. We are only surveying the survivors of the government recruitment. University graduates who do not make it are all missed. If we conduct a survey in an online forum on the habit of people using computer, we are only surveying those surviving in the forum. Such statistics need to be qualified on their target participants. However, there is a misconception that survey with survivorship bias can be applied universally.

Many probabilities have skewed distributions. Many real life situations do not have a 50% probability like the two sides of a coin, but have unusual and counter-intuitive distributions. People can often be fooled by the fact that they won a bet 50 times and think that they will win next time with absolute certainty. Taleb opines that some aggressive stock and option traders eat like chickens and go to the bathroom like elephants. They earn a steady small income from selling the stocks and options, but when a disaster happens they lose a fortune. They are fooled by the randomness of the market which is hidden from them.

There is the story of black swan on probability, on which Taleb eventually wrote another book. Swans in Europe are white. People may take numerous observations to prove that swans are white. So a fact is established that all swans must be white, and the probability is 100%. However, it only takes one twist in the DNA to turn one swan black and the probability is re-written. In fact, black swans are found in Australasia. The impact of the highly improbable is severe. The more improbable it is, the harder the impact when it happens. Another joke on the false improbability is when Taleb observes an old man everyday to see if he is still alive. For eighty years, there have been about 30,000 observations and the old man is still alive. With such a large number of observations, he could conclude that this old man must be a superman who is highly improbable to die. By the track record, he may even live forever. But it only takes one death to turn the probability to zero. The truly scary thing is that the black swan could be a random event. That means it is capable of happening any time to turn a high probability totally upside down.

Methods of thinking and mental models worth learning
Every once in a while, someone really intelligent focuses his thoughts on the most valuable skill a human can have--how to think. Nassim Taleb has done an admirable job at just that: not telling us what to think--but showing us how to think in ways we can apply to innumerable life situations. I'm talking about what Charlie Munger refers to as "multiple mental models."

The most important ideas explored are those of Popper--the idea of the open society--one in which no theory is known with certainty--only with probability, and theories continually replace one another as more information comes in. Interestingly Taleb continually cites Soros as a famous investor who utilized Popper's ideas, but Warren Buffett, the ultimate realist, if queried, would no doubt acknowledge Popper in influencing his thinking. In contrast to Soros and Buffett would be Bill Miller, an intensely philosophic investor, who recently has classified himself as an optimist--but not a realist. In any case, the methods of thinking propounded by Taleb fit nicely into what Charlie Munger classifies as "mental models"--doubtlessly useful stuff for the introspective, philosophical investor.

An Insightful Rant
This book reads a lot like a self-absorbed blogger's rant, but it is a rant that is highly satisfying to read. Almost all of us have a distant relative or friend who is allegedly a "stock market genius". Taleb argues that it is usually hard to know whether that person is truly skilled or just lucky. Those of us who tend toward schadenfreude (enjoyment taken from the misfortune of someone else) can take solace in the fact that this person might just be a dolt who is likely to blow up one day. He argues that most often trading success is either the result of ones arbitrary trading style happening to jibe with market conditions or a product of exposure to volatility in a way that allows for small regular gains followed eventually by a spectacular blowup.