Book Review: Fooled By Randomness
This week’s book is Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
What I like about the book
Taleb is the cleverest author I have ever read. He does not suffer fools gladly, and liberally showers criticism on all sorts of people, including traders, investors, scientists, journalists, and managers. What makes this arrogance and impatience bearable is that he is so funny in the way he points out the follies of the way most people think.
You can’t help being amused and fearful at the same time while reading the book; amused because you start to understand how so many of us are foolish in the way we reason, and fearful because you think that if you even came face to face with Taleb, you would easily fall into one of the many categories of silly people he disdains.
One example of most people having flawed logic is this: if a disease strikes one out of a thousand people, and a test for the disease has a 5% false positive rate, and you test positive for the disease, what is the likelihood that you have this disease? Many people think there is a 95% chance you have the disease. The scary thing is that doctors who took the test also said that you are 95% likely to have the disease, which means that many of us are getting inaccurate diagnoses from the professionals.
The correct answer is that you have a less than 2% chance of having the disease. If you can’t work this out and still think the answer is 95%, you need to read this book. If you worked it out on your own, then you may understand the rest of the book better than most, since it gives many other examples of the thinking process that is required in order to logically work out the correct probabilities. The book is not so much about probabilities though, but more about a way of thinking which we need in order to make sense of the world around us.
Who should read this book and why
Investors and traders
It doesn’t take a genius to know that the markets have become irrational, and yet people are still trying to predict which way it will go next and how long this will take, in order to know what kind of investment decisions to make. This kind of thinking is futile, according to the book, since much of what happens is random. Best to adopt a trading strategy that accounts for randomness to maximise overall returns than thinking we have the skill to beat the odds.
Students of life
Those of us who want to understand more about life and how it works would learn a lot from this book. It explains how we often read too much into random happenings in our personal lives, miscalculate life expectancies, trust the experts too much even when they are wrong, and work too hard on developing skills in certain areas when we should be working hard to understand the odds in the first place.
Quotes from the book
My favourite quote
“The interesting thing about stoicism is that it plays on dignity and personal aesthetics, which are part of our genes. Start stressing personal elegance at your next misfortune. Exhibit sapere vivere (’know how to live’) in all circumstances.
“Dress at your best on your execution day; try to leave a good impression on the death squad by standing erect and proud. Try not to play victim when diagnosed with cancer. Be extremely courteous to your assistant when you lose money. Try not to blame others for your fate, even if they deserve blame. Never exhibit any self-pity, even if your significant other bolts with the handsome ski instructor or the younger aspiring model. Do not complain. If you suffer from a benign version of the attitude problem, do not start being a nice guy if your business dries up. The only article Lady Fortuna has no control over is your behaviour. Good luck.” (page 249)
Other quotes
“Mathematics is not just a numbers game, it is a way of thinking. We will see that probability is a qualitative subject. (page 24) … it is far more a way of thinking than a computational method. Mathematics is principally a tool to meditate, rather than to compute.” (page 44)
“We do not need to be rational and scientific when it comes to the details of our daily lives – only in those that can harm us and threaten our survival. Modern life seems to invite us to do the exact opposite; become extremely realistic and intellectual when it comes to such matters as religion and personal behaviour, yet as irrational as possible when it comes to matters ruled by randomness, say portfolio or real estate investments.” (page 77)
“Bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no experience in handling risk. Alas, investors and businesses are not paid in probabilities; they are paid in dollars. Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration.” (page 102)
“No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word. We are left only with dignity as a solution – dignity defined as the execution of a protocol of behaviour that does not depend on the immediate circumstance. It may not be the optimal one, but it certainly is the one that makes us feel best. Grace under pressure, for example. Or in deciding not to toady up to someone, whatever the reward. Or in fighting a duel to save face. Or in signalling to a prospective mate during courtship: ‘Listen, I have a crush on you; I am obsessed with you, but I will not do a thing to compromise my dignity. Accordingly, the slightest snub and you will never see me again.’” (page 246)
Other reviews of the book
Jim Mueller writes an intelligent review at The Motley Fool, explaining briefly what a rare event is as well as providing links to other interesting articles on the site.
James K Glassman gives a lengthy and informative review at National Review Online, with an emphasis on the implications of randomness for investors and traders.
John Forman provides an easy-to-read review at Essentials of Trading cautioning readers to read the book with the right expectations.