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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

Written by Nassim Nicholas Taleb

Narrated by Sean Pratt


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

Written by Nassim Nicholas Taleb

Narrated by Sean Pratt

ratings:
4.5/5 (113 ratings)
Length:
10 hours
Publisher:
Released:
Jan 4, 2008
ISBN:
9781596591844
Format:
Audiobook

Description

This audiobook is about luck, or more precisely, how we perceive and deal with luck in life and business. It is already a landmark work and its title has entered our vocabulary. In its second edition, Fooled by Randomness is now a cornerstone for anyone interested in random outcomes. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill, the world of trading, this audiobook is a captivating insight into one of the least understood factors of all our lives. In an entertaining narrative style, the author succeeds in tackling three major intellectual issues: the problem of induction, the survivorship biases, and our genetic unfitness to the modern word. Taleb uses stories and anecdotes to illustrate our overestimation of causality and the heuristics that make us view the world as far more explainable than it actually is. The audiobook is populated with an array of characters, some of whom have grasped, in their own way, the significance of chance: Yogi Berra, the baseball legend; Karl Popper, the philosopher of knowledge; Solon, the ancient world's wisest man; the modern financier George Soros; and the Greek voyager Ulysses. We also meet the fictional Nero, who seems to understand the role of randomness in his professional life, but who also falls victim to his own superstitious foolishness. But the most recognizable character remains unnamed, the lucky fool in the right place at the right time - the embodiment of 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 through chance. It may be impossible to guard against the vagaries of the Goddess Fortuna, but after listening to Fooled by Randomness we can be a little better prepared.
Publisher:
Released:
Jan 4, 2008
ISBN:
9781596591844
Format:
Audiobook

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What people think about Fooled by Randomness

4.4
113 ratings / 34 Reviews
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Reader reviews

  • (4/5)
    I think I picked this up from our building's swap shelves. It's an advance uncorrected proof, and wow does it need corrections. I hope a copy editor and/or the author got hold of this in galley and fixed the grammar, typos, etc. and made sure the charts showed up!Talib, of course, wrote [The Black Swan] to describe the same theme of randomness, or the impact of the improbable, and he makes his living trading derivatives with just that in mind. This book is almost a screed against what he sees as the refusal of economists and traders to see the folly of their quest for patterns, even in the face of financial disaster. It's a little like getting into an Uber with someone determined to convert you to his religion. I felt at once mesmerized and battered. Of course, it is true that people don't understand statistics, and don't see how their biases and emotions make it hard to understand true risk. Talib is searching for a scientific appreciation of risk to balance those biases and emotions. Going back to the image of a black swan, he explains that just because no European had seen a black swan did not make the statement 'All swans are white' true. Understanding that rules must be refutable goes hand in hand with his emphasis on randomness, on clarity between correlation and causation, sorely lacking today.I read it fast, which is probably not the ideal approach. We learn a lot about Talib, at least what he wants us to learn, from his own perspective, and a lot about how snarky, insulting, and uncompromising he can be when randomness is discounted. Some of it is even fun.
  • (4/5)
    Probability and chance fascinate me. Many people believe in fate, or argue over the role of chance in the course they have taken in their lives. Those of us who operate in the world of financial speculation find ourselves at the 'cutting edge' of randomness, chance and the un-knowable future in a very tangible way day by day. It is odd then that humans seem to be poorly programmed to win at the probability game. In fact in most situations we usually make the mathematically irrational choice, often choosing a poorer but certain outcome rather than one which mathematically generates a better expected return or outcome.

    This important book highlights the centrality of probabilistic outcome in almost everything we do. It emphasises our exaggerated tendency to claim or allocate credit to people (e.g. CEOs of successful or unsuccessful companies) on the basis of ability rather than luck. This tendency is not only myopic, it is also dangerous. Taleb particularly highlights the false sense of security that exists in distorted situations where a highly likely beneficial scenario is paired with an unlikely, but extremely dangerous outcome. The classic example is in the market, where naked option sellers are able to pursue a 'reliable' strategy with steady small profits, but place themselves in a situation where extreme market movements can erase years of profits in days. These 'hidden risks' are explored in more depth in Taleb's later book The Black Swan which was especially prescient as it was published immediately before the 2007-08 financial crisis. The Black Swan revealed massive hidden risks concealed behind commonly accepted but flawed risk calculation models such as VAR.

    Taleb writes in a conversational style that at times is a little indulgent. It is a very personal book with many asides regarding artistic preferences, and which invokes some of his pet subjects such as philosophy and poetry. I enjoyed this however others might feel this detracts from the central argument. It is a very personal argument as well, with examples that appear to be based on individuals known by Taleb and largely based on his expertise in the financial markets. It will provoke contemplation about both the source of our own success and also about the risks that we may not have considered. As an example it would have been (and may still be) valuable for instance to many who have highly leveraged themselves in purchasing property but who have not thought through the consequences of unemployment.

    Action on these ideas will encourage a more robust investment strategy, and indeed life in general. Perhaps Taleb could have given a few more 'real world' examples from outside the world of finance to help people considering these ideas in a wider sense. Certainly he has written an eloquent and colourful account highlighting important concepts which may influence philosophical thought in years to come, and will hopefully have a practical impact on risk management and regulation in financial markets.
  • (3/5)
    The author discusses his observations about how we are fooled by random events into make false causal links. Many of his examples are from his financial trading experience. Well worth the reading, though the author is a bit pugnacious and critical of other folks and their opinions. He is not over-endowed with humility! He did confirm my suspicion that the ups and downs of the stock market, for the most part, have no relationship to reality and to say a stock price, or market, went up (or down) because of a particular event is pretty much pure guesswork and journalistic filler.
  • (5/5)
    like other books of the author, i love books that make you think and open your exyes to the curiosity of finding new ideas.
  • (5/5)
    A light account of the role of randomness from a market trader's perspective. Told from a personal perspective, but with reference to key works, theory and implications.

    The thesis of a more important role for randomness in deciding success works better for the context of stocks and shares, but may translate less well into other walks of life, professiona and experiences - aka a question mark of its explanatory power as more general theory. Still a readable and interesting account.
  • (5/5)
    Amazing read, it made me enjoy time without a schedule and no defined plan
  • (5/5)
    Taleb is a great writer. Some of what he writes about is a little over my head and may take rereading to fully understand the lessons taught. Overall, he makes you think differently than you do now - more thoughtful.
  • (4/5)
    I read Nassim Taleb's "The Black Swan" a couple of years ago, and now I got around to reading his previous book, "Fooled by Randomness". This is the book that made Taleb famous for his theory about the role of chance in markets. Taleb says that humans tend to explain away random events by rationalising them, instead of accepting that life has an element of randomness in it. He examines biases such as causality, "survivorship" (learning only from winners) and skewed distributions. Fortune magazine named "Fooled" as one of the smartest books of all time. I'm not so sure. While I share Taleb's contempt for the inhabitants of Wall Street, I feel the pendulum has swung too much in the opposite direction. True, not everything can be explained and rationalised; but not everything in life is down to Lady Fortuna either.
  • (3/5)
    Never boring, but sometimes a bit obtuse. I got the impression that he admits in this book that he does want to enlighten but not to enlighten everybody. In this book I do enjoy his comment that math is for meditation not for computation.
  • (5/5)
    Fooled by Randomness: The Hidden Role of Chance in Life and the Markets by Nassim Nicholas Taleb. It and its sequel, The Black Swan, have been on the BusinessWeek bestseller list for the past year. This book had a bigger impact on my year than any other, and changed how I view things.

    Taleb is a true eccentric. A mathematician/statistician/options trader who fills every page with parenthetical ramblings. "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." He quotes heavily from ancient Greek and Persian literature, philosophical works, physics research, psychology journals, and studies in statistics. He inspires you to read difficult texts.

    (I think) One of his main points is that we ascribe success to those who have done nothing but been on the right side of the odds. There might be 1,000 new bond traders entering the business after college. If they have a 50% annual success rate purely due to random chance, then after 10 years there will be 2 guys that people will clamor to for advice simply because they "must" have some knowledge to allow them to "beat" the market, when it is all due to randomness. There are 998 other guys who have "blown up" or been fired b/c they lost due to the same randomness, and no one is offering a book deal to them.

    I've often wondered what it would be like to be Spock and think purely logical and without emotions. Taleb looks at some research and finds that emotions are what actually help us make decisions. There are times in mathematics when you solve an optimization problem and come up with multiple solutions that would all be equally good. A purely logical person would be unable to decide between the options and would be stuck forever, like a computer program stuck in a loop. Emotions are important.

    He gives several real-life examples to illustrate these phenomena. He also delves into the psychology of how successful people in the right circumstances feel inferior and unsuccessful.
    He gives examples of firms who bet heavily on a probable outcome, but don't take insurance against the improbable and lose billions (like in our current market troubles).

    A question to ask yourself:
    Would you play Russian roulette if there was only a 1/6 chance of dying, but a 5/6 chance of winning $1 million for every time you survived? It's pretty good odds. If enough people play then chances are that someone is going to play a lot and end up with several million dollars. But, the vast majority will eventually lose everything. So it is in business when what looks like a good bet might ignore the (sometimes very slim) chance that something will go wrong.

    Taleb is also quite critical of modern-day economics, claiming that economists are trying to camouflage their inability to explain things in mathematics that are too limited to do what economists need it to do. I found those criticisms highly interesting.

    He is also critical of regression analysis, particularly time-series models because of the problem of stationarity. Over time, there are countless unobserved things that could change, therefore it becomes less likely to learn what you want do by doing a long time series.

    I give this book 4.5 stars out of 5. It is a difficult read because of all the parenthetical ramblings, but the points the way the book stretches the mind is definitely outstanding. I'm very eager to read The Black Swan.
  • (3/5)
    I didn't find any novel ideas in this book. It's more for people who trust numbers without understanding where or how they were formed. I agree with Taleb on many points, but wish the book were more coherent and organized. He writes like a monkey at a typewriter. It was an interesting read that I would recommend to those who enjoy decision making and statistics.
  • (3/5)
    This is the type of book that needs to be read slowly. There are also a number of sections in the book that need to be re-read in order for the reader to understand the points being made. That being said, Taleb writes very well – – I don't want to give the impression that the author is unclear – –Taleb writes economically. Others have summarized in their reviews what this book is all about better than I can....

    He wrote a book of aphorisms The Bed of Procrustes that I really enjoyed. I also highlighted some words of wisdom below from this book shown below..

    That all millionaires were persistent, hardworking people does not make persistent hard workers become millionaires.

    This book has two purposes: to defend science (as a light beam across the noise of randomness), and to attack the scientist when he strays from his course (most disasters come from the fact that individual scientists do not have an innate understanding of standard error or a clue about critical thinking, and likewise have proved both incapable of dealing with probabilities in the social sciences and incapable of accepting such fact).

    That which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that).

    The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.

    Lucky fools do not bear the slightest suspicion that they may be lucky fools—by definition, they do not know that they belong to such a category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets (our hormonal system does not know whether our successes depend on randomness).

    Any reading of the history of science would show that almost all the smart things that have been proven by science appeared like lunacies at the time they were first discovered.

    Gray hair signals an enhanced ability to survive—conditional on having reached the gray hair stage, a man is likely to be more resistant to the vagaries of life.

    The wise man listens to meaning; the fool only gets the noise.

    When I see an investor monitoring his portfolio with live prices on his cellular telephone or his handheld, I smile and smile.

    I do not know if it applies to other people, but, in spite of my being a voracious reader, I have rarely been truly affected in my behavior (in any durable manner) by anything I have read. A book can make a strong impression, but such an impression tends to wane after some newer impression replaces it in my brain (a new book). I have to discover things by myself (recall the “Stove Is Hot” section in Chapter 3). These self discoveries last.

    Remember that nobody accepts randomness in his own success, only his failure.

    You attribute your successes to skills, but your failures to randomness. This explains why these scientists attributed their failures to the “ten sigma” rare event, indicative of the thought that they were right but that luck played against them. Why? It is a human heuristic that makes us actually believe so in order not to kill our self esteem and keep us going against adversity.

    But CEOs are not entrepreneurs. As a matter a fact, they are often empty suits. In the “quant” world, the designation empty suit applies to the category of persons who are good at looking the part but nothing more. More appropriately, what they have is skill in getting promoted within a company rather than pure skills in making optimal decisions—we call that “corporate political skill.”
  • (2/5)

    2 people found this helpful

    Amazon.com provides an interesting statistical commentary on this and all other products on its site: a graphic of the relative proportions of different star ratings assigned by customer reviews. If you flip this on its side it looks a lot more like what it is: a statistical representation of customers' views of the book.Nassim Taleb's Fooled by Randomness has an unusual "curve": a short "head" of 5 star reviews and a long tail of lesser ratings which doesn't tail off. (it's even flatter on Amazon.co.uk!) A large standard deviation, then, against a mean of four stars, compared to Leonard Mlodinow's The Drunkard's Walk: How Randomness Rules Our Lives- also a four star average, but a much more conventional distribution of grades with a tighter standard deviation (a consistent curve from 50% five star to 2% one star, against Taleb's 46% five star and 11% one star).So I have learned something from this (or Mlodinow's) book.Having being equally entertained and aggravated by Taleb's more recent The Black Swan, I was leery of picking up this earlier effort. While Taleb is undoubtedly stimulating literary company, he does verges on being a crashing bore, crossing the verge on and ramming your letterbox on many occasions. He seems also to harbours some unremedied professional grievances - the award of Nobel prizes is something in particular which irks him. Taleb's writing is constantly grandiose and egotistical - but he is self-aware enough to not only realise but celebrate that fact.So a real vegemite, love-him-or-hate-him sort of writer. Fooled By Randomness is, if anything, *more* bombastic, and its content less interesting. Its first half comprises mainly anecdotes (possibly apocryphal) about colleagues unnamed, and Taleb's repeated efforts to persuade you just how well read and what a voracious reader he is. (Interestingly in Black Swan he places much store in his *anti-library* - the books he has not read). Taleb's early observations about probability are pat, and under explained and, as other reviewers point out, have been more thoroughly and less idiosyncratically expounded by others (my recommendation is Leonard Mlodinow's book cited above).On probability itself, Taleb's love of anecdote sometimes contradicts his own preaching. At one point he recounts a bit of "anecdotal empiricism" as to "Anchoring" of expectation. "I asked the local hotel concierge how long it takes to go to the airport. "40 minutes?" I asked. "About 35" he answered. Then I asked the lady at the reception if the journey was 20 minutes. "No, about 25" she said. I timed the trip: 31 minutes.Two paragraphs later, in his next anecdote, Taleb rails against the stupidity of a man who derives conclusions from a single observation.There is a seam of useful information in the second half of this book, but you must wade through quite a lot of self-aggrandisement to find it, and none is unique: as mentioned, there are better presented and less irritating accounts of the same information elsewhere, so Mr Taleb may be disappointed to see yet another equivocal assessment of his book on this site.Except, he tells us, he won't be: he doesn't read or care about "amateur" reviewers on Amazon anyway, so no harm done.

    2 people found this helpful

  • (4/5)
    An excellent book that explains clearly how probability and statistics affects everyone, or rather how not understanding randomness causes most people to over or under-estimate the likelihood of events.In particular he demonstrates how irrational human beings are when it comes to understanding:- black swan (rare) events and planning for them,- that events with (seemingly) positive correlations do not necessarily mean that one causes the other, and,- that randomness and uncertainty (i.e. luck) have a greater influence on the outcomes of human activities than most people, even those who think they act rationally, care to believe.While written fairly clearly, I will admit that I had to read some sections more than once before I understood exactly what the author was saying, even though I have, or thought I had, a better than average understanding of probability and statistics.Now at least I have a good understanding of why I act irrationally even when I know the true probability of success in some activities, such as when buying lottery tickets.
  • (3/5)
    Like The Black Swan, this is a book by/about a self-evidently nasty man with a message to send. We aren’t good at assessing risks, and we fool ourselves that we are. Though he doesn’t use the term “value at risk,” the concept that helped overleverage and then explode the economy, he viciously and presciently critiques the mentality that led to greater and greater risks for smaller and smaller percentages of return. Though published earlier, this book is shorter and contains less inside baseball score-settling than The Black Swan, though I might recommend just reading a couple of things from his website instead of either, especially if you’re already familiar with behavioral economics and the various heuristics that distort our decisionmaking.
  • (2/5)
    I started the book with high expectations. Fooled By Randomness was supposedly one of the classics of investing, or so I heard. After reading it, I am not sure what it was. It appears to be philosophy about philosophy and science. Basic conclusions drawn can be summarized as such: (1) beware of rare event i.e. black swan (2) don't just rely on historical data purely (3) decision should be judged by circumstances when decision was made and not by outcome (4) luck plays a huge part in success/failure in random environment (5) we are emotional fool and we can do nothing about it. Book is not difficult, but neither easy read since it delves into meta philosophy quite often. And if I can say my learning from it: nothing significant.
  • (3/5)
    Interesting stuff, particularly re how the findings from the risk analysis aspects of behavioral economics (that people don't behave and perceive in the rational manner economists have traditionally said they so) can be applied to investing. But what an obnoxious man. Who would want to meet him in person? If he's smarter then everyone else in the universe, why does he have to keep insisting on it?And for all his huffing and puffing, he barely addressed how to apply this knowledge to the market. OK, so he's betting against the odds, knowing such and such is actually much more like than most traders think and so on. But how does he know what the odds are? Vegas? Off-track-betting?I don't I would have understood this at all if I hadn't just read Michael Lewis's The Big Short. Taleb must have made a killing there (though it seems to me he would have nosed his way into Lewis's book somehow if he did, despite his revulsion re journalists and journalism). But that was a pretty rare case in which, if you were willing to listen and read, the odds of the subprime mortgage bonds collapsing were readily apparent. But even the guys that Lewis profiled who did make the winning bets don't usually invest that way. They generally want to go long and look for solid companies that will grow. Taleb doesn't seem to ever look at companies that.
  • (1/5)
    okay concept but I couldn't be bothered to read the book. Perhaps I should try again
  • (5/5)
    Very interesting material by a great mind. Show how we can be fooled by others AND ourselves into false assumptions.
  • (4/5)
    Interesting read about the unpredictability of events, and hence of markets. Market events that are supposed to be "Multiple Sigma" -- ie, less than once in several lifetimes -- have in fact occured several times within the lifetime of current market participants. The assumption that they happen less often than, in fact, they do, explains much of the instability of markets -- and much of our current economic pain.
  • (1/5)
    Though this was highly recommended by some bloggers I read, I found it to be pointless and meandering. I kept getting the feeling that the author had something to say . . . BUT HE JUST WOULDN'T GET AROUND TO SAYING IT. I gave up after 50 pages or so.
  • (5/5)
    One of the most insightful books that I have ever read about human behavior, statistics, and investments
  • (4/5)
    Interesting but somehow not satisfying. I kept talking about it while I was reading it - this or that would remind me of something Taleb said - but by the time I was finished I was tired of it. Partly, I think, because he determinedly is not 'explaining' anything or giving any reasons or paths to follow; partly because my empirical experiences conflict with his; and partly because of the style of his writing and choice of illustrative incidents. A lot of the book is about how we, humans in general, are ill-equipped to properly consider probabilities - things like, we tend to be more worried about things we hear a lot about than less-publicized matters. So people are afraid of flying and not of driving, though in terms of miles traveled per death driving is several hundred times as dangerous (that's not one of Taleb's illustrations, it's one I've seen elsewhere). Taleb tends to use the stock market for his illustrations, which is another reason I found his book unsatisfying - I know very little about the stock market, and especially about the fancy variations of the stock market (selling short, selling and buying options, etc) that make up his life and to which he refers easily and with (apparent) full understanding. He does explain, a little, but few of his explanations conveyed much to me. Interesting book, and I want to read the Black Swan one too, but less fun to read than Stephen Jay Gould (who I started out thinking his style resembled).
  • (4/5)
    A skewed, bonkers and enjoyable look at the role of randomness in success. This brought out some neat key points, such as that performance should be determined not (just) by outcome, but on the basis by which the decision was made in the first place, and the long-run performance of a strategy. Coming more from the psychology side of things I know very little about trading and economics, and struggled a bit with the lingo, but nonetheless found this readable. One of the books I've recently read to make me shout out loud "Yes! That is *exactly* spot on!"
  • (4/5)
    A most enlightening and entertaining reading experience. The author provides a collection of mini-essays (musings if you will) that collectively expanded my world view. Mr. Taleb is now a favorite auther.
  • (4/5)
    Taleb isn't afraid to diss the pretenders in this field and hang them out to dry. I find his darkest black humour to be adorable though he does ramble rather. couldn't help chuckling at the various anecdotes: one memorable one, 'Now Yuri will have a word with you' when interviewing those MBA-ers who put chess skills on their resume - priceless! he's really too cynical though in the area of personal growth, so he'll never realise the detachment he seems to want ;-)
  • (4/5)
    Taleb tells as is in the markets and life in general. You can tell he has absolutely no tolerance for pretenders. I like the fact that he looks at things at a deeper level, at least he tries to but his style can be very blunt and sound arrogant at times.
  • (4/5)
    read this and feel better about your job, whatever it is. people are not as clever as they think they are - luck plays a big part in success.
  • (2/5)
    A rare example where the second book (Black Swans) is more interesting than the first (this one). Some good ideas buried in there, but the thread is sometimes hard to follow.
  • (5/5)
    Taleb's principal thesis is that humans in general, and financial journalists in particular, are remarkably blind to the random element in most events. They overemphasize results over process. They attribute great ability to great success. Taleb argues that success tends to be very non-linear: large successes often flow from slight differences, some of which are merely random. Many human activities, particularly market-oriented businesses, are subject to much random fluctuation. Because of this, much success in such activities can be attributed only to luck. Taleb contrasts such businesses with dentistry, which has little or no random element to its successful practice.People overemphasize frequency at the expense of total outcome. They prefer being right often, for small gain, than being occasionally very right about rare events ["black swans," in Taleb's shorthand] that allow very large gains. Maximizing the probability of winning [a little] does not maximizing the expectation from the game when one's strategy may include skewedness.One of the greatest barriers to valid or even effective inference is survivorship bias. We tend to infer properties of an entire distribution of events [who made money; who didn't] from those left over after a shakeout process has eliminated some of the members of the distribution. The shape of our inferences can thereby be markedly different from that warranted by the original distribution.Taleb's intellectual heroes include: 1. Solon--beware, King Croesus, your good fortune may not last; 2. Robert Shiller--financial markets overreact to late news; 3. Charles Pierce--infallibility is impossible; 4. George Soros--be aware of your own fallibility; 5. Karl Popper--real science consists in formulating principals that are inherently falsifiable: thus, it is invalid to infer the truth of any proposition from the fact it was correct any limited number of times; we can only infer its falsity [from one occurence]; history can not be not real science; 6. Daniel Kahneman and Amos Tversky--peoples' perceptions are distorted by immediate facts that inhibit them from making rational generalizations; and 7. David Hume--great rigor in drawing inferences from data. His bete noires include (1) journalists in general and George Will in particular, who infer much too general ideas from much too small samples and (2) mathematical economists, who believe their models genuinely mirror reality.A trader's mental construction should direct him to do what other people do not do. He is acutely aware of egodicity, i.e., that very long random sample paths wind up resembling each other. Thus even though some high risk strategies prove radically successful in the short run, they may eventually "blow up" in the long run. Taleb himself has made a good living as a commodities option trader by being aware of the randomness of market moves, and trading to protect his positions in regard to that randomness. He does not say explicitly what kinds of trades or techniques he uses; he only talks about his general philosophy.A very interesting debunking of some commonly held business lore. (JAB)