I stumbled on Nassim Taleb’s book, “Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets”, in the fall of 2015 while searching for personal finance literature via the online portal of the Winnipeg Public Library.
While I had never heard of the author before then, the book title caught my attention. You see, I have traded the markets while living on 3 different continents – Africa, Europe, and North America, and have seen first-hand the unpredictability of financial markets. I wondered if this book was able to answer my questions on the inner workings of the markets, uncertainty, probability, risk, human error, decision making, and luck.
Fooled by Randomness has a refreshing take on all the above and life in general. While some may be fazed or offended by Taleb’s in-your-face irreverence and sometimes blatant arrogance, I was not. I chuckled often at Taleb’s apparent dislike for journalists, academics, MBAs, PhDs, economists, and lawyers.
His independent thinking showed through at every turn, an art increasingly rare to find in the wheeling and dealing literature that litters Wall Street.
A few points and quotes from the book:
- Not everything in life is explainable. Many things are attributable to randomness, not skill like we would like to think.
- People should be judged by their decisions, not their results. Things are always obvious after the fact.
- We focus on the few winners “survivors” and forget the majority or the number of losers. Survivorship bias.
- We read too much into recent history and try to predict the future based on prior events. Human beings overestimate causality.
- Markets are ruled by randomness.
- Protect yourself against rare events that are going to be damaging to your existence.
It does not matter how frequently something succeeds if failure is too costly to bear.
Heroes are heroes because they are heroic in behavior, not because they won or lost.
A mistake is not something to be determined after the the fact, but in the light of the information available until that point.
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.
Nobody accepts randomness in their successes, only their failures.
My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.
Those who were unlucky in life in spite of their skills would eventually rise. The lucky fool might have benefited from some luck in life; over the longer run he would slowly converge to the state of a less-lucky idiot. Each one would revert to his long-term properties.
No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word.
My principle activity is to tease those who take themselves and the quality of their knowledge too seriously.
Mild success can be explainable by skills and labor. Wild success is attributable to variance.
The only article Lady Fortuna has no control over is your behavior. Good luck.
Fooled by Randomness is one of four other books in the ground-breaking incerto series. Other books I have read and recommend in this series on uncertainty include The Black Swan: The Impact of the Highly Improbable (Amazon) and Antifragile: Things that Gain from Disorder (Amazon).