Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets is a book by Nassim Nicholas Taleb that deals with the fallibility of human knowledge. It was first published in 2001. Updated editions were released a few years later. The book is the first part of Taleb’s multi-volume philosophical essay on uncertainty, titled the Incerto, which also includes The Black Swan “The Black Swan (Taleb book)”) (2007–2010), The Bed of Procrustes (2010–2016), Antifragile “Antifragile (book)”) (2012), and Skin in the Game “Skin in the Game (book)”) (2018).
Source: Fooled by Randomness (Wikipedia)
Nassim Nicholas Taleb explores the ways we are often unaware of randomness in the world. This comes in many ways, whether it be by overestimating causality or seeing the world as explainable. This is the first book of the Incerto series, a five-volume work on the nature of uncertainty.
Marginalia
Preface
More than half a million readers later I am discovering that books are not written for book editors.
Chapter Two
What is easy to conceive is clear to express / Words to say it would come effortlessly.
The reader can imagine my disappointment at realizing, while growing up as a practitioner of randomness, that most poetic sounding adages are plain wrong. Borrowed wisdom can be vicious. I need to make a huge effort not to be swayed by well-sounding remarks. I remind myself of Einstein’s remark that common sense is nothing but a collection of misconceptions acquired by age eighteen. Furthermore, What sounds intelligent in a conversation or a meeting, or, particularly, in the media, is suspicious.
Chapter Three
Life for us is made to resemble an adventure movie, as we know ahead of time that something big is about to happen. It is hard to imagine that people who witnessed history did not know at the time how important the moment was. Somehow all respect we may have for history does not translate well into our treatment of the present.
While we know that history flows forward, it is difficult to realize that we envision it backward.
Chapter Four
Rhetoric can be constructed randomly, but not genuine scientific knowledge.
Now, regardless of whether the poetry was obtained by a Monte Carlo engine or sung by a blind man in Asia Minor, language is potent in bringing pleasure and solace. Testing its intellectual validity by translating it into simple logical arguments would rob it of a varying degree of its potency, sometimes excessively; nothing can be more bland than translated poetry
I have to say that I find Baudelaire far more pleasant to frequent than CNN newscasters or listening to George Will.
Chapter Five
Carlos is now out of the market. The possibility that history may prove him right (at some point in the future) has nothing to do with the fact that he is a bad trader. He has all of the traits of a thoughtful gentleman, and would be an ideal son-in-law. But he has most of the attributes of the bad trader. And, at any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists—because these professions are more immune to randomness.
How could traders who made every single mistake in the book become so successful? Because of a simple principle concerning randomness. This is one manifestation of the survivorship bias. We tend to think that traders were successful because they are good. Perhaps we have turned the causality on its head; we consider them good just because they make money. One can make money in the financial markets totally out of randomness.
Chapter Six
would the reader listen to the opinion of a doctor who does not read medical papers?
Chapter Seven
There is something nonphilosophical about investing one’s pride and ego into a “my house/library/car is bigger than that of others in my category”—it is downright foolish to claim to be first in one’s category all the while sitting on a time bomb.
whenever I hear work ethics I interpret inefficient mediocrity
Why is a theory never right? Because we will never know if all the swans are white (Popper borrowed the Kantian idea of the flaws in our mechanisms of perception). The testing mechanism may be faulty. However, the statement that there is a black swan is possible to make. A theory cannot be verified.
Like Pascal, I will therefore state the following argument. If the science of statistics can benefit me in anything, I will use it. If it poses a threat, then I will not. I want to take the best of what the past can give me without its dangers.
PART II
The major problem with inference in general is that those whose profession is to derive conclusions from data often fall into the trap faster and more confidently than others. The more data we have, the more likely we are to drown in it.
Chapter Eight
Aside from the misperception of one’s performance, there is a social treadmill effect: You get rich, move to rich neighborhoods, then become poor again. To that add the psychological treadmill effect; you get used to wealth and revert to a set point of satisfaction. This problem of some people never really getting to feel satisfied by wealth (beyond a given point) has been the subject of technical discussions on happiness.
Chapter Nine
Some analysts may attribute his achievement to precise elements among his childhood experiences. His biographer will dwell on the wonderful role models provided by his parents; we would be supplied with black-and-white pictures in the middle of the book of a great mind in the making. And the following year, should he stop outperforming (recall that his odds of having a good year have stayed at 50%) they would start laying blame, finding fault with the relaxation in his work ethics, or his dissipated lifestyle. They will find something he did before when he was successful that he has subsequently stopped doing, and attribute his failure to that. The truth will be, however, that he simply ran out of luck.
The publisher will never put on the jacket of the book anything but the best praise. Some authors go even a step beyond, taking a tepid or even unfavorable book review and selecting words in it that appear to praise the book.
What strikes me in these morning explorations is the abundance of claims by the alternative medicine vendors of the curing power of their products. These no doubt are caused by the lower advertising rates at that time. To prove their claim, they present the convincing testimonial of someone who was cured thanks to their methods. For instance, I once saw a former throat cancer patient explaining how he was saved by a combination of vitamins for sale for the exceptionally low price of $14.95—in all likelihood he was sincere (although of course compensated for his account, perhaps with a lifetime supply of such medicine). In spite of our advances, people still believe in the existence of links between disease and cure based on such information, and there is no scientific evidence that can convince them more potently than a sincere and emotional testimonial. Such testimonial does not always come from the regular guy; statements by Nobel Prize winners (in the wrong discipline) could easily suffice.
Chapter Eleven
There exist plenty of different catalogues of these heuristics in the literature (many of them overlapping); the object of this discussion is to provide the intuition behind their formation rather than list them. For a long time we traders were totally ignorant of the behavioral research and saw situations where there was with strange regularity a wedge between the simple probabilistic reasoning and people’s perception of things. We gave them names such as the “I’m as good as my last trade” effect, the “sound-bite effect,” the “Monday morning quarterback” heuristic, and the “It was obvious after the fact” effect. It was both vindicating for traders’ pride and disappointing to discover that they existed in the heuristics literature as the “anchoring,” the “affect heuristic,” and the “hindsight bias” (it makes us feel that trading is true, experimental scientific research).
By a law of probability called distribution of the maximum of random variables, the maximum of an average is necessarily less volatile than the average maximum.
PART III
The difference between me and those I ridicule is that I try to be aware of it. No matter how long I study and try to understand probability, my emotions will respond to a different set of calculations, those that my unintelligent genes want me to handle. If my brain can tell the difference between noise and signal, my heart cannot.
The information from an anonymous reader on Amazon.com is all about the person, while that of a qualified person, is going to be all about the book.
I am currently so weaned that it actually costs me more energy to watch television than to perform any other activity, like, say, writing this book. But this did not come without tricks. Without tricks I would not escape the toxicity of the information age. In the trading room of my company, I have the television set turned on all day with the financial news channel CNBC staging commentator after commentator and CEO after CEO murdering rigor all day long. What is the trick? I have the volume turned completely off. Why? Because when the television set is silent, the babbling person looks ridiculous, exactly the opposite effect as when the sound is on.
Chapter Twelve
we are not made to view things as independent from each other. When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other. Our bias is immediately to establish a causal link.
Most of us know pretty much how we should behave. It is the execution that is the problem, not the absence of knowledge.
Chapter Thirteen
An academic who became famous for espousing an opinion is not going to voice anything that can possibly devalue his own past work and kill years of investment. People who switch parties become traitors, renegades, or, worst of all, apostates (those who abandoned their religion were punishable by death).
In a few decades will we look upon the Nobel economics committee with the same smirk as when we look at the respected “scientific” establishments of the Middle Ages that promoted (against all observational evidence) the idea that the heart was a center of heat? We have been getting things wrong in the past and we laugh at our past institutions; it is time to figure out that we should avoid enshrining the present ones.
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.
Postscript
I am convinced that we are not made for clear-cut, well-delineated schedules. We are made to live like firemen, with downtime for lounging and meditating between calls, under the protection of protective uncertainty. Regrettably, some people might be involuntarily turned into optimizers, like a suburban child having his weekend minutes squeezed between karate, guitar lessons, and religious education.
I remember there was a time when I would choose one word to focus on each year. Since putting my newsletter on hiatus, I have…