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Fooled by Randomness
The main topic of the book is the fact that all humans are simply terrible at judging probabilities. Taleb is a securities trader, so a lot of the book revolves around financial probabilities, but his argument is mainstream and requires absolutely no knowledge of the markets. The book details examples of people wildly misjudging risks and probabilities in many contexts. Often that misestimation is understandable in advance of certain events, but harder to excuse after they've occurred; Taleb hits pretty hard on what he calls "data snoopers," his term for people who back-fit theories to existing data.
One of the most notorious examples is the Bible code (which has been thoroughly debunked), but Taleb argues that analysts who spend their time trying to find patterns in historical market data are no different: if you try long enough and hard enough, you will unavoidably find apparent regularities, which can be extremely compelling when seen in isolation. In context, though, they dissolve into nothing but meaningless statistical anomalies. Taleb rightfully compares these searches for meaning to the famous monkeys and typewriters parable.
Taleb's best example of poor probability intuition is probably the infamous survivor bias, which is our tendency to be disproportionately impressed by success. We almost always ignore the fact that, for one success story, there are many failures. But we seldom hear about the failures (just like we never hear about the many theories that didn't fit the data). So it's all a game of numbers: out of 10,000 traders, a few are statistically bound to be successful, even if they are nothing more than lucky idiots. The fact that they succeeded does not mean anything. It doesn't mean that they are bad traders, but it doesn't mean that they are good traders either, because on average somebody had to succeed.
One of Taleb's hot buttons is that people tend to be too confident in what they know. He argues convincingly that we should take everything, including science, with a grain of salt. Writing about Karl Popper, he points out that there are only two kinds of scientific theories: those that are demonstrably false, and those that are not yet demonstrably false. An irksome (but sadly true) observation, yet most people behave as if what they know is eternal truth. One could of course argue that Popper's observation is but another kind of truth, but I tend to put a lot more trust in people who question what they know than in people who don't.
Another of Taleb's peeves is the human tendency to over-attribute every random event (the old post hoc, ergo propter hoc). For instance, a commentator saying that "the Dow went down ten points today on concerns about Iraq" is talking nonsense: there is no way anyone can tie such a small market move to any particular reason. I found this specific point (which in retrospect is blindingly obvious) especially enlightening, as I am embarrassed to admit that, until now, I just accepted those market comments at face value.
Taleb also has some fun at the expense of economists and analysts, especially those whose predictions turned out wrong, but who claim that the theories were in fact right, and that the facts simply weren't supposed to be that way. This is what he calls denial of history, and is common among investors and gamblers (the two being of course close cousins).
The style of the book is informal and funny, and often meandering. We hop from one topic to the next, which occasionally may detract from the book's continuity, but overall the author's points come through loud and clear. Ironically for a man who advocates self-doubt, Taleb is starkly self-confident, though not in an irritating way.
Taleb is an intriguing, multi-cultural, iconoclastic character that has been around Wall Street for a while, and now runs his own small firm. Malcolm Gladwell (author of The Tipping Point, an absolute must-read for anyone who owns a brain) has written an excellent article that shows how Taleb's reasoning runs counter to just about every bit of conventional Wall Street wisdom. If you're interested in the markets, especially derivatives, and how Taleb trounces most of Wall Street's voodoo doctors, this moderately technical interview from 1996 is worth reading too.
Overall, a warmly recommended book.
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... is Innumeracy: Mathematical Illiteracy and Its Consequences by John Allen Paulos. I read it a couple of years ago, and thoroughly enjoyed it. I think it is an excellent commentary on how probability, large numbers, and basic mathematical principles are largely misunderstood by the general public, and the effects that this phenomenon has both on lives of individuals and society as a whole (e.g. the embrace of numerology, or public policy based on sleight-of-hand statistics). All in all, a short, entertaining, and insightful book.
Life is too important to be taken seriously - Oscar Wilde
Conservatives tend to think you are where you are because you deserved it. Dumb and lazy people are poor, smart and hard working people are rich. Dumb people get hit by trains, smart people comment on how dumb they are. Your situation is a result of your disposition.
This viewpoint is absolutely not essential to conservativism. It is unfair to characterize conservativism as people who punish the poor because they "deserve it."
There is a legitimate conservative idea that many well-meaning social welfare programs actually trap people in poverty by encouraging failure and discouraging success. Clinton famously "ended welfare as we know it" because he believed this kind of reform was the right thing to do.
Of course there is also a wrong kind of conservativism (practiced by many Libertarians and Republicans), in which welfare is cut, while job training programs are cut as well.
Centrists of both parties (such as Clinton) recognize and co-opt the good parts of conservativism and of liberalism. When you say that you can't stand conservatives, I think what you really mean is that you can't stand the self-righteous, self-promoting bigots who make a mockery of the ideology they unfortunately claim to represent.
In CS lingo, it would appear to be NP-Complete. ;)
:), so please take in good sprit ... but everybody here seems to treat NP as a synonym for "difficult to solve."
Don't want to troll too badly
Easy mnemonic: an NP problem has a solution that can be verified in polynomial time. Clearly, lots of problems that people casually say are NP are actually far far harder.
The open question P=NP question is essentially whether there's a way to quickly (polynomially) find the solution to verify.
'nuff said.
-- p
Very good read.
The infinitude of random factors that may cause market fluctuations makes prediction completely (probably?) intractable. In CS lingo, it would appear to be NP-Complete.
Okay I am a CS theory puritan and a troll. But here is the deal.
Rant #1: Intractable problems are unsolvable problems. Even if you have infinitely powerful machines. Because our logic (the foundation of our math) has "holes" that prevent it from solving them. Halting problem (can you write a program that will verify if a program is correct)is an example. It simply cant be done.
Rant #2: NP hard problems are hard to solve. You just need lots of time. Throw in a trillion years and a very powerful computer and heck - you have a solution. Quantum computing *may* solve these NP hard problems in polynomial time. Still Quantum computing cannot solve intractable problems.
Rand #3: NP problems are not the most difficult to solve problems (among the solvable problems). In fact they are the easiest. There is something called polynomial hierachy of harder and harder problems and NP is at the very bottom.
Rant #4: Only problems that have a one bit solution (yes or no, true or false) can be NP complete. Others are "hard".
Further references to be directed at "computational complexity" by papadimitrou.
Sorry but had to take it out on someone
That was my take too. Some good content, but he seems like a pretty angry guy. Can't imagine that he'd be a lot of fun to hang out with. Also, what's with him at the gym? He must have talked about himself working out a good half-dozen times.
As provocative as the book's thesis seems to be -- and I must admit that my information on it comes entirely from this review -- it's not new. In the 1970s, Burton Malkiel's A Random Walk Down Wall Street posited that market fluctuations are mutually independent, though the market follows a general upwards trend, and thus it's impossible (ceteris paribus) to make any bets on short-term stock performance.
That's a bit inaccurate in two ways:
1) Taleb doesn't claim the market is an efficient random walk - he thinks the market inefficiently prices events that have low probability because people are bad at estimating low-prob events. He capitalizes on that mispricing by buying low-prob events, mostly losing money but occasionally scoring big (and hopefully making money on average).
2) Even if the market *is* a random walk, you can still expect to make money in the long term because the stock market pays a better return on average than, say, the bond market. That's because investors demand a higher return in exchange for the extra risk due to stock volatility. But that only applies to investing for the long term, not day trading. Over short terms the extra return is completely swamped by the noise from volatility.
All opinions expressed herein are not my own; I haven't had free will since last year when aliens ate my brain.
The parent post is accurate. Many of Taleb's stories are highly amusing, but they are also highly self-flattering. An unreasonable proportion of the book is devoted to explaining that although Taleb is an idiot, he is really a genius because he knows that he's an idiot. These excursions are accompanied by descriptions of tricks he uses to fool himself into being smart. Not all of this is entertaining.
The book has one other serious flaw which really merits mention in a review: it is very badly written. 'Meandering' does not describe the book as well as 'completely unstructured'. Also, there is too much repetition for such a short book.
The overall impression is that Taleb has published the notes for a book, rather than the book itself. With proper writing and editing, these notes would, of course, make an extremely brief book; but certainly there is material here for an instructive essay.
"The good reader is a rarer swan than the good writer."
Being a statistician I'd like to point out that you can define a random walk with any distribution that you want. The simple random walk is the sum of random variables that are either +1 or -1 (think flipping a coin, take a step to the left on a heads, and a step to the right on a tails). If each of your steps has a gaussian distribution, then you are observing a Brownian Motion on a lattice (i.e. at integer times). No reason why you can't use a heavy-tailed distribution to define your random walk.
Quack!Quack!.....QUACK!!
Taleb mentions that the long-term winners like Soros tend to have a trait in common : they hold no pre-conceived ideas, and will swing with the market. In other words, they accept the facts as they are, instead of trying to fit them into theories.