Fooled by Randomness

Max Tardiveau writes "I just finished Nassim Nicholas Taleb's Fooled by Randomness. It is an enjoyable book, written engagingly by an interesting character -- the kind of book that makes you think twice about certain things (for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?) Although written all the way back in 2001, this book is more relevant than ever, since one of its major topics is the impact of unpredictable events on markets, insurance, and our perception of life in general. In fact, Taleb makes a living from unforeseen events; these days, that seems like a rather cunning niche." Read on for the rest of his review of this book. Fooled by Randomness author Nassim Nicholas Taleb pages 220 publisher Texere rating 8 reviewer Max Tardiveau ISBN 1587990717 summary Debunking fallacies of observation, Taleb reminds us of the pervasive ineffables that complicate life at every turn.

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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Comments

Dumb Luck

[Anonymous Coward]

(for instance, the fact that you're not dead: is that really because you're so darn good, or does dumb luck play a part?)

There are times where I feel like I should have died but I haven't. Falling off a ravine into a river, losing control of my car in a turn with traffic on the other side. Just dumb luck.

Re:Slashdot lameness filter

[L7_]

I pee sitting down.




Where is the lameness filter?