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

It was indeed compelling. But I did not wholly agree with him. I suppose that is my right.

At risk of great oversimplification, Taleb argues quite articulately that extreme occurrences in a distribution happen a lot more frequently than humans are prone to believe. Ergo, in derivatives trading, it makes no sense for one to be "frontspread" (short gamma/vega). Ever.

My experience is in equity derivatives. Mr. Taleb's is presumably in fixed income and FX. Without knowing much about the world of FX options, I can assert that in the equity listed options markets, downdrafts in volatility can be almost as deadly as explosions in volatility. The vol crush of the summer of 2000 wiped out as many traders as the Russian debt default of 1998. Out of the money options are never cheap; lots of people buy them for the protection that Taleb seeks. Sometimes even they are too expensive to own.

Going further, I found Mr. Taleb's insights on the role of luck in human performance to be EXTREMELY unsettling. He talks at length about the rich idiot trader and the vastly more competent but underpaid trader (presumably himself). He goes on to ascribe most of those who are wildly successful in life to LUCK, and that individuals ascribe way too much of their own success to their own ability and hard work (which he scorns).

I find this to be frightening. I'm sure Mr. Taleb would find this reaction entirely predictable. The implications are most frightening, from a political standpoint: if most wealth is undeserved, then therefore it can be rightfully taxed (expropriated) and redistributed to those are not so lucky. Furthermore, most individuals who despise hard work do so not because they are brilliant, but because they are lazy. Evaluation of a particular person's work ethic is an imperfect but reasonably good indicator of performance.

Many of the MBAs he derides as being shallow thinkers and pluggers, while may not be (ahem) the intellectual giant that Taleb is, are no slouches themselves. They do not represent the legions of clueless option sellers that Mr. Taleb has somehow encountered throughout his career. Most young associates do have the luxury of telling their boss they did not read the Wall Street Journal in the morning because it represents nothing but random noise.

As you can tell from this review, I enjoyed the book. Otherwise I wouldn't be so critical of it. I couldn't put it down. You probably won't agree with all of it, but it will cause you to think about things in a very different way for a long time.

FOOLED BY RANDOMNESS is an introduction to the difficulties human beings have at reasoning around probability. Taleb argues that human beings are genetically hardwired to misattribute the results of human endeavors to skill and knowledge that are, in fact, just coincidental, random events. Taleb discusses the results of this embedded flaw in human reasoning in three areas.

In part 1, Taleb discusses impacts of `rare events' on both financial markets and on human history. Taleb argues we should beware seemingly successful strategies if they are not proven by the test of history. In particular, we should examine human history in the long term for general trends and treat skeptically claims that humanity has reached `the end of history' or `a new economic model' where the old, proven rules do not apply.

In part 2, Taleb discusses the `survivor effect', or mistaking success based on luck for success based on skill. In particular, Taleb warns against judging a strategy by its actual results. Instead, we should judge strategies based upon a sum of all possible outcomes.

In part 3, Taleb briefly discusses `tricks' he has developed to try and derail his flawed, ingrained, statistical reasoning and live a rational and, to a great degree, classical life based upon a good understanding of the effect of randomness on our lives.

The book is peppered with classical references to ancient philosophers and literature, as well as humorous anecdotes to Taleb's own experience in the world of Wall Street. Unfortunately, interesting nuggets and provocative thoughts throughout the book are rarely fully explored. While I was entertained and intrigued, when I got to an end of a chapter or section, I often felt dissatisfied, as if I was trying to wrap my arms around some meaty ideas and came away with empty air.

Unlike other reviewers, however, I did not find Taleb particularly pretentious. In fact, I often felt that Taleb was more than open with his own particular foibles and failings. His only source of pride seemed to be in realizing that he had these failings. Ironically, Taleb attributes this understanding to the experiences suffered in his own personal, contingent history.

Overall, I found the book to be like a good Chinese dinner: entertaining at the time of reading, but left hungry an hour later.

Dav's Rating System:
5 stars - Loved it, and kept it on my bookshelf.
4 stars - Liked it, and gave it to a friend.
3 stars - OK, finished it and gave it to the library.
2 stars - Not good, finished it, but felt guilty and/or cheated by it.
1 star - I want my hour back! Didn't finish the book

While Taleb does not fully dive into this issue until later in the book, the primary conjecture of the piece is that human beings are psychologically prone to misinterpret random events. We need to explain things, whether it be in the social sciences, art and literature, or the natural sciences, so we find ways to explain them. Considering the infinite quantities of data at our disposal, no statistician denies that extremely powerful correlations will occur simply out of chance. Certain aspects of an author's life will be almost identical to passages in his or her novels, certains stocks will share perfect correlations, and we are creatures in need of explanation, and whole industries have been created to mine the data and tell us why things occur.

Prior to this book, Taleb had already written 'Dynamic Hedging,' considered by many, including myself, to be one of the best books ever written on exotic and vanilla options. That book is not for anyone who has not spent years studying (or preferably practicing) options, but in 'Fooled by Randomness' he illustrates his ideas in terms that anyone could understand. In 'Dynamic Hedging' he provides more insights into his trading strategies than he would have done had he been solely profit motivated, and likewise, as the boss of a fund that profits from other people's misconceptions of probability, he cannot have any reason to try to increase people's awareness of how the world really works other than a genuine desire to play the role of the teacher. Many have attacked the book as arrogant, but it must be remembered that anyone who goes against the common ways of thinking is essentially suggesting that he or she understands things better than do most people and therefore cannot help but come off as arrogant. Several times in the book Taleb specifically states that he falls victim to the tendencies that he condemns, and that the main difference that he sees between himself and others is that he is at least aware of it.

Considering the fact that Taleb blatantly argues that many who consider themselves the rulers of the universe were in fact a group of lucky fools, it is inevitable that many will come away from it with a sense of anger and a refusal to believe it. I am therefore almost surprised that the book has not drawn harsher reviews than it has, for Taleb was certainly not seeking to make friends through the publication of it. I suspect that those who rate the book as poor fall into two general categories: those who were troubled by the thought that a considerable portion of their success may have resulted from luck, and those who are attached to their current views on the workings of the markets and are hostile to any new views on them. These two categories naturally overlap quite often. An important thing to remember is that even if you work very hard, not only are the outcomes of your projects the result, to varying extents, of chance, but chance also played a role in getting you to the position where you can work hard and actaully see it pay off. Considering the complexity of the world we live in, and the infinite forces that push and pull on our lives, this book is critical to anyone who desires an objective veiw of how things come to be...

And while the book does provide some of that, the valuable information is embedded in writing that is overly self-centered if not egomaniacal.

I'd like to point out that I REALLY wanted to love this book. But I didn't.

Taleb writes about interesting ways in which people do not understand randomness but he does it in a way which is unnecessarily insulting and condescending.

Even worse, I find him hypocritical. He spends a lot of energy talking about the value of being able to change one's mind, as well as the value of large sample sizes in probability-based decision making. But then he describes how far out of his way he goes to avoid information (which might cause him to change his mind or which would increase his sample size.) Further he implies that anyone who takes in certain information, like almost any form of news broadcast, must be an idiot and lives in a world of self-delusion.

Taleb writes like a smart but anti-social and holier-than-thou trader. He writes some very useful stuff about randomness and its misapplication in modern thinking. But then he goes on psychological tangents which are nothing more than trying (and failing) to find a mathematical basis on which to defend his personality foibles (flaws?).

He over-generalizes about trading in a style which he does not employ, i.e. selling premium or making bets based on past occurrences. He writes as if his way is the only way that makes sense, and implies that in the long run it is only because of randomness that anyone who does not trade the same way he does could be successful. ("Ergoditic" is definitely the best word in the book....)

Taleb gets very close to interesting discussions of a non-mathematical nature as well, such as the level of emotion involved with success or failure, as well as some interesting historical information. But he lessens the effect of the good writing by then telling us how all this fits into how he lives his life, using as many obscure references as possible, in an ongoing attempt to justify (to the reader or to himself?) the lifestyle he has created for himself. For example, he uses the above discussion to explain why he does not like to look at his own trading profit or loss statements. And he writes it in a way that shows he expects us to think he's brilliant or heroic for having such discipline. Very silly stuff....

Taleb describes his hero worship (of a philosopher named Popper) and it becomes clear that at least a partial goal of this book is to get the reader to revere (or emulate) Taleb the way he reveres (and tries to emulate) Popper. Unfortunately, it doesn't work that way.

Overall I found the probability discussion interesting, but not worth the tedium of having to listen as if the reader is Taleb's (badly needed) therapist.

Luckily for Taleb, he says directly in the book that he will ignore all reviews. I think you should be able to find a less tedious source for the bits of valuable information "Fooled By Randomness" provides without having to suffer the insufferable smugness of the author.