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

by Nassim Nicholas Taleb Narrated by Joe Ochman

Overview

Fooled by Randomness is a standalone book in Nassim Nicholas Taleb's landmark Incerto series, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don't understand. The other books in the series are The Black Swan, Antifragile, Skin in the Game,*and The Bed of Procrustes.

Now in a striking new hardcover edition, Fooled by Randomness is the word-of-mouth sensation that will change the way you think about business and the world. Nassim Nicholas Taleb-veteran trader, renowned risk expert, polymathic scholar, erudite raconteur, and New York Times bestselling author of The Black Swan-has written a modern classic that turns on its head what we believe about luck and skill.

This book is about luck-or more precisely, about how we perceive and deal with luck in life and business. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill-the world of trading-Fooled by Randomness provides captivating insight into one of the least understood factors in all our lives. Writing in an entertaining narrative style, the author tackles major intellectual issues related to the underestimation of the influence of happenstance on our lives.

The book is populated with an array of characters, some of whom have grasped, in their own way, the significance of chance: the baseball legend Yogi Berra; the philosopher of knowledge Karl Popper; the ancient world's wisest man, Solon; the modern financier George Soros; and the Greek voyager Odysseus. We also meet the fictional Nero, who seems to understand the role of randomness in his professional life but falls victim to his own superstitious foolishness.

However, the most recognizable character of all remains unnamed-the lucky fool who happens to be in the right place at the right time-he embodies the “survival of the least fit.” Such individuals attract devoted followers who believe in their guru's insights and methods. But no one can replicate what is obtained by chance.

Are we capable of distinguishing the fortunate charlatan from the genuine visionary? Must we always try to uncover nonexistent messages in random events? It may be impossible to guard ourselves against the vagaries of the goddess Fortuna, but after reading Fooled by Randomness we can be a little better prepared.

Includes bonus pdf of tables and figures.

PRAISE FOR FOOLED BY RANDOMNESS:

Named by Fortune One of the Smartest Books of All Time

A Financial Times Best Business Book of the Year

“[Fooled by Randomness] is to conventional Wall Street wisdom approximately what Martin Luther's ninety-five theses were to the Catholic Church.”
-Malcolm Gladwell, author of Blink

“The book that rolled down Wall Street like a hand grenade.”
-Maggie Mahar, author of Bull! A History of the Boom, 1982-1999

“Fascinating . . . Taleb will grab you.”
-Peter L. Bernstein, author of Capital Ideas Evolving

“Recalls the best of scientist/essayists like Richard Dawkins . . . and Stephen Jay Gould.”
-Michael Schrage, author of Serious Play: How the World's Best Companies Simulate to Innovate

“We need a book like this. . . . Fun to read, refreshingly independent-minded.”
-Robert J. Shiller, author of Irrational Exuberance

“Powerful . . . loaded with crackling little insights [and] extreme brilliance.”
-National Review

Editorial Reviews

Paul Wilmott

A blast of common sense. From classical to modern philosophers, via cab drivers, businessmen, and dentists . . .

Marco Avellaneda

Intelligent, honest, and revealing. There exists a distinct Taleb way of thinking and it is contagious.

Robert J. Shiller

I really liked this book. . . It is fun to read, refreshingly independently-minded and at the same time playful.

Peter L. Bernstein

. . . Taleb will grab you. As a non-random consequence, your understanding of life (and your money will expand exponentially.

Donald Geman

Taleb's book is mathematically sound as well as entertaining and informative for the general public, which is quite an achievement . . .

Victory Niederhoffer

Whether you agree with Mr. Taleb or not, his book will leave you with many suggestive queries.

Publishers Weekly

In this look at financial luck, hedge fund manager Taleb (Dynamic Hedging) addresses the apparently irrational movement of money markets around the world. Using his own investing experience and examples of others' successes and disappointments, he discusses theories like Monte Carlo math (easy; considered cheating by purists) and the concept of Russian roulette. Taleb tells interesting, well-wrought stories about individual behavior: "While Nero has succeeded beyond his wildest dreams, both personally and intellectually, he is starting to consider himself as having missed a chance somewhere." While serious investors and mathematics enthusiasts will be intrigued, readers looking for practical investment strategies will be disappointed by this rambling intellectual discourse. Tables. 40,000-copy first printing; $150,000 marketing budget. (Oct. 30) Copyright 2001 Cahners Business Information.

From the Publisher

"[Taleb is] Wall Street’s principal dissident. . . . [Fooled By Randomness] is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-nine theses were to the Catholic Church.”
–Malcolm Gladwell, The New Yorker

“Fascinating . . . Taleb will grab you.”
–Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk

“Recalls the best of scientist/essayists like Richard Dawkins . . . and Stephen Jay Gould.”
–Michael Schrage, author of Serious Play

“We need a book like this . . . fun to read, refreshingly independent-minded.”
–Robert J. Shiller, author of Irrational Exuberance

Product Details

BN ID:	2940172024504
Publisher:	Penguin Random House
Publication date:	01/08/2019
Series:	Incerto Series , #1
Edition description:	Unabridged
Sales rank:	984,140

Read an Excerpt

Prologue

Mosques in the Clouds

This book is about luck disguised and perceived as non-luck (that is, skills) and, more generally, randomness disguised and perceived as non-randomness (that is, determinism). It manifests itself in the shape of the lucky fool, defined as a person who benefited from a disproportionate share of luck but attributes his success to some other, generally very precise, reason. Such confusion crops up in the most unexpected areas, even science, though not in such an accentuated and obvious manner as it does in the world of business. It is endemic in politics, as it can be encountered in the shape of a country's president discoursing on the jobs that "he" created, "his" recovery, and "his predecessor's" inflation.

We are genetically still very close to our ancestors who roamed the savannah. The formation of our beliefs is fraught with superstitions—even today (I might say, especially today). Just as one day some primitive tribesman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president "at the helm". Bookstores are full of biographies of successful men and women presenting their specific explanation on how they made it big in life (we have an expression, "the right time and the right place" to weaken whatever conclusion can be inferred from them).

This confusion strikes people of different persuasions; the literature professor invests a deep meaning into a mere coincidental occurrence of wordpatterns, while the financial statistician proudly detects "regularities" and "anomalies" in data that are plain random.

At the cost of appearing biased, I have to say that the literary mind can be intentionally prone to the confusion between noise and meaning, that is, between a randomly constructed arrangement and a precisely intended message. However, this causes little harm; few claim that art is a tool of investigation of the Truth—rather than an attempt to escape it or make it more palatable. Symbolism is the child of our inability and unwillingness to accept randomness; we give meaning to all manner of shapes; we detect human figures in inkblots. I saw mosques in the clouds announced Arthur Rimbaud the 19th-century French symbolic poet. This interpretation took him to "poetic" Abyssinia (in East Africa), where he was brutalized by a Christian Lebanese slave dealer, contracted syphilis, and lost a leg to gangrene. He gave up poetry in disgust at the age of 19, and died anonymously in a Marseilles hospital ward while still in his thirties. But it was too late. European intellectual life developed what seems to be an irreversible taste for symbolism—we are still paying its price, with psychoanalysis and other fads.

Regrettably, some people play the game too seriously; they are paid to read too much into things. All my life I have suffered the conflict between my love of literature and poetry and my profound allergy to most teachers of literature and "critics". The French poet Paul Valery was surprised to listen to a commentary of his poems that found meanings that had until then escaped him (of course, it was pointed out to him that these were intended by his subconscious).

More generally, we underestimate the share of randomness in about anything, a point that may not merit a book—except when it is the specialist who is the fool of all fools. Disturbingly, science has only recently been able to handle randomness (the growth in available information has been exceeded by the expansion of noise). Probability theory is a young arrival in mathematics; probability applied to practice is almost nonexistent as a discipline.

Consider the left and the right columns of Table P. 1. The best way to summarize the major thesis of this book is that it addresses situations (many of them tragicomical) where the left column is mistaken for the right one. The sub-sections also illustrate the key areas of discussion on which this book will be based.

Table P.1 Table of Confusion
Presenting the central distinctions used in the book

GENERAL
Luck—Skills
Randomness—Determinism
Probability—Certainty
Belief, conjecture—Knowledge, certitude
Theory—Reality
Anecdote, coincidence—Causality, law
Forecast—Prophecy

MARKET PERFORMANCE
Lucky idiot—Skilled investor
Survivorship bias—Market outperformance

FINANCE
Volatility—Return (or drift)
Stochastic variable—Deterministic variable

PHYSICS AND ENGINEERING
Noise—Signal

LITERARY CRITICISM
None (literary critics do not seem to have a name for things they do not understand)—Symbol

PHILOSOPHY OF SCIENCE
Epistemic probability—Physical probability
Induction—Deduction
Synthetic proposition—Analytic proposition

The reader may wonder whether the opposite case might not deserve some attention, that is, the situations where non-randomness is mistaken for randomness. Shouldn't we be concerned with situations where patterns and messages may have been ignored? I have two answers. First, I am not overly worried about the existence of undetected patterns. We have been reading lengthy and complex messages in just about any manifestation of nature that presents jaggedness (such as the palm of a hand, the residues at the bottom of Turkish coffee cups, etc.). Armed with home supercomputers and chained processors, and helped by complexity and "chaos" theories, the scientists, semi-scientists, and pseudoscientists will be able to find portents. Second, we need to take into account the costs of mistakes; in my opinion, mistaking the right column for the left one is not as costly as an error in the opposite direction. Even popular opinion warns that bad information is worse than no information at all.

However interesting these areas could be, their discussion would be a tall order. In addition, they are not my current professional specialty. There is one world in which I believe the habit of mistaking luck for skill is most prevalent—and most conspicuous—and that is the world of trading. By luck or misfortune, that is the world in which I operate. It is my profession, and as such it will form the backbone of this book. It is what I know best. In addition, business presents the best (and most entertaining) laboratory for the understanding of these differences. For it is the area of human undertaking where the confusion is greatest and its effects the most pernicious. For instance, we often have the mistaken impression that a strategy is an excellent strategy, or an entrepreneur a person endowed with "vision", or a trader an excellent trader, only to realize that 99.9% of their past performance is attributable to chance, and chance alone. Ask a profitable investor to explain the reasons for his success; he will offer some deep and convincing interpretation of the results. Frequently, these delusions are intentional and deserve to bear the name "charlatanism".

If there is one cause for this confusion between the left and the right sides of our table, it is our inability to think critically—we may enjoy presenting conjectures as truth. We are wired to be like that. We will see that our mind is not equipped with the adequate hardware to handle probabilities; such infirmity even strikes the expert, sometimes just the expert. A critical mind, on the other hand, is someone who has the guts, when confronting a given set of information, to attribute a large share of its possible cause to the left column.

The 19th-century cartoon character, pot-bellied bourgeois Monsieur Prudhomme, carried around a large sword with a double intent: primarily to defend the Republic against its enemies, and secondarily to attack it should it stray from its course. In the same manner, this book has two purposes: to defend science (as a light beam across the noise of randomness), and to attack the scientist when he strays from his course (most disasters come from the fact that individual scientists do not have an innate understanding of standard error or a clue about critical thinking). As a practitioner of uncertainty I have seen more than my share of snake-oil salesmen dressed in the garb of scientists. The greatest fools of randomness will be found among these.

This author hates books that can be easily guessed from the table of contents—but a hint of what comes next seems in order. The book is composed of three parts. The first is an introspection into Solon's warning, as his outburst on rare events became my lifelong motto. In it we meditate on visible and invisible histories. The second presents a collection of probability biases I encountered (and suffered from) in my career in randomness—ones that continue to fool me. The third concludes the book with the revelation that perhaps ridding ourselves of our humanity is not in the works; we need tricks, not some grandiose moralizing help. Again the elders can help us with some of their ruses.

Copyright © 2001 Nassim Nicholas Taleb

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