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

In investing, few can tell the difference between being lucky and smart. Being successful in the short term can come from either source. If it is coming from unrecognized sources of luck, however, the behavior that the investor associates with success can sink the ship. The cautionary tale of Long Term Capital Management is cited in the book as an example of this point. yIf youyre so rich, why arenyt you smart?y is the wonderful reversal here on the old saw.

I see this effect all the time in my consulting practice with helping companies understand how their decisions affect their stock price. A large percentage of people feel that they know all the answers when their stock price is rising. They keep doing the same things when the stocks are falling. Few survive to still have top jobs when the cycle shifts again. Then a new group of self-confident people take over who often donyt know any more than those who preceded them. Itys just that their track records look better.

Fooled by Randomness will help make you more knowledgeably humble about what you can expect to accomplish with investments. Not only do fewer than one percent outperform the market averages over long time periods, the ones who do are probably often being aided by luck as well. yGet thee to the index funds as soon as possibley is the message that most should take away from this book. Better yet, buy them when multiples are low!

The bookys fundamental point is that there is tremendous volatility in any investment. Ignore that volatility to your peril.

At the same time, you should be cautious about how well you understand the volatility. Stocks at their lows can still go to zero. There are all kinds of events that can happen, that have not done so yet. When they do, throw out all the old rules of investing. The terrorist attacks on the United States last week are probably an example of this. So each investment must be made as though you could be totally wrong. This means that you have to manage your risk exposure to events you donyt even know how to expect.

I loved his example of the joint probabilities of having a rare disease if you get a positive result on a test for that disease. Even most doctors apparently donyt know how to evaluate that one. If even well educated people cannot quantify two known risks occurring simultaneously in their own field, how can investors be expected to make good decisions?

Dr. Taleb has some very good advice for how to handle the psychology of being able to do this. He upholds the Stoic ideal -- ythe attempt by man to get even with probabilityy which encourages ywisdom, upright dealing, and courage.y This means not chasing the latest investment fad or fashion, not looking at your investments very often, and being open to both sides of any idea (it could go wrong as well as right --what are the consequences of both?). I especially liked his idea of watching CNBC with the sound off so that the yexpertsy seem humorous and you are less likely to hear and follow their advice. Even more poignant was his advice not to live on Park Avenue where living with all of the arrogant, temporarily lucky can make you feel small. Instead, live somewhere that the results of your cautious approach will cause you to be the envy of all.

Dr. Taleb impressed me with his willingness to tell stories on himself about how quickly he can become superstitious when things are going well, take on excess risks, and start looking too short term. After all, we are only human!

The importance of this book can only be appreciated if you go back and think about your biggest investing successes. How much was luck versus skill? A good way to test is to see if the same approach has continued to work for you whenever you use it. Another good test is to see how often it would have backfired in the past.

In my research on good decision making, I find that those who guard the downside first make the most money in the long run. They are able to find ways to get the best of both worlds!

Remember that the two-edged sword can cut in either direction!

Fabulous, IF you judge it on its own terms.   September 6, 2006
The Dilettante
29 out of 33 found this review helpful

The spolighted reviews are unfair and irritating. I enjoyed the hell out of this book, not because the author's thesis is necessarily correct, but because it is extremely entertaining and well-written.

This is a brief literary essay about epistemology, not a textbook. It tells the story of a philosopher who unintentionally stumbles into options trading, and presses his neuroses to his advantage. It does not purport to be a handbook for success in the stock market. Nor COULD it resolve the perennial debate between empiricism and rationalism. Taleb does not "ignore" the possibility of deductive reasoning from a priori truth, he discounts it. He's a empiricist, and this is an polemic for empiricism. He's a partisan, not an ignoramus.

I also disagree with the contention that Taleb spreads his "cultural comfiture" thin, though I am not at all surprised to learn that that is a French idiom. As a TRUE sophisticate, I can vouch for the fact that this a culturally-sophisticated book, even if he gets the details of signal/noise filtration wrong on page 167. Or whatever. (Not caring much, I'll have to take his word on it.)

I can understand why this book has hurt feelings, since the author adopts a cavalier and often snide tone toward those who have experienced success in the market. But, come on here, it isn't as though he's picking on crippled children; his targets are high-risk traders - they should have thicker skins. In any event, the streak of self-deprecation that runs through this book is obvious. The author humorously portrays HIMSELF as a petty, jealous, greedy snob. It's an ironic pose and -if your ego's not wrapped up in these things- it's pretty damn funny.

There is a growing market for the philosophical business book. Rather than panning Taleb's book, the critics above should write their own. If anyone can explain "praxeological analysis" with the same style and grace that Taleb has brought to black swans, heuristics and biases, then I will eagerly buy their book, too.


BE FOOLED NO MORE - (by charlatans, anyway)   October 31, 2001
Alessandro Bruno (Toronto, Canada)
46 out of 64 found this review helpful

I normally dislike business books and approached this one with a slight diffidence. The title, nonetheless, seemed interesting. However, I soon became drawn into it and found its writer so brilliant as to become envious of his obvious ease at weaving excerpts of knoweldge acquired from many fields to produce such entertaining and insightful writing. Apart from investing and finance the book really attempts to answer the question: are great men made by circumstances or are they born ? I doubt this book will become a bestseller; it's simply too original and intellectual to attract the average minds that run business and finance. This book is about philosophy, science, psychology, history and literature as much as it is a useful guide to investment strategies - though I doubt Mr, Taleb would appreciate the last qualification. Those privileged enough to read it will share an amazing secret and advantage.
In short, I loved it.


Packed with Knowledge!   March 15, 2002
Rolf Dobelli (Luzern Switzerland)
13 out of 20 found this review helpful

The past decade has witnessed the release of many books about risk management and assessment, but none have managed to illustrate the role that random events play in life and markets as well as Nissim Nicholas Taleb's latest work. Writing in a leisurely and personal style that makes his complex subject utterly accessible, Taleb instructs us on how to account for randomness in our decision making, and illustrates the many ways in which we confuse luck with skill. We from getAbstract highly recommend this book, which many investors will wish they had read in, say, 1994.


Reconsidering a classic   May 10, 2006
Aaron C. Brown (New York, New York United States)
20 out of 26 found this review helpful

When FBR came out, it created a sensation among quantitative financial traders, but the arguments are primarily philosophical, not mathemtical or financial. It slowly trickled out to a wider readership and became the classic exposition of the nature of randomness in human experience. People bought it for clever writing and insight into the world of quantitative finance, but the ideas stuck with them because they are important and true in a much broader context. Yes, this book teaches how to make high risk trades without blowing up, but the bigger point is life consists of high risk trades, and there are powerful social forces dedicated to hiding that fact.

Inevitably, a reaction set in and you see a lot of newer reviews saying either "I knew this all along," or "he should be nicer and more humble." While the core ideas have been explored for at least 2,500 years, there is important new insight in this book. And the only reason someone could make these points in a quiet voice today is that FBR shattered the ossified consensus and introduced a new paradigm.

While it's true many of the ideas have been reflected in other works, sometimes sanded down to be less upsetting or stripped of philosophic rigor, you should go back to the original. Agree or disagree with Taleb, an educated person today has to know what he said, in his own words. This is a classic people will be reading for decades, maybe longer. Accept no substitutes.