Fooled by Randomness

Fooled by Randomness, by Nassim Nicholas Taleb


Nassim Taleb’s point can be summarized by Solon’s Warning: Don’t admire a man’s present happiness, because the future is unpredictable. Basically, Taleb uses this book to establish the case that the world is full of random events, and that many of the successful Wall Street types are not necessarily skilled or intelligent. Rather, they are lucky. Too often, we mistake skill or intelligence for luck. When a trader makes good investments, he considers himself skilled. However, when he performs poorly, he attributes his losses to being unlucky. This is just one of the behavioral biases that plagues investors. Taleb also discusses other biases such as the anchoring bias and the hindsight bias. Overall, I thought this book was interesting, and it made some very good points. Sometimes Taleb’s jokes went over my head, sometimes his jokes were irritating, and other times the jokes were funny. I particularly enjoyed the jokes that poked fun at MBAs. Why does everybody poke fun at MBAs, especially when they themselves have the degree, such as Taleb?

A few thoughts

I was familiar with most of the mathematical concepts and behavioral biases discussed by Taleb. However, I read this book primarily for some insights into investing and trading. Although Taleb argues that the book is not about trading, clearly the book is bent towards finance types.

So, did I glean any actions from “Fooled by Randomness”? Kind of. I need to think about how to structure my investments to take advantage of asymmetric opportunities. Something that Taleb recommended was finding investments that consistently lose a little bit of money, but rarely earn a lot of money. For example, consider an investment that has 999/1,000 chances of losing $1, and 1/1,000 chance of making $10,000. The odds say that you will lose money, because most of the cases result in losing $1. However, this loss only refers to frequency. When we consider magnitude, it is better to bet on the $10,000 chance. Taleb uses the example of John to illustrate this principle. John was a successful high-yield trader who earned roughly $250 million for his bank over the course of 7 years. However, in just a few days, he lost more than $600 million and was fired. How do you structure your investments/trades to take advantage of this simple concept of asymmetry? How do I apply it in my personal life?

The world is full of noise. It is challenging to determine what information is relevant and what is not. For example, Taleb does not watch the television or read the news, because these sources do not provide any valuable information; they are all noise. I’ve argued this point with many people, and I couldn’t agree more. What value does the television have? How about the newspaper? These things have very little value, beyond simple entertainment. If you are truly interested in news, then you need to curate your information to remove the noise. For example, use a news aggregator, or find a source that is targeted specifically to your occupation and interests.

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