Fooled By Randomness: Nassim Nicholas Taleb

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This is the book that made Taleb a rockstar, as opposed to Black Swan, which made him a superhero. For two years, I had been hearing various people sing praises of the book, and I decided to finally take the plunge and read till the end, no matter how much time it took.

Taleb doesn’t make it easy for you. True to the title, the first few chapters are dense and seem pointless and you could be fooled by all the randomness and want to give up. Don’t. Through all the meandering and philosophizing and vilification of traders and MBAs, Taleb is trying to direct you to one conceit- ignore probability at your own risk. He decimates the idea of relying on past successes to predict future trends, especially in finance, arguing that survivorship bias (the error of concentrating on success stories that survived, and ignoring failures that didn’t due to lack of visibility) puts blinders on our decision-making ability. He exemplifies the pitfall of deduction through induction with this pretty awesome example:

“I have just completed a thorough statistical examination of the life of President Bush. For 55 years, close to 16,000 observations, he did not die once. I can hence pronounce him as immortal, with a high degree of statistical significance.”

In this book, he lays the seed for his other bestseller, Black Swan, through the theories of Karl Popper, who is Taleb’s version of God. Popper says that theories can never be right, only falsified, and not falsified yet, the same way that seeing 4000 white swans doesn’t mean that there is no black swan in existence. It’s a theory Taleb wants us all to remember- the fact that an event is rare doesn’t mean that it will not happen. Probability can make any applecart overturn.

This is not an easy book to read. Taleb’s tone is aggravatingly arrogant, and you always get the sense that he is rolling his eyes at you and thinking what a fool you are for having listened to all the jibber-jabber about finance in your daily news. Since evolution has made us biologically handicapped to understand probability, Taleb thinks it is his duty to hammer it into our heads. It also requires you to have some knowledge of mathematics and finance, and I must admit, the chapter on Monte Carlo simulations went over my head. This book needs slow, patient reading, possibly a rereading to grasp the points he is trying to make, behind all the anecdotes and antagonism.

 

 

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