Days of our Lives!

March 2, 2009

Book Review: Fooled By Randomness – Nassim Taleb

Filed under: Books — Santhosh @ 6:11 PM
Book Name: Fooled By Randomness : The Hidden Role of Chance in Life and the Markets
Author: Nassim Nicholas Taleb
Year: 2001
Genre: Non-fiction –> Business & Finance
The author says right at the beginning in his 20+ page preface that the book is intentionally left unstructured so that it may resemble the flow of his thoughts as and when they popped up. And that I believe is the problem. He seems to go around in circles repeating his ideas and thoughts, coming back to the same points, pulling in unrelated anecdotes while already inside one, leaving thoughts hanging without any form of closure, and generally ensuring you end up doing exactly what he says you shouldn’t be doing: making sense of random noise.
That said, some of his thoughts do seem reward enough for us to do so:
  • humans are built to see patterns, to find causes for things, and to believe in our own rationality;
  • some things can’t be explained; the human mind can’t accept this and seeks some explanation; we can’t help doing it
  • most investment strategies are thus based on what people rationally believe to be the causal equation
  • having lucky mascots is an example of looking for causality that doesn’t exist
  • we make many decisions emotionally, applying reason with an after-the-fact rationale
  • we tend to ignore events that have a low probability of occurring
  • random events occur all the time, yet we don’t assign probabilities to or plan for these events
  • we should also look to learn from those who lost, and not just from the winners – survivorship bias
Taleb himself is the founder of a firm that thrives on unexpected events, a strategy he calls “crisis hunting” that is diametric to traditional trading companies that notch up steady profits which are wiped out by occasional catastrophic losses. Whether such a practice, if followed by the entire industry, would be useful for, among other things, the economy, is something that he hasn’t pondered upon.
In all, a decent read, though I thought way too lengthy and cluttered for what he had to say. And the fin-hater in me had to plough through all these pages on investments and trading.
My Rating: 3/5
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