Book Review – Fooled by Randomness
Image: Fooled by Randomness by Len Lantz (CC BY-NC-ND)
Synopsis: Len's Star Rating: 9 out of 10. An excellent, engaging book on the effects of randomness and rare events on financial systems and life in general.
BY LEN LANTZ, MD / 6.9.2021; No. 32
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Star Rating – 9 out of 10
Rating guide: 1 = horrible, 5 = average and 10 = wow
Author
Nassim Nicholas Taleb
About the author
Nassim Taleb, PhD, is a mathematical statistician, former options trader and risk analyst and author of several influential books on the effects of randomness, probability, and uncertainty in financial markets and life in general.
General description
Fooled by Randomness is a book about how people perceive luck in life and financial markets. Dr. Taleb provides important warnings about randomness in life and the dangers it presents. The ideas he shares are far different from the popular explanations and recommendations the general public receives on investing and future planning. This book might just change how you think about life and success. He presents the case that market heroes are often the lucky survivors of random events. Topics covered in this book include:
Concealed rare events
The use of Monte Carlo simulations to explain life and historical events
The dangers of economists who pretend to be practicing a science
The concept of skewness
Induction and Black Swan events
How survivorship bias leads to wrong conclusions about causality
Blindness to randomness and vulnerability to superstition
Unique and most important aspects
Fooled by Randomness is a brilliant book in which Nassim Taleb explains difficult-to-grasp concepts. He introduces interesting anecdotal and historical characters to make his points and shares entertaining stories that outline the concepts he covers. He is not afraid to take on leaders in the fields of finance and economics, especially if he believes these people are leading individuals, countries and world economies astray. One of the scariest aspects of this book is that it was first published 20 years ago, and it appears that Wall Street and federal financial regulators still have not received the message. This is an amazing book, and I would have rated it a 10 if there were not frequent errors in sentence structure and punctuation that a competent editor could easily have fixed. Important features of this book include:
The “Table of Confusion” outlining the mistakes people make about decision-making and causality in financial markets and life
The importance of paying attention to the signal and ignoring the noise
The danger of hindsight bias in thinking that if a person can create a model to “predict” past events, then they will also be good at predicting the future
The dangers of journalists’ attempt to explain why things happen, especially when it comes to financial markets
The nonlinear dynamics described by Chaos Theory
Factoring rare, devastating events into decision-making
Best quotes
“I start with the platitude that one cannot judge the performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e., if history played out a different way).”
“Any reading of the history of science would show that almost all the smart things that have been proven by science appeared like lunacies at the time they were first discovered.”
“Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny.”
“The more data we have, the more likely we are to drown in it.”
“Machiavelli ascribed to luck at least a 50% role in life (the rest was cunning and bravura), and that was before the creation of modern markets.”
“Remember that nobody accepts randomness in his own success, only his failure.”
Who would enjoy this book?
Economists, financial advisors, investors and anyone interested in new ideas and contrarian thinking would likely enjoy Fooled by Randomness.
Who would not enjoy this book?
People who are looking for a book that tells them how to invest their money and which stocks to choose might not enjoy Fooled by Randomness.
Conclusion
Fooled by Randomness is an excellent, engaging book on the effects of randomness and rare events on financial systems and life in general.