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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Paperback) (Paperback)
by Nassim Nicholas Taleb
| Category:
Nature of randomness, Human behavior, Nobfiction |
| Market price: ¥ 158.00
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| MSL Pointer Review:
Finally in paperback, the word-of-mouth sensation, a book with a reputation that matches that of Malcolm Gladwell's books, will change the way you think about the markets and the world. |
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Author: Nassim Nicholas Taleb
Publisher: Random House Trade Paperbacks; 2 Updated edition
Pub. in: August, 2005
ISBN: 0812975219
Pages: 368
Measurements: 8 x 5.1 x 0.7 inches
Origin of product: USA
Order code: BA00946
Other information: ISBN-13: 978-0812975215
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- Awards & Credential -
From the bestselling author of The Black Swan, this book received lots of positive reviews. |
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Especially good for sales, marketing, finance and investment professionals, this book will appeal to nonfiction lovers and other general readers.
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Nassim Nicholas Taleb is an essayist principally concerned with the problems of uncertainty and knowledge. Taleb?s interests lie at the intersection of philosophy, mathematics, finance, literature, and cognitive science but he has stayed extremely close to the ground thanks to an uninterrupted two-decade career as a mathematical trader. Specializing in the risks of unpredicted rare events ("black swans"), he held senior trading positions in New York and London before founding Empirica LLC, a trading firm and risk research laboratory. Taleb is a fellow at the Courant Institute of Mathematical Sciences of New York University where he has been teaching a class on the failure of models since 1999. His degrees include an MBA from the Wharton School and a Ph.D. from the University of Paris Dauphine. The author's ideas on skeptical empiricism have been covered by hundreds of articles around the world. Since childhood, Taleb has been obsessed with the defects of his own thinking. In addition to his scientific and literary interests, Taleb enjoys cafe
lounging and museum hopping.
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If the prescriptions for getting rich that are outlined in books such as The Millionaire Next Door and Rich Dad Poor Dad are successful enough to make the books bestsellers, then one must ask, Why aren't there more millionaires? In Fooled by Randomness, Nassim Nicholas Taleb, a professional trader and mathematics professor, examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill. This eccentric and highly personal exploration of the nature of randomness meanders from the court of Croesus and trading rooms in New York and London to Russian roulette, Monte Carlo engines, and the philosophy of Karl Popper. Part of what makes this book so good is Taleb's ability to make seemingly arcane mathematical concepts (at least to this reviewer) entirely relevant in evaluating and understanding everything from the stock market to the success of those millionaires cited in the aforementioned bestsellers. Here's an articulate, wise, and humorous meditation on the nature of success and failure that anyone who wants a little more of the former would do well to consider. Highly recommended.
(From quoting Harry C. Edwards, USA)
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Chapter 1
Croesus, King of Lydia, was considered the richest man of his time. To this day Romance languages use the expression “rich as Croesus” to describe a person of excessive wealth. He was said to be visited by Solon, the Greek legislator known for his dignity, reserve, upright morals, humility, frugality, wisdom, intelligence, and courage. Solon did not display the smallest surprise at the wealth and splendor surrounding his host, nor the tiniest admiration for their owner. Croesus was so irked by the manifest lack of impression on the part of this illustrious visitor that he attempted to extract from him some acknowledgment. He asked him if he had known a happier man than him. Solon cited the life of a man who led a noble existence and died while in battle. Prodded for more, he gave similar examples of heroic but terminated lives, until Croesus, irate, asked him point-blank if he was not to be considered the happiest man of all. Solon answered: “The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.”
The modern equivalent has been no less eloquently voiced by the baseball coach Yogi Berra, who seems to have translated Solon’s outburst from the pure Attic Greek into no less pure Brooklyn English with “it ain’t over until it’s over,” or, in a less dignified manner, with “it ain’t over until the fat lady sings.” In addition, aside from his use of the vernacular, the Yogi Berra quote presents an advantage of being true, while the meeting between Croesus and Solon was one of those historical facts that benefited from the imagination of the chroniclers, as it was chronologically impossible for the two men to have been in the same location.
Part I is concerned with the degree to which a situation may yet, in the course of time, suffer change. For we can be tricked by situations involving mostly the activities of the goddess Fortuna - Jupiter’s firstborn daughter. Solon was wise enough to get the following point; that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness. Solon also had the intuition of a problem that has obsessed science for the past three centuries. It is called the problem of induction. I call it in this book the black swan or the rare event. Solon even understood another linked problem, which I call the skewness issue; it does not matter how frequently something succeeds if failure is too costly to bear.
Yet the story of Croesus has another twist. Having lost a battle to the redoubtable Persian king Cyrus, he was about to be burned alive when he called Solon’s name and shouted (something like) “Solon, you were right” (again this is legend). Cyrus asked about the nature of such unusual invocations, and he told him about Solon’s warning. This impressed Cyrus so much that he decided to spare Croesus’ life, as he reflected on the possibilities as far as his own fate was concerned. People were thoughtful at that time.
If You’re So Rich, Why Aren’t You So Smart?
An illustration of the effect of randomness on social pecking order and jealousy, through two characters of opposite attitudes. On the concealed rare event. How things in modern life may change rather rapidly, except, perhaps, in dentistry.
Nero Tulip
Hit by Lightning
Nero Tulip became obsessed with trading after witnessing a strange scene one spring day as he was visiting the Chicago Mercantile Exchange. A red convertible Porsche, driven at several times the city speed limit, abruptly stopped in front of the entrance, its tires emitting the sound of pigs being slaughtered. A visibly demented athletic man in his thirties, his face flushed red, emerged and ran up the steps as if he were chased by a tiger. He left the car double-parked, its engine running, provoking an angry fanfare of horns. After a long minute, a bored young man clad in a yellow jacket (yellow was the color reserved for clerks) came down the steps, visibly untroubled by the traffic commotion. He drove the car into the underground parking garage - perfunctorily, as if it were his daily chore.
That day Nero Tulip was hit with what the French call a coup de foudre, a sudden intense (and obsessive) infatuation that strikes like lightning. “This is for me!” he screamed enthusiastically - he could not help comparing the life of a trader to the alternative lives that could present themselves to him. Academia conjured up the image of a silent university office with rude secretaries; business, the image of a quiet office staffed with slow thinkers and semislow thinkers who express themselves in full sentences.
Temporary Sanity
Unlike a coup de foudre, the infatuation triggered by the Chicago scene has not left him more than a decade and a half after the incident. For Nero swears that no other lawful profession in our times could be as devoid of boredom as that of the trader. Furthermore, although he has not yet practiced the profession of high-sea piracy, he is now convinced that even that occupation would present more dull moments than that of the trader.
Nero could best be described as someone who randomly (and abruptly) swings between the deportment and speech manners of a church historian and the verbally abusive intensity of a Chicago pit trader. He can commit hundreds of millions of dollars in a transaction without a blink or a shadow of a second thought, yet agonize between two appetizers on the menu, changing his mind back and forth and wearing out the most patient of waiters.
Nero holds an undergraduate degree in ancient literature and mathematics from Cambridge University. He enrolled in a Ph.D. program in statistics at the University of Chicago but, after completing the prerequisite coursework, as well as the bulk of his doctoral research, he switched to the philosophy department. He called the switch “a moment of temporary sanity,” adding to the consternation of his thesis director, who warned him against philosophers and predicted his return back to the fold. He finished writing his thesis in philosophy. But not the Derrida continental style of incomprehensible philosophy (that is, incomprehensible to anyone outside of their ranks, like myself). It was quite the opposite; his thesis was on the methodology of statistical inference in its application to the social sciences. In fact, his thesis was indistinguishable from a thesis in mathematical statistics - it was just a bit more thoughtful (and twice as long).
It is often said that philosophy cannot feed its man - but that was not the reason Nero left. He left because philosophy cannot entertain its man. At first, it started looking futile; he recalled his statistics thesis director’s warnings. Then, suddenly, it started to look like work. As he became tired of writing papers on some arcane details of his earlier papers, he gave up the academy. The academic debates bored him to tears, particularly when minute points (invisible to the noninitiated) were at stake. Action was what Nero required. The problem, however, was that he selected the academy in the first place in order to kill what he detected was the flatness and tempered submission of employment life.
After witnessing the scene of the trader chased by a tiger, Nero found a trainee spot on the Chicago Mercantile Exchange, the large exchange where traders transact by shouting and gesticulating frenetically. There he worked for a prestigious (but eccentric) local, who trained him in the Chicago style, in return for Nero solving his mathematical equations. The energy in the air proved motivating to Nero. He rapidly graduated to the rank of self-employed trader. Then, when he got tired of standing on his feet in the crowd, and straining his vocal cords, he decided to seek employment “upstairs,” that is, trading from a desk. He moved to the New York area and took a position with an investment house.
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| View all 9 comments |
Malcolm Gladwell (The New Yorker) (MSL quote), USA
<2007-07-29 00:00>
[Taleb is] Wall Street’s principal dissident... [Fooled By Randomness] is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-nine theses were to the Catholic Church.
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Michael Schrage (MIT Media Lab, author of Serious Play) (MSL quote), USA
<2007-07-29 00:00>
In many ways, his writing recalls the best of scientist/essayists like Richard Dawkins, George Gamow, and Stephen J. Gould. |
Gaurav Pareek (MSL quote) , USA
<2007-07-29 00:00>
Fooled by randomness is a very intelligent take on how human beings percieve risk and uncertainty in life. The author provides relevant comparisons from history, philosophy, mathematics to make his point. Read the book cover to cover (the introduction, foreword clarify author's intentions and some misconceptions you might develop while reading). Language and style of writing is smart and fun-filled. The book has the potential to change your attitude and approach to uncertainty; it has changed mine! Looking forward to more from Taleb. |
Ernesto Vazquez (MSL quote), USA
<2007-07-29 00:00>
We are emotional beings, capable of understanding our emotions but not very good at controlling them; hence we are blind to probability.
We also like nice neat explanations for events (I succeed because I am brilliant, I fail because of bad luck) and are susceptible to superstition. No where are these human traits more visible than in the financial community.
Taleb writes from experience and weaves an entertaining, insightful piece. His intelligence is evident in his writing, which may be why my `middlebrow' (a favorite adjective of his) mind had trouble adjusting to his style.
He has a quick wit and is not afraid to use it (Wait, he was kidding there, right?) More importantly, his observations are spot on. A healthy dose of selfdeprecation let's the reader know that this guy has first hand experience being fooled by randomness.
This is a really useful read for anyone starting a career (not just in Finance), or enjoying great success in one.
An awareness of survivorship bias, denigration of history and our innate blindness to probability (fueled by emotion and a need to draw causality in what we observe) will serve recent college grads well in the industry of their choice.
For the recently successful, Taleb warns that the five common characteristics shared by fools of randomness are
1.Overestimating the accuracy of some metric they believe in
2.Being married to a position
3.Failure to plan on what to do when the unthinkable happens
4.Lack of Critical Thinking
5.Denial in the face of the unthinkable
You will nod and understand the concepts as he presents them. However, the author cynically points out, you will proceed to forget it all and go back to being governed by your emotions. |
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