Trading Book Reviews

Book Review: Fooled by Randomness

People are fooled into believing what is random has meaningful causality

[easyazon-link asin=”0812975219″][/easyazon-link]Over the last couple of weeks I have been reading [easyazon-link asin=”0812975219″]Fooled by Randomness[/easyazon-link] by Nassim Taleb on my daily commute to and from the office. Taleb is a bit of a lightening rod figure. He drives some people to distraction, while others have a great deal of respect for him. Certainly, he’s gotten his fair share of media play in recent times thanks to the dramatic market events. Fooled by Randomness is his first major book, one which he eventually followed up with [easyazon-link asin=”1400063515″]The Black Swan[/easyazon-link]. I haven’t read the latter yet, so I’ll stick with sharing my thoughts on the first book.

The first cautionary point I would make the prospective reader is that the author can definitely come off as extremely arrogant. He pulls very view punches when it comes to sharing his opinions, particularly about people, be it groups or individuals. His fellow Wall Street professional are vilified, as are those who can be considered the luminaries of financial theory and plenty of others. Taleb is free with his criticism, though he does also offer complimentary words for some others, like George Soros, whom he clearly respects.

My second cautionary point is that Fooled by Randomness is not a handbook or scientific treatise of any sort. The author is actually pretty upfront about that. It’s not really meant to be a practical text. Taleb classifies it as an essay. I’m not of sufficient literary expertise to know how exactly one defines and essay vs. some other sort of work, so I’ll refrain from commenting on that aspect. What I will says, though, is that to my mind the book is an expression of personal observation, opinion, and philosophy.

The main thrust of Fooled by Randomness is quite simple. It’s that people are fooled into believing that what are likely random things have instead some meaningful causality. Taleb talks about all the different ways this can happen, and they are fairly numerous. This is probably the aspect of the book which upsets the most readers (or prospective ones), because he essentially says that we cannot necessarily assume the success someone has in trading or business or life necessarily has anything to do with that individual’s intelligence or skill or whatever. It might just be luck, good or bad.

This is not, as I understand it, to say that Taleb believes everything is a matter of luck. Rather, he suggests that certain ventures (trading, for example) are much more influenced by randomness and uncertainty than others (dentistry, to cite his favored example). Naturally, the idea that randomness may be more important than our decision-making abilities is something that’s not going to sit well with many people.

Something I would have liked to see as a compliment to the uncertainly discussion was a bit of practical talk about the implications of uncertainty in how one operates, for example in how one develops a trading strategy. Aside from highlighting the requirement to account for that uncertainty, though, Taleb is mostly silent on the application side of things. Nor does he bring in much specific science or math into the discussion. I would have liked more of that, but the author states from the beginning that such will not be the focus, and he’s supplied a number of notes and references in the back of the book toward that end.

It’s worth noting that the randomness angle isn’t the only one in the book. There are plenty of other philosophical ideas discussed in the text as well.

In terms of writing style, I found Taleb generally engaging and easy to read. There are some complex concepts he discusses which necessarily slow you down, but as I noted about, he doesn’t get into stats and math and stuff like that, so the text is generally fluid. Grammar sticklers might be a bit put off by the relatively frequent use of sentence fragments at the start of paragraphs, but the ideas are communicated effectively nevertheless.

As for the overall presentation, I personally found the latter part of the book to get a bit scattered, causing me to wonder where the author was going. Generally speaking, however, it was an enjoyable read. Taleb certainly triggered in me a number of different thoughts and ideas. Given that [easyazon-link asin=”0812975219″]Fooled by Randomness[/easyazon-link] is above all else a philosophical exposition, that is exactly what should have happened, so I would say the book definitely achieved it’s objective. I definitely recommend it

Actually, Taleb has given me some ideas for little “experiments” I can do to demonstrate the influence of randomness on trading as part of my ongoing educational efforts. Look for posts to that effect in the future.

By John

Author of The Essentials of Trading

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