Fooled by Randomness

Nissam Taleb is a former Wall Street trader with a cynical take on success in his industry. In fact, he believes that much of the success and failure in the market (and by extension, life in general) can be explained by randomness. To prove his point, his book Fooled by Randomness introduces an eclectic array of logical and philosophical support, from Hume’s argument against induction to the Turing Test to Popper’s theory on theories (which is that no theories can be proved true—there are only theories that have been proven false and theories which have yet to be proven false).

Despite Taleb’s rather arrogant and sometimes abrasive tone, Fooled by Randomness is an entertaining read. It struck me as a treatise on logic for our society, continually exposing the irrationality of many of our assumptions on life. And while he never leaves the financial world for too long, the sting of his arguments can be felt in other fields as well.

The whole randomness argument is keenly interesting and broadly relevant, although often counter-intuitive. Random variations account for quite a bit of financial success in our world, yet our society lauds those that have made money and assumes they possess some secret alchemy. On Wall Street, if the successful keep trading they are often eventually exposed, sometimes very ignominiously. (In the balance of the business world, the fortunately wealthy often move on to become venture capitalists or angel investors, all the better to maintain the illusion of their business prowess.)

It’s when he is illustrating his points that Taleb is most convincing. For example, I can translate the principle of random success into a compelling scam. Suppose I send 5000 people a letter with a bold prediction that a certain volatile stock will increase. And then I send a different 5000 people the opposite prediction. I turn out to be right with half of them. So I do it again, with a different volatile stock, now split 2500/2500. And this can continue, with a small investment in stamps and envelopes, until a few hundred people view my remarkable track record and are convinced that I’m a stock-picking genius. Clever scam indeed, but the corollary truth that makes it possible is that even if monkeys are making trades, a certain percentage of them will be wildly successful, earning millions in commissions and guest spots on MSNBC. Think about that the next time your investment banker pal pulls up in his Ferrari.

There’s a lot more. Taleb delightfully points out how we misuse and are misled by statistics, how our beliefs are warped by biases (the survivorship bias, availability bias, etc.), and how our decisions and conclusions, even from intelligent and educated people, can often be driven by irrational heuristics. (Example: People think it is more likely that a major earthquake will occur in California than that one will occur in the United States.)

And with every example I found myself laughing at how painfully ridiculous we are in our feeble thinking. Shakespeare said it best, in A Midsummer Night's Dream: “What fools these mortals be!”