On Fooled by Randomness

I recently finished reading Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets – by Nassim Nicholas Taleb.

As stated by the author in the prologue, the main premise of the book is: “More generally, we underestimate the share of randomness in about everything, a point that may not merit a book – except when it is the specialist who is the fool of all fools…In my experience (and in the scientific literature), economic “risk takers” are rather the victims of delusions (leading to overoptimism and overconfidence with their underestimation of possible adverse outcomes) than the opposite. Their “risk taking” is frequently randomness foolishness.”

Below are key excerpts from the book that I found particularly insightful:

1- “I start with the platitude that one cannot judge a 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 in a different way). Such substitute courses of events are called alternative histories. Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voice only by people who fail (those who succeed attribute their success to the quality of their decision…And like many platitudes, this one, while being too obvious, is not easy to carry out in practice.”

2- “It is a fact that our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease with which they come to mind. In addition to such problems with the perception of risk, it is also a scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the “thinking” part of the brain but largely in the emotional one (the “risk as feelings” theory). The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is rationalize one’s actions by fitting some logic to them.”

3- “There is an important and nontrivial aspect of historical thinking, perhaps more applicable to the markets than anything else: Unlike many “hard” sciences, history cannot lend itself to experimentation. But somehow, overall, history is potent enough to deliver, on time, in the medium to long run, most of the possible scenarios, and to eventually bury the bad guy…Mathematicians of probability give that a fancy name: ergodicity. It means, roughly, that (under certain conditions) very long sample paths would end up resembling each other.”

4- “1) Over a short time increment, one observes the variability of the portfolio, not the returns. In other words, one sees the variance, little else…2) Our emotions are not designed to understand the point…3) When I see an investor monitoring his portfolio with live prices on his cellular telephone or his handheld, I smile and smile.”

5- “…It is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration. How frequent the profit is irrelevant, it is the magnitude of the outcome that counts.”

6- “…Brian Arthur, an economist concerned with nonlinearities at the Santa Fe Institute, wrote that chance events coupled with positive feedback rather than technological superiority will determine economic superiority – not some abstrusely  defined edge in a given area of expertise.”

7- “Causality can be very complex. It is very difficult to isolate a single cause when there are plenty around. This is called multi-variate analysis…People might ask me: Why do I want everybody to learn some statistics? The answer is that too many people read explanations. We cannot instinctively understand the nonlinear aspect of probability.”

8- “I am just intelligent enough to understand  that I have a predisposition to be fooled by randomness – and to accept the fact that I am rather emotional. I am dominated by my emotions – but as an aesthete, I am happy about the fact. I am just like every single character who I ridiculed in this book…The difference between me and those I ridicule is that I try to be aware of it.”

9- “People confuse science and scientists. Science is great, but individual scientists are dangerous. They are human; they are marred by the biases human have. Perhaps even more. For most scientists are hard-headed, otherwise they would not derive the patience and energy to perform the Herculean tasks asked of them…It was said that science evolves from funeral to funeral. After the LTCM collapse, a new financial economist will emerge, who will integrate each knowledge into his science. He will be resisted by the older ones, but, again, they will be must closer to their funeral date than he.”

10- “It took me an entire lifetime to find out what my generator is. It is: We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.”


Omar Halabieh

Fooled by Randomness


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