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This microbook is a summary/original review based on the book: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
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Also available in audiobook
Have you ever wondered what precisely is randomness and what its definition tells us about the way we live our lives?
Well, Lebanese-American scholar Nassim Nicholas Taleb certainly has.
Widely considered the world’s foremost expert on randomness and arbitrariness—as well as one of the loudest advocates for the creation of “black swan,” “robust,” and “antifragile” organizations and societies—he has dedicated most of his life to this question, culminating in a multi-volume philosophical essay on uncertainty, titled Incerto.
Its first part is Fooled by Randomness, the book we’re about to summarize today.
In essence, it suggests that many of the outcomes we consider non-random are actually quite random and that our belief that they are not is responsible for some of the greatest catastrophes of the modern era.
Split into three parts and fourteen sections, and written in a clear and casual, witty and comprehensible manner (which recalls “the best of scientist/essayists like Richard Dawkins and Stephen Jay Gould”), Fooled by Randomness is filled with so many good ideas that we think it deserves a chapter-by-chapter summary.
Here we go!
Inspired by the famous ancient story of Solon and Croesus (told by Herodotus), Taleb uses the first part of Fooled by Randomness (which encompasses about half of the book) to talk about three things:
• the luck/asymmetry problem: which comes with the help of luck can be taken away by luck (the flipside is more optimistic: things that come with little help from luck are more resistant to randomness)
• the induction/black swan problem: how can we anticipate unpredictable events?
• the skewness problem: it does not matter how frequently something succeeds if failure is too costly to bear.
No matter what most capitalist societies say, luck plays a massive role in deciding the wealth of an individual.
More often than not, rich people are no smarter than the average Joe. The reason why the latter isn’t as rich as them is simple: the former risk more on a daily basis, and, consequently, get more as well.
However, risk is inherently linked with luck. The ones who are unaware that they have been lucky fools (because they are fools, to begin with) and ascribe their achievements (say on the market) to their supposed intelligence, one day, almost certainly, will lose their wealth.
As a rule of thumb, skills can only make you mildly successful. Only luck can make you wildly successful. However, bear in mind that only the former are immune to randomness and chance.
Luck never has a bias, reminds Taleb, and the past is never a sure indicator of the future, no matter how much you believe the opposite.
It all boils down to a simple truth: when success isn’t related to hard work, then it’s all about a game of probabilities.
The second chapter of Fooled by Randomness is filled with illustrative examples which should help you better understand the relationship between luck, hard work, and long-term success.
Take, for example, the Russian roulette game to get a glimpse of what Taleb is building to. The game may be synonymous with craziness, and yet, if you bet 10 million dollars that you’ll survive a round, there’s only 1 in 6 chances that you won’t become a millionaire.
The financial market is even less rational and scarier, and wealthy traders are merely playing Russian roulette with more than one bullet in the revolver. And they also play it for more than one round.
The thing they forget: just because random events occur infrequently doesn’t mean that you should discard them. Someone will get shot—and that consequence is too awful to even start playing the game.
Have you ever heard of the Monte Carlo simulators?
If not, think of them as a sort of generators of the future: they are computer algorithms which produce an extremely high number of outcomes for any given input.
For example, you can launch a Monte Carlo simulation of you playing several times Russian roulette for a given sum during a single night, and see how many of these attempts would result in enrichment, or how long it would take you on average before you hit the obituary.
As far as Taleb is concerned, Monte Carlo simulators are much better at analyzing the past than anything else, for the simple reason that we are incapable of grasping a mistake after the fact.
The Monte Carlo simulators are superior over other analyses because they provide us with a more complete picture of an event, which includes scenarios in which some things may have gone wrong.
“We do not need to be rational and scientific when it comes to the details of our daily life,” writes Taleb in the fourth chapter, “only in those that can harm us and threaten our survival.”
Yet, he warns, modern life invites us to do the opposite, i.e. to become “extremely realistic and intellectual” when it comes to literature, religion, and personal behavior, and yet to stay as irrational as possible when it comes to matters ruled by randomness, such as the economy, portfolios or real estate investments.
“If I am going to be forced to eat pork,” says an old Yiddish saying, “it better be the best kind.” “If I am going to be fooled by randomness,” adds Taleb, “it better be of the beautiful (and harmless) kind.”
In other words, don’t let yourself be fooled by randomness when it comes to your money or your future career; but do allow yourself a break when it comes to poetry or music.
In its simplest form, Darwin’s theory of evolution says that species change over time, and only the ones whose traits are more adapted to a specific set of circumstances, are able to survive.
However, as any biologist knows, in nature, it is much more complicated than that: sometimes the less capable reproduce, and detrimental mutations can survive for a few generations as well.
In nature, this is not really a problem: basically, when something stops working, it stops existing. However, in almost every other sphere of life—it is.
Unfortunately, “Darwinism” and evolution are misunderstood in the nonbiological world. As we said above, evolution too can be fooled by randomness, but in the world of economy and finance, this means that sometimes the worst companies may survive and act as societal cancer.
Things aren’t moving constantly towards improvement and progress, Taleb says, and we should never forget this.
We already mentioned these words in the introduction to Part I. To understand how they are related we need to introduce another word: the median, the middle value, the value separating two halves of data.
As Stephen Jay Gould found out the hard way and later wrote: “the median is not the message.” You see, in his forties, Gould was diagnosed with cancer and was told that the median survival for the disease is approximately eight months.
What Gould found out that this means is something less gruesome: 50% of the people suffering from this cancer die in less than eight months. But those that survive this eighth month, usually live about as long as an average human being.
What this means in real life is that, on the market, you can win big in rare cases, but you can also lose small in many cases.
The problem of this asymmetry is that the latter are often ignored and they shouldn’t be.
There’s the third word from the introduction: induction.
In essence, the problem of induction is this: “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”
The first part of the sentence above describes the inductive method, and the latter one the deductive.
Actually it means that no matter how many times an investor wins on Wall Street, it’s wrong to induce that they cracked the system; however, even if he loses once is enough to deduce that he is merely lucky.
If in the first part of Fooled by Randomness Taleb discusses how much our understanding of the world can be deformed by a rare event, in the second part, he explores the deformations caused by a few biases of randomness even in the absence of such a rare event.
The three biases he explores are the survival bias (Chapters 8 and 9), the fact that luck is most frequently the reason for extreme success (Chapter 10), and the biological handicap of our inability to understand probability (Chapter 11).
It is in Chapter 8 that Taleb illustrates best the “survivorship bias,” i.e., the logical error of deducing something general by analyzing only a specially selected set of elements—the survived ones.
For example, if you analyze a group of successful investors (or a group of millionaires), what you may find is that all of them became wealthy by taking some risk here and there.
What you won’t find, however, is that many other people who’ve taken the very same risks have failed to become millionaires.
Let’s say that a group of 100 investors is tasked with deciding whether a stock will go up or down; let’s say that the ones who’d make a mistake are not allowed to go on playing the game.
By pure luck and random probability, 50 should guess correctly during the first round, 25 the second, 12 the third, 6 the fourth, 3 the fifth. By the end of the sixth round—once again, by pure luck—you’ll have at least one investor who has guessed the fluctuations of the stock correctly every single time.
Ask him how he has done it, and he’d probably try to give a rational explanation: some tactic, or an original method. Yet, it is a simple fact that, no matter how bad the performers, provided there’s enough of them, a successful performer will eventually emerge.
Given enough time and members, a group of monkeys should statistically be able to type a Shakespeare play at some point in the future. But should you bet on it?
Sometimes, a tiny change can cause a disproportionately significant effect, best illustrated in the popular phrase “the straw that broke the camel’s back.”
This phenomenon is evidence enough in favor of the fact that no matter how good a “how-to” guide to virality looks like at face value, it is nothing more than a guess.
Nobody knows what starts a trend, and it is difficult to predict who or why might become an influencer.
Unfortunately, as Taleb demonstrates in possibly the scariest of all chapters of Fooled by Randomness, we are biologically incapable of facing randomness head-on. On the contrary, indeed : we are much more comfortable with believing we have control over some outcomes.
That’s why we’re superstitious, and that’s why we think that if something doesn’t work out, we should have done something differently.
The truth is that we are all probability blind and we are all born to be fooled by randomness (by his own admission, even Taleb himself).
The reason why it’s so easy to understand an event after it happens because you can always invent a causal link between any events you like in the past. Whether this link will apply to a similar event in the future is an entirely different question.
Even though we are biologically incapable of insulating ourselves from randomness, the conclusion of Taleb’s debut book on the subject presents “the human aspect of dealing with uncertainty,” mostly focusing on the few tricks the author has developed to counter arbitrariness in his own life.
First of all, you need to be aware that no matter how much you know about randomness, you’ll still believe in some irrational things such as that the side of the bed you’re sitting on directly affects the results of your favorite team.
We just can’t help it: B.F. Skinner did an experiment with pigeons and realized that even animals’ brains are programmed to work in this manner, i.e., to suppose causality when they can’t find one, and simply repeat the habits that brought them success in the past.
Simply knowing this is helpful, but what is even more helpful is trying to find a way to work around it.
Believe it or not, even the most celebrated scientists are incapable of working around their randomness-related biases.
On the contrary, in fact: they marry their ideas and cling to their positions until they can even though their job is not to be right, but to pronounce the truth.
The effects are catastrophic, especially in the sphere of social sciences where it is almost impossible to delineate the objective truth from the constructed truth. And even when the constructed truth is refuted , it sometimes makes no difference: there are economists, for example (read Robert Merton) who have won Nobel Prizes for ideas, which in practice, have bankrupted people!
Unfortunately, as Taleb says, science evolves from funeral to funeral, meaning, the old guards must die first so that the new guys can properly start disseminating the new-found truths.
When Henry de Montherlant, a French classicist and writer, was told that he was going to lose his eyesight (whether to an injury or degenerative disease), he decided that it is much more appropriate to take his own life before that.
Because, as Taleb reminds us, “the stoic’s prescription was precisely to elect what one can do to control one’s destiny in front of a random outcome.”
More often than not, in life, we don’t choose what will happen to us; but we can decide how to react when faced with a random event.
That is stoicism for you, the best way to counter randomness: a) accept it as a part of life; b) do whatever you can to balance its effects.
“Stoicism is not the stiff upper lip,” writes Taleb, “but the illusion of victory of man against randomness… It is the attempt by man to get even with probability.”
Included in Fortune’s list of “75 Smartest Books of All Time,” and described by Malcolm Gladwell in glowing terms as the dissident volume which is “to conventional Wall Street wisdom approximately what Martin Luther’s ninety-five theses were to the Catholic Church,” Fooled by Randomness is one of those rare books capable of making you question the very foundations of your worldview.
If you are not ready for that—don’t bother with this book. But be warned that you’re doing so at your own peril and, in a way, isolating yourself from the truth.
Don’t ascribe your successes to your intelligence: be smart enough to realize when you’re nothing but lucky. And stop while you’re ahead.
Nassim Nicholas Taleb is a Lebanese American author, former hedge fund manager, derivatives trader, and a scholar dealing with probability and uncertainty. He holds degrees in mathematical finance and worked as a researcher at... (Read more)
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