Customer Rating:
Summary: Is randomness random?
Comment: I would suggest that this book is NOT for someone who has a clear view of where they are going in life, and how they will get there. For in both the large and small events in life, there are unpredictable events. Nassim Taleb talks about how we handle those events, and more importantly, how we can use them in our favour. If you are one I recommend not to start the book, the reading may change your outlook. Permanently.

Taleb is a market trader, with experience of having survived several severe financial storms - `difficult trading conditions'. The book is peopled with real and composite characters from his trading life. Most are no longer working in the market, a result of having `blown up'. The essence of the volume is in the title, describing situations where an apparent underlying order was merely randomness with a semblance of tidiness.

The book ties several seemingly disparate subjects together; market trading (a fairly risky activity in itself), science, history, and philosophy of science. Taleb makes no secret of his own fallibility, reckoning that each of us is regularly fooled into thinking that what are really random actions have a basis in `science'. His standpoint is that he knows he is often hoodwinked, whereas others are not in this knowledgeable position. Sometimes it is using inductive reasoning, with too little information, whereas on other occasions it is faulty reasoning, or the mis-use of probability.

The author frequently cites Karl Popper, and his (when introduced in the 1930's) novel ideas on falsification. Rather interestingly, he gives some instances where Popper (the man) did not live up to Popperian principles. We are all fooled by randomness, and the irrational ways we think. Taleb does not actually use the cliché that the only golden rule is that there is no golden rule, but the sentiments are there.

Examples are frequently tied into the currency or bond market place. Would your current strategy be completely shaken by a `black swan' event, something that has never been seen before? We all develop strategies in life, for small events as well as larger occurrences. In these, each needs to consider what would happen if something that has never been seen before happens.

This volume is highly recommended, as an anti-dote to same-old / same-old thinking. It may not give any answers, but may encourage you to find strategies for yourself. Perhaps you too will become someone who loses a little frequently, but occasionally wins in a spectacular fashion. Compare this to traders who have `blown up'.

Those that do well are those that learn from their mistakes, are fooled by randomness (and know it) and have no personal capital tied up with past decisions (so are not afraid of changing their minds).

Peter Morgan (morganp@supanet.com)

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Customer Rating:
Summary: Fooled by Probabilities
Comment: The ideas in this book have created more controversy than they deserve, and it might have something to do with the title of the book. Given the number of people who equate "random" with "equiprobable", "Fooled by Probabilities" would have been a more appropriate title for the book, though not as provocative as "Fooled by Randomness". There is a finite chance that there is a black cat in every dark room, but when you switch the light on, there is no black cat in the room. Both are correct statements - mathematically and practically. This book must be read in the same light.

It seems to me that the transition from an average to good investor (probabilistically speaking) happens as soon as you internalize the concept of expected values and invest by it. My favorite story from the book is where Taleb is asked which way the market is expected to go next week, and he says slightly up with a high probability (70%). Then someone intervened that Taleb had just made a big bet on the S&P going down next week, and he said that indeed he did. The one lesson this book teaches is that the two statements are not inconsistent with each other. 70% chance of a +1% change and 30% chance of a -10% change sums upto -2.3, a strongly negative expected value. Good investors always shadow the expected value (trend and magnitude), although market sentiments are always driven by either the expected trend of upward or downward movement, or expected magnitude of upward and downward movement.


Four key insights that I received from the book about how we all get fooled by probabilities in our everyday lives are the firehouse effect, survivorship bias, endowment effect and Wittgenstein's ruler. Firehouse effect is characterized by a clique of people with much downtime (firemen) who end up strongly agreeing with each other about things that would seem incorrect to any rational observer - something that many investors suffer from. The survivorship bias talks about exclusion of failures from "objective" after-the-fact performance studies - something that many business books suffer from. Endowment effect suggests that people value something more after they own it or get familiar with it - something that many businesses suffer from. Wittgenstein's ruler says that when an unreliable ruler is used to measure a table, the table is measuring the ruler and not the other way around. Reliability of the ruler determines what is being measured - something that consumer reviews and stock recommendations suffer from. For these and many such, read Fooled by Randomness.

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