Fooled By Randomness Review By Nassim Nicolas Taleb

Nassim Taleb’s sublime Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets is the first book I have read in a long while that really struck a chord with me.  Page after page I found myself nodding in agreement with Taleb’s keen insight.  More than any other author, Taleb has been able to articulate precisely my own thoughts and feelings on how the world works.  I’ve always had a nagging feeling that traditional thought had severe shortcomings, and now I know I’m not alone.  I’ve read this book at least 3 times and will probably read it several more before wearing through my copy.

Is It Skill Or Is It Luck?

The central question of Fooled by Randomness is a familiar one:  which is more important in determining success, skill or luck?  Of course we acknowledge the important role good fortune has in live, but human civilization in general and Western Civilization in particular owe their very existence to the pervasive belief that if you are skilled enough, determined enough, and above all work hard enough, the world is your oyster and success is sure to follow.  The occasional winning lottery ticket notwithstanding, it is hard work and ability that determine your lot in life, with good fortune playing a small supporting role.

Or is it?  Taleb isn’t so sure, and Fooled by Randomness is his attempt to flesh out his theory.  Taleb’s belief, which mirrors my own, is that people pay far, far too little attention to the role randomness plays in their lives.  Case in point, imagine you labored for years trying to build a new business from the ground up but that in the end was a failure.  What would be your response when asked about your failure?  Chances are, it would go something like this: “I worked hard and gave it my best shot.  I guess luck just wasn’t on my side.” Sounds reasonable, and it is, but now let’s flip things on their head.  Say you struggled for years and eventually caught a break that allowed you to build a billion-dollar enterprise.  In your old age (probably on your private yacht) you would relate to your biographer the details of how your childhood prepared you to run a company and your leadership skills allowed you to leverage your workforce more efficiently than the competition.  Or maybe you would cite your prudent organizational practices, superior financial management skills, or any one of a thousand different factors.  And you know what?  You’d probably be right.  All those things probably did help you succeed.  But would anybody in this situation seriously say, “Well, I guess I was just lucky…”? Of course not.  In general, people blame bad luck for their failures but claim full responsibility for their successes.

Rare Events Happen All The Time

We all have a strong predisposition for assuming events that are likely to happen are guaranteed to happen and that events very unlikely to happen are actually impossible.  The last decade of market history illustrates this quite clearly.  Over any given 10 year period, the chances are exceedingly good that stocks will yield positive returns.  The chance of stocks losing money over an entire decade?  Quite small.  Many people took this basic fact and somehow came back with the idea that losing money over a 10 year period in the market was actually impossible rather than merely improbable.  Of course, it’s happened, so we know it isn’t impossible (at least until the next bull market).

Perhaps a better example is the lottery.  The odds of winning the lottery are one in a million, and even that is probably generous.  And yet somebody wins the lottery almost every single week.  Rarely does more than a few weeks go by without a winner.  Herein lies Taleb’s most obvious and yet most profound point:  rare events actually happen all the time.  The chances of winning the lottery may be one in a million, but how many people do you think play it every week?  I’d wager at least a million.  So the surprise isn’t that somebody wins so often, it’s that somebody doesn’t win more often.  The same is true of market panics.  If the financial panic accompanying the Great Depression was a once-a-century thing, why are we so surprised it’s happened again?  After all, it’s been the better part of a century since the Great Depression…

Randomness Rules Our Lives

Fooled by Randomness lays out a convincing case that not only do random events rule our fate, we have cleverly succeeded in convincing ourselves we are in control of our own destinies.  Taleb doesn’t say we aren’t, he merely says it’s possible we aren’t.  I cannot recommend this book enough.  Anybody interested in mathematics, probability, financial markets, economic cycles, and sudden catastrophic rare events (what Taleb calls Black Swans, the subject of his most recent book) will love Fooled By Randomness.  It’s definitely the most intelligent book I’ve read in years, if not my entire life.

Buy Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets from Amazon.com.