Review: Fooled By Randomness

Each Sunday, The Simple Dollar reviews a personal productivity or personal development book.

fooledI’ve been debating how exactly to discuss Nassim Nicholas Taleb’s Fooled by Randomness (subtitle: The Hidden Role of Chance in Life and in the Markets). It is perhaps singularly the most frustrating book I’ve ever read, but yet on some level I still have the urge to recommend it to others.

On the one hand, there is a lot of very interesting and thought-provoking material inside this book. Reading it made me think quite a lot about a wide array of topics – and very few books that I read leave me with page after page of notes for things to look up and investigate later. In fact, I may have actually jotted down more thoughts to follow up on with this book than any other book I’ve ever read. It is definitely thought provoking.

The only problem is that it’s hamstrung by some gigantic flaws. The first, and most devastating one, is the gigantic ego of the author. He thinks incredibly highly of himself, and it comes out over and over and over again in the writing, to the point of being extremely off-putting. I have zero interest in ever meeting this arrogant and self-centered person face to face.

The second problem is that there are a lot of inaccuracies in the book, starting off right in the preface where he actually states some very invalid conclusions for a couple books I’ve read, The Millionaire Next Door and The Millionaire Mind, claiming that they somehow state that being rich has no connection to luck (completely false – they’re quite adamant about the luck factor and merely focus on the other factors that can maximize the chances of opportunities coming your way). There are a lot of specific points in the book that are way off base like this – I was able to pick out some in every chapter. Even more amazing, there’s actually a factual error on the cover of the paperback edition – Martin Luther did not post 99 theses on the door of the church, merely 95. A minor mistake, sure, but one that’s hugely important in the development of the Protestant Church and indicative of the fact-checking that went on with this book.

Do these two major flaws make this book unreadable, or is it still worth investigating even with these problems? Let’s dig in and find out.

Getting Into Fooled by Randomness

One – If You’re So Rich, Why Aren’t You So Smart?
Taleb spends most of this opening chapter introducing two characters, Nero and John. Through them, Taleb illustrates many of the points discussed in the book, and the first one is mostly a comparison of their social statuses. John takes high risks in his investments and hits a string of winners, which accords him a greater social status than Nero, who is a much more conservative investor. When John hits a string of losers, though, he loses his job and his social status falls through the floor, while Nero’s remains unchanged.

Two – A Bizarre Accounting Method
History remembers the big winners and rarely the losers. Thus, quite often, we conclude that the path that the winners followed to victory is a great path to follow because we see only the successes, not the failures. Think of it as Russian roulette with five out of six of the chambers filled with bullets, but we only see the times when the person pulls the trigger and nothing happens. After enough of these, it begins to appear safe.

Three – A Mathematical Meditation on History
So what’s the solution to that problem? You need to look at as many events as you possibly can that meet the basic criteria, and look at them over the longest timescale possible. That way, you begin to get an accurate picture of events. Take the stock market, for example. If you look at a certain five year timescale (say, 2002 to 2007), you’re going to get a different picture than if you used a much larger timescale (say, 1900 to 2007). The latter one provides substantially more data and gives a much clearer picture of the expected behavior of the stock market – and we find ups and downs that are much more random than the steady upward trend of 2002 to 2007 alone.

Four – Randomness, Nonsense, and the Scientific Intellectual
This problem of using a very narrow window to make random data appear less random pops up all the time in all sorts of areas of life. It’s one of the many tricks we use as humans to make patterns appear, to bring sense into nonsense. It’s an effective survival mechanism, but it’s not always right, and we as humans almost always overestimate how much of a useful pattern appears in nature, from scientists to game players.

Five – Survival of the Least Fit – Can Evolution be Fooled by Randomness?
Here, Taleb makes the astute observation that, yes, randomness does sometimes fool evolution. A tree can randomly fall in the woods and kill off the best-adapted member of a population – just because that member has the best chance of survival doesn’t mean it’s the one that survives. To a degree, the same thing happens with humanity – countless stellar young people are killed off in wars, even though many of them may have been among the fittest and should have been the ones to survive with all things being equal. It also happens in investing – the stocks of the best companies might not show great performance over certain periods because of the chaos of the markets.

Six – Skewness and Asymmetry
Recent events are often given far too much emphasis and often skew people’s pictures of how things actually are. For example, the idea of a “bull” market and a “bear” market look entirely at the extremely short recent history of events, and thus fall prey to many of the fallacies described above. People often take those concepts to the extreme, though, thinking of bear markets as precipitous falls and bulls as rises to dizzying heights, even though it’s very hard to find periods longer than a year of stock market performance where there are substantially more “up” days than “down” days and vice versa.

Seven – The Problem of Induction
Another big problem is that we often like to fill in the blanks with missing data. For example, if you look at a bunch of different individual samples of a heart monitor’s data, you might conclude that the whole thing is a giant, single straight line, but the actual truth is that there are usually a lot of heartbeats (big spikes) in the middle. We do these things all the time and then are completely surprised when something different happens. Look at horror movies, for instance – they’re most effective when the truly unexpected happens because we experience the rush of feelings that occurs when our expectations are tossed aside.

Eight – Too Many Millionaires Next Door
Here, Taleb mostly just criticizes the book The Millionaire Next Door for pandering to survivorship bias – in other words, it studies individuals who were randomly luckier than others (and criticizes them an awful lot, to boot). I felt this to be the weakest chapter of the book because it seems that rather than having an open mind, Taleb merely didn’t like the picture painted of the millionaires in the book. The book is extremely up front about the survivorship bias and repeatedly acknowledges that they are intentionally just studying the “lucky” to see if there are patterns in the behavior. I found the book mostly to be an acknowledgement that frugal behavior works, nothing more, nothing less, while Taleb mostly seems to complain about not liking frugality. Really, really useless.

Nine – It Is Easier to Buy and Sell Than Fry an Egg
Here, Taleb gets back on track and debunks the “successful” investor by pointing out that the market itself is effectively an average, with half of the people beating the market in a given time period and half of the people not beating it in that same time period. Repeat that period four more times, and only three percent have beaten the truly random market during all of those periods. The more people that invest, the more people will be in that three percent group, and the more people will believe that they’re brilliant and shrewd investors.

Ten – Loser Takes All – On The Nonlinearities of Life
If you doubt this, look at it from the perspective of life. At different times, we all have runs of good luck. Some people, bless them, can have very long streaks of luck, but they’re the outliers. Most people have a mix of good and bad luck. Now take the perspective of that lucky person – wouldn’t it seem that they would believe that they’re doing something exceptionally special in their life? That’s not to say you can’t make choices that maximize the chances of luck, but in the end, there are lucky events and unlucky events, and both will happen in your life.

Eleven – Randomness and Our Mind: We Are Probability Blind
When we think of events, we think of them in absolutes: we’ll either live or die, for example, instead of looking at the varieties and qualities of life. Because of that, we tend to ignore the probabilities and focus entirely on the outcomes – we transform a fight against cancer into strictly a equal chance of living or dying, even if probability gives us a strong chance of living – or a strong chance of dying. We are effectively blind to probability, and that’s why Cubs fans are optimistic: we know that at the start of a season the Cubs have the same chances of getting to the World Series as any other National League team, even though data of various sorts indicates the probability is actually much lower.

Twelve – Gamblers’ Ticks and Pigeons in a Box
Our hearts don’t agree with our brains. Our hearts tend to leap wildly at the unexpected, while our brain tells us it’s just random. Meanwhile, our mind appreciates a well-solved problem, but our heart stays at rest. In short, our human nature causes us to enjoy randomness, and often that pleasure leads to following our hearts more than our minds: in other words, behaving like a true gambler.

Thirteen – Carneades Comes to Rome: On Probability and Skepticism
Essentially, Taleb argues here on behalf of evolution of ideas. Individuals tend to have biases and this clouds their judgement, even if they come up with great ideas. The more people that evaluate these ideas, the more likely it is that the truth will bubble to the top. In fact, Taleb goes on to say that one of the best parts of science is that people die and new people (with new perspectives) come along to take their place, to provide new thoughts and perspectives on ideas.

Fourteen: Bacchus Abandons Antony
The book closes with a look at heroes, and an argument that a hero is a person who uses intense personal effort to not allow the random to affect things – think of a war hero who charges into a dangerous battle situation in order to draw fire (random events) from his colleagues. A stoic might not take a chance with a disease and commit suicide, similarly. In other words, the exceptional behaviors are often ones where people take extreme measures to reduce randomness in their situation.

Buy or Don’t Buy?

As I wrote this review, I constantly had to check myself from going straight after the author’s ego or a factual error in the book (okay, one shot: I guess if you’re that filled with hubris, actually having your facts straight is beneath you). That being said, it’s pretty obvious that there is a lot of interesting stuff going on in this book. It made me think quite a bit about how I use my own mind’s need to find a pattern to put patterns where there really aren’t any – or the patterns are far more complex than I’m seeing.

Here’s the thing: one key part (for me and for many others) of really loving a book is that I come to trust and like the author. I tend to want to see the positives in their argument, seek out more information, and also to read it again. Taleb makes that basically impossible – in fact, I was quite happy to find the problems in his argument and I didn’t really want to find anything positive at all in his book.

In the end, though, it did make me think about randomness, and I wound up investigating a lot of interesting things because of it. Will I ever read this book again? No. Will I ever even begin to trust Taleb’s writing elsewhere? No. But am I glad I read it? Yes.

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