Book Review: “Fooled by Randomness” by Nassim Taleb

I read this book after reading the “Black Swan” book that was written after the success of this book, hoping to get more insight of his arguments. I was greatly disappointed, as most of the points were discussed already in “Black Swan.”

Early in the book, he told a story of Nero and John, who live next to each other. Nero is the conservative, constantly-hedging trader (not very rich) and John is the lucky, temporarily rich fools who traded high-yield bond and were on the winning/awarding streak until the market collapsed. The morale of the story: don’t think all rich people are smart – they may have been lucky and it ain’t over until it’s over (Solon’s or Yogi Bera’s advise). This may sound like sour grape but it has some truth to it. The same argument can be applied to the heroes or national leaders we worship. Are they truly that good or they happen to be at the right place at the right time. As the Chinese saying goes, it’s the era that makes the heroes.

Taleb assailed the reports for blowing things out of proportion like mad cow disease (killing hundreds) as opposed to car accidents (killing hundred thousands). The sensationalism of journalism can “divert empathy toward wrong causes, sacrificing cancer or malnutrition or other worthy causes. He concluded that journalism may be the “greatest plague we face today – as the world becomes more and more complicated and our minds are trained for more and more simplification.” I noticed this trend as well. Less and less people want to spend the time to think. “Just tell me what to do.”

Taleb mentioned many times in the book the use of Monte Carlo simulation. I was amazed how he could apply Monte Carlo to historical events and see how history might have been changed. He highlighted that there are many historical paths that were never played out and we are obsessed with only one of the historical path within a very short time horizon. He also touched on the possibility that due to randomness evolution may be fooled by randomness. In other words, not all species within a short time horizon are fittest (like John in his example), they may be just lucky enough to face no environmental obstacles. In the long run, these species will be wiped out. Is homosapien one of these species?

The author elaborated that why the statisticians are not good at predicting the future: 1) rare samples may not be included in the samples due to its rarity, 2) the population is constantly changing due to people’s rational behavior in reacting to changes (like having a mischievous boy keep adding/removing balls from the bottom of the urn while you’re sampling balls from the top of the urn). According to Taleb, “rare events are always unexpected, otherwise they would not occur.” He cites the examples of your “killer” neighbor that seems so courtly, reserved, the model of an excellent citizen until he shows up in the national newspaper. In other words, the past cannot predict the future. Sounds familiar?

On the problem of induction, Popper’s answers are there are two kinds of theories: 1) ones that are proved wrong (like Newtonian mechanics) and 2) ones that have yet to be proved wrong. No theories are ever right because we haven’t tested all the cases yet – time will tell. Our brain simply cannot handle all the random possibilities; we need to generalize and make inductive inferences. This is our human limitation. The best way is to take advantage of the statistical data in making bets but make sure you hedge your bets.

The “Millionaires next door” book suffers two major flaws, according to Taleb, 1) survivorship bias. All the interviewees were visible winners. What happened to those who practiced the same austerity and didn’t become a millionaire. 2) It ain’t over yet. Virtually all subjects enjoyed the asset appreciation. What if we have asset value crash? Watch out for the trading strategy of investing on “dogs” of the funds, as the theory of the strategy is deeply flawed in the survivorship bias – based on Taleb’s advise.

Speaking on superstitions, Taleb caught himself practicing superstitious acts after the taxicab driver dropped him off at the undesirable entrance to work and ended up having a profitable trading day the day before. “Our brains are simply not made to view things independent from each other… Our bias is simply to establish a casual link… For it is harder to act as one were ignorant than as if one were smart… We take things too seriously.” I guess one reason we are superstitious is that we want to know we’re in control, not a victim of circumstances.

People, even the best of them, are often fooled by randomness. The conservative Nero character beat the 28% chance of dying from cancer and vindicated himself of this trading strategy when all other Wall Street hotshots got poor, but he ended up dying from a helicopter crash he piloted. The “black swan” got his man.

Taleb labeled that most the corporation CEO are “empty suites” – just lucky (lucky decisions) and tall and charismatic and good at looking the part or playing “corporate politics.” “The higher up the corporate ladder, the lower the evidence of such contribution – The Inverse Rule.” To a certain extent, I agreed with him. This may explain why we had so many optional back-dating scandals and certainly Enron comes to mind. Perhaps due to the extreme luck factor, the CEOs’ salaries (or the jackpot) continue to rise – so the “expected” salary remains the same.

I like one of his afterthoughts: Randomness’ benefit – less stress. If all things are random (like subway schedule) and we all believe in them, we will most likely take things less seriously and subject ourselves to less strict schedule.

This book is a difficult read. Many times, I tried to stay awake to finish the chapters and eventually gave in to the boredom or his esoteric arguments, sometimes seem trivial. I had to read the book twice to capture the above essence from my perspectives. In a way, Taleb practices what he preaches – random thoughts.