Fooled by Randomness – Taleb

Yes, it is Taleb’s most popular title. I like most of the points Taleb make in this book. He mentions how we are always trying to find the reasons for successes or failures and most of the time we end up with some superstitious reason behind some particular event. He starts with good example of how when one tribesman scratched his nose and saw rain falling and came up with the conclusion that if one scratches in particular way it rains.

Taleb says randomness in the happenings of events is always underestimated and tendency is always to find some irrelevant causes and stick to them throughtout the life.

He explains how charlatan becomes popular as skilled person in financial world.

One of the lines that I really love in this book is what Solon said : ” The observation of the numerous misfortunes that attend all conditions forbids us to grow insolvent upon our present enjoyments, or to admire a man’s happiness that may yet, incourse of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has (guaranteed) continued happiness until the end we may call happy”. This Solon replied to King of Lydia’s question of whether he should be considered successful.

What I make of that is till we close the trade we should not bank on paper profits, or to take to next step till we retire we should not brag about the successes we had in our career, or still further till we die we can’t be considered successful.

In Yogi Berra’s words ” it ain’t over untill it’s over”.

Taleb mentions that, things which come with the help of luck could be taken away by luck and things that come with little help from luck are more resistant to randomness.
Taleb gives the example of Nero, a conservative trader who has had good years in the past and no bad years and has managed to earn a stable income over the past few years. His peers were making much more than him and he was let go by the firm.
Next year all the top traders who were making millions went out of business due to worldwide bond market crash.
Nero’s neighbor was high yield trader and five years younger than him and used to make much more than Nero. Although Nero knew the kind of risks his neighbor was taking and his ultimate future but still after some time Nero started losing his self control.
He started feeling as if he missed the great bull market. It was not very late, when Nero came to know of how his neighbor blew the fund and was now out of business.
People usually pay too much attention on their short success stories and start thinking everything will play out like that. Taleb compares that with someone running on serotonin that thet start fooling themselves about their ability to outperform markets.
Taleb mentions how past is used almost without any question to predict future.
Taleb mentions how if an infinite number of monkeys are put in front of type writers, one of them would come out with an exact version of the Iliad. Now does that mean that one can rely on that monkey?
He questions the time series analysis. How much can past performance is relevant in forecasting future performance?


About Danish Kapur

Danish Kapur is a writer, commentator and actively follows the global financial markets.

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