Book-review: Fooled by Randomness by Nassim Nicholas Taleb

This book was on my reading list for a long time. The full book title describes its message quite well: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.

I believe to have an above average understanding of probabilistic thinking and understanding of odds, statistics, luck and the like. Further, I believe that many people (especially in investing) get regularly fooled by randomness, i.e. they believe a decision was ‘right’ if the outcome is ‘positive’. Since I have a strong interest in the topic, especially when mixed with a discussion about luck vs skill in investing/trading, I knew the book is a great read for me. I was not disappointed!

If you have a basic understanding of statistics/probabbilities the book will not present any new methods to you (and I did not expect it to). I even believe the author did try to only use basic methods and he succeeded.

Taleb did a great job to tell everyday stories of real-life situations and how we can get and surely do get fooled by randomness. Our mind is just not up to the task. Taleb discusses various biases in the light of specific situations, mostly within a trading-environment but also in other settings, like medicine.

A great part was about breaking news which usually do not include ‘distilled information’ but are mostly noise. Journalists will invent any possible reason to explain the latest market devlopmnents (regardless of its merit).

Sometimes a simple trick like applying different time frames by zooming in/out on the time scale (also a topic in Thinking in Bets by Annie Duke).

For example, your feeling about your current net worth of $1m will completely differnet depending on the path taken (did you start with 10m or 300k). This is called anchoring and a bias that is always present in investing I believe.

The parts I loved the most, and I believe is highly important in todays markets, was about the observation that at any point in time, the most successful traders (or investors) are likely to be those that are best fit to the latest cycle (currently shitcos and shitcoins?). This topic is related to Howard Marks’ discussion of offense vs defense (in The Most Important Thing Illuminated). You could aim for always being the investor ‘best fit’ to the current cycle, but I believe the better insight to get is do not compare your recent performacne against the wrong peergroup. (Traders that outperformed him crashed later)

A few sections of the book were rather phylosophical with frequent references to ancient mythology (and such stuff). I admit, I often did not get the point but I believe it was not essential for learning a lot from the book.

The punchline of the book: We should not take science too seriously, since science is a lot better than scientists who are also fooled by randomness (especially within medical research) and are motivated by (wrong) incentives. I.e. publishing results against the findings of a well known world-class scientists is often not possible or desired (that’s why often false results are taken at face value) and publishing negative results is almost never done (not deemed worth to publish). A line in the book read:

But science is better than scientists.
It was said that science evolves from funeral to funeral.

I can strongly recommend the book if you are interested in the topic of randomness or if you care about the luck vs skill in investing ortrading. Believe me, the book included far too many lessons than I would possibly write here.

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