Fooled by Randomness is the sort of book that I normally wouldn’t read. Like When Breath Becomes Air, it’s about a subject that I’m not particularly interested in (statistics and how they play out in daily life) and, like The Age of Federalism or The Bell Curve, it is quite dense.
But, for reasons I will get into in my summary and review of it, I was pleasantly surprised. Although it appears dense and hard to read from the outside, most sections of it are actually quite interesting. But still, it’s not exactly a page-turner. In any case, I encourage you to go outside your comfort zone and, at the very least, read this review of Fooled by Randomness.
If Taleb’s work seems interesting to you after you finish this article, then try to read the book itself. Even if you find it too dense and put it down, then at least you will have learned something and might have a better grasp on how statistics can play out in real life.
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Summary of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
As we’ve seen in recent elections, probability and chance often play out differently than we expect. Even assuming the pollsters were correct about Trump’s chances in 2016 (they probably weren’t), for example, the numbers they gave versus how they treated those numbers made no sense. They gave Clinton a ~90% chance of winning. That means that yes, with those odds, she’d win 9/10 times. But 9/10 is not 10/10. For every 10 theoretical times the election played out, Trump would theoretically win one of them. Yet the pollsters and pundits treated a Clinton win as a certainty. Their shock come the morning after election day shows just why that view is wrong and what statistics mean.
That idea is essentially what Fooled by Randomness is about. Not that it’s a book about politics. It’s not. It is far more about investing and the financial markets than anything else. But still, I think that, for most readers of this conservative political commentary website, that is an effective way of starting to think about the unexpected way that chance plays out in real life.
And Fooled by Randomness covers that topic in a wide variety of ways. Taleb covers everything from why he disagrees with the thesis of books like The Millionaire Mind to what role currency crashes can play in the bond market.
To show how varied Fooled by Randomness is, I will go chapter by chapter for each part of the book and give (very) brief summaries of what Taleb covers. I think that will show why I ended up finding Fooled by Randomness interesting and how Taleb is able to relate probability to most every aspect of life.
Part I of Fooled by Randomness
In Chapter 1, Taleb covers the relationship between wealth and intelligence and why taking moderate risks, even for large payoffs, is probably not worth it in the investment realm; it is better to have slow but steady returns than to have large returns but then lose everything. The role chance and percentages play in that is a major focus of the section.
Then, in Chapter II, Taleb covers everything from Russian Roullette to people employed as risk managers, again using a wide variety of stories and personal examples to color his discussion of how statistics and percentages affect daily life in ways we wouldn’t expect. Again, Taleb returns to the idea of focusing on, in the financial realm, the importance of limiting risk rather than maximizing returns.
Chapters III and IV is about mathematics and probability; the most interesting aspect of which is the use of Monte Carlo simulations for predicting risk and financial returns. Once again, the focus is on why a realistic view of probability should lead you to limit your risk rather than try to maximize returns by increasing risk.
Chapter V, entitled “Survival of the Least Fit — Can Evolution Be Fooled by Randomness?” is very interesting. In it, Taleb uses his past experiences with different types of security traders to discuss the role that randomness could play in evolution. While I found some other chapters dense, this one was quite interesting.
In Chapter VI, Taleb uses probability to explain why, even as a seasoned trader, he never pretends to know what will happen to markets from day to day. Anything could happen on individual days, even if a long-term trend could perhaps be predicted.
Finally in Part I, Chapter VII is about probability as it relates to philosophy and induction.
Part II- All about Biases
Chapter VIII, fitting the theme of Part II, is about survivorship and other biases. To show how the survivorship bias affects our understanding of probability, Taleb expounds on Dr. Thomas Stanley’s books, The Millionaire Next Door and The Millionaire Mind and how the survivorship bias within them makes them less than useful for actually understanding wealth and the wealthy.
Chapter IX of Fooled by Randomness is about how people are fooled by numbers and why randomness makes it is easier to buy and sell eggs than to fry them well. He also discusses luck and how the fact that cancer sometimes randomly disappears has spawned a large variety of ineffective cancer “cures” that users and sellers actually believe work.
Chapter X, is on a similar topic; it is about how life is not linear. That is, things have a way of happening exponentially rather than linearly.
Chapter XI of Fooled by Randomness finally gets to the most important part of the book, which is that humans can’t really comprehend probability. We focus too much on past results or rounding probabilities up or down to try to understand them, so we can’t truly comprehend how they work. The material in this chapter is, I think, very important because it makes the rest of the book make sense. Every mistake made or flaw in reasoning, especially related to risk, is because the intelligent people making those decisions couldn’t comprehend the true nature of probability.
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Part III: Living with Randomness
Chapter XII again relates to real life and is about “taxi cab English” and gambling tricks.
Then, in Chapter XIII Taleb gets to the idea of how probability and skepticism are related and on the “path dependence” of our beliefs.
Finally, Chapter XIV is about having personal elegance despite the randomness of probability.
My Take on Fooled by Randomness
Like I said in my introduction, I found Fooled by Randomness surprisingly interesting. Yes, much of it is dense and some of it can be hard to understand. But then again, pretty much everything about probability is hard to understand.
Luckily, Taleb both guides the reader through his discussions of how probability relates to life and doesn’t take himself too seriously. Despite the academic subject matter, Taleb doesn’t try to put down the reader by making the chapters too hard to understand or using complex terms to emphasize his own understanding of the material. Instead, he is pretty funny and self-depreciating. He makes joke after joke about himself and his friends and uses personal examples to make the chapters make more sense to the layperson.
Furthermore, Taleb’s personal history is brought to light (somewhat) in the book and helps make the relevance of it even more apparent. He was born a Christian in Lebanon shortly before that country’s disastrous civil war. Expecting a life of ease, his family lost everything in the war and he moved to America in search of opportunity. Once here, he became a bond trader.
Keep that all in mind as you read Fooled by Randomness. If you lost everything because of a chance event that turned out to be highly disastrous, would you be focused on maximizing your future returns? Or would you try to learn about probability and minimize your risk? Taleb did the latter and, in so doing made the smart choice. When others failed because of the risks they took, he remained shielded from a similar meltdown or implosion.
I still don’t really think I understand probability. Sure, I get the point, which is that percentages can’t be viewed as meaning anything will actually happen. They are just the chance that something will happen. But that is hard to always remember and act on. But, in any case, Fooled by Randomness teaches you how to try to act on chance; by minimizing, to whatever extent possible, that a disastrously bad outcome will occur. That is a valuable life lesson.
I don’t expect everyone to be interested in reading Fooled by Randomness. It’s a complex book about difficult to comprehend subjects. But, Taleb does make it interesting and uses the stories and details within it to teach valuable life lessons about randomness, risk, and probability. That makes it worth reading, even if doing so is difficult or takes some time.
By: Gen Z Conservative