Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Unabridged) [Audio Download]

I was ambivalent about this book when I picked it up, but was quickly gripped and had to read to the end.

This book is about the Illusion of Control on a massive scale: a refusal to acknowledge blind luck's contribution to our success. Taleb is a trader as well as a scholar, and mixes his logical points with many tales about the "Masters of the Universe": traders who, with a run of successful investment, become rich, promoted and profiled in Fortune magazine. Given the huge numbers of people who become traders, the number of these high-flyers is pretty much what you would expect by chance. The logical conclusion is that there is no evidence that any of these traders have any real skill, or that any of the investment advice given by gurus and journalists has any value. This contrasts with other walks of life where skill and practice are necessary: you couldn't become a concert pianist by blind luck, for example.

Yet the finance industry refuses to acknowledge this. Noise (the natural volatility of the market) is mistaken for signal (understandable and predictable responses to events), and hence pure luck is mistaken for skill. When the hot-shot trader loses all his money, and is escorted from the building by security, it comes as a total surprise to him.

Embarrassingly for his targets, Taleb is not advancing some daring new theory. He just uses probability theory, basic statistics and a knowledge of the psychological research on biases: the toolbox of an informed critical thinker. He shows how professionals in finance, the media and even academia repeatedly fail to use these basic tools: ignoring probabilities, drawing bold conclusions from minuscule evidence, or focusing on probabilities but ignoring values of outcomes

Just as research on bias overlaps research on human happiness, the book also discusses how we can be more happy by exposing ourselves to less information. Far from a whimsical speculation, this is backed up by a clever mathematical/psychological argument.

Taleb's writing style will grate with some people (his favourite topic is clearly himself) but others will find it a very personal and engaging voice. It's an intellectual rather than scholarly book (Taleb mentions a great deal of scientific, philosophical and literary influences, but is not very concerned to back up each claim with citations) but this won't be a problem for most readers.

If you have ever listened to economists, analysts, or other supposedly intelligent commentators and wondered is it just you or are they really talking complete rubbish, then this book is for you. Taleb has produced a witty, informed, and entertaining book that debunks much of what passes for analysis and success in financial markets.

Taleb has a clear admiration for Physics and adopts a physics approach. He dives right into the heart of the problem, finds the essential truth - that markets are random, the path we observe is only one of many, and that we cannot make proper assessments on trading strategies until a sufficient time-period has elapsed to give a significant sample which includes those rare but headline-making events that occur from time-to-time. He picks out several consequences of this phenomenon. The main one is Survivorship Bias (that those experiencing good fortune at picking the right investments will be elevated to guru status, until one of those rare but extreme events removes them from their pedestals). There are many other useful insights here; how the shorter the time-scale we use to study performance the more noise we see; how journalists comment on the one random outcome we observe and interpret it as significant news; how pseudo-science has spread to all sorts of unsuitable areas; and how groups of traders form collective opinions which defy rational analysis (the so-called "fire-station" effect); how lucky traders become all puffed-up with their own success, and the link to Seretonin levles and evolutionary benefits of being able to identify winners in competitions. This entertaining section gives compelling reasons for sharing Taleb's scepticism about much of the modern financial world.

Physics, however, has difficulty providing a complete explanation for any system more complex than a single particle. Real problems benefit from a more all-round approach, or a more heuristic analysis. Taleb's single parameter analysis of success in financial markets and the behaviour of participants and institutions soon runs into contradictions and problems. He frequently talks about "good traders" and "bad traders", but sees this only in terms of buying low-probability events which he insitst are universally undervalued, and gives pseudo-real case histories of bad traders who blew up buy selling these lo-probability events. Yet he also comes up with a list of distinguishing features of bad traders; so could a bad trader become self-aware and learn to become a good trader, but still sell low-frequency extreme events? Is anyone who buys extreme events a good trader? More analysis is needed here to give a water-tight case.

When discussing bubbles such as the recent tech-stock bubble, Taleb's single variable explanation misses a whole dynamic. Everyone knew it was a bubble that would burst, yet many made money from buying into it, and some who held out against going into it at lost their jobs. The mass-psychology that sucks so many people into bubbles against their better judgement is a fascinating subject. There is much that can usefully be said, and now would be a good time to say it, but it isn't said here.

Elsewhere, Taleb's explanations also fail to enlighten as much as they might. The influence of randomness in medical research and medical practise is mentioned briefly, and the use of statistics in the legal profession gets a mention as well. There are many legal cases where statistical arguments have formed the basis of judgements and mis-judgements, from the Dreyfus case right up to the Sally Clark case in the UK today, yet all we get is a couple of throw away-examples from the O.J. Simpson trial. Perhaps if Taleb had spent less time reading high-society gossip pages and a bit more time researching his arguments he might have produced more significant arguments here.

Taleb has written a useful, readable, and thought-provoking book. Reading it is probably a better use of your commuting time than reading the Wall Street Journal. Yet the book ultimately disappoints because Taleb is neither original enough to fill an entire book with his musings and thoughts, nor diligent enough to give a properly researched presentation of his case.

I was hesitant about buying this book because I thought it might be a technical book about trading. It isn't. It reminded me of Fred Schwed's, Where are all the customers' yachts? - a humorous look at human folly in the media and the world of investments. There's a little bit of Northcote Parkinson, P J O'Rourke and maybe a little of Montaigne in there, too.

I liked the fact that Taleb recommends not reading newspapers or watching TV news, I like his anti-corporate dandyism, too. He makes a sweeping statement about how self-help books don't work, which I didn't agree with, particularly because I think this book is a rather smart and elegant self-help book written by a very funny guy.

I work as a speechwriter and this book is crammed full of colour that can be recycled for that kind of exercise. If you don't use it for that it will liven up your dinner-party conversation.