Review of Fooled by Randomness

Title:

Fooled by Randomness, 2nd edition

Author:

Nassim Nicholas Taleb

Publisher:

Random House

Date:

2005

ISBN:

0-8129-7521-9

Pages:

316

Price:

$14.95

Reviewed by Nick Christenson, npc@lvrevealed.com

June 13, 2007

The human brain is just not built to work well with probabilities. We tend to interpret good fortune as the result of skill, see coincident events as causally related, and find meaningful patterns in randomness. These tendencies cause people to significantly misinterpret the world around them, often to their detriment. In Fooled by Randomness, Nassim Taleb explores many of the circumstances where our misperception of probabilities misleads us and explains why this is so.

Taleb approaches his material from the his vocational perspective, that of a Wall Street trader, although he easily could have come to the same conclusions had he been a professional gambler instead. Because of his perspective, Fooled by Randomness contains few direct references to gambling, yet I believe that his overall world view is extremely beneficial for those who wish to be successful gamblers. The fact that the casinos he uses for his examples are the financial markets of Wall Street rather than the gaming floors of Las Vegas doesn't matter.

The first few chapters demonstrate that by and large human beings do a poor job of understanding the relationships between events that occur in our world. For example, when we see several people endeavor to succeed in the same marketplace, we ascribe positive attributes such as skill and diligence to the winners and negative attributes to the losers. For some endeavors this is due to a true difference in aptitude, but in others, such as equities trading, Taleb contends that the differences could more likely be due to luck than skill, and that most people have difficulty discerning the difference.

These admonitions easily cross over into the gambling realm. Noted gambling authorities caution us against being "results oriented", as our short term results may have little correlation with our long term expectation. We know that there is a weak correlation between the results of a single poker session or tournament and the skill of the players. We know that from a statistical or predictive standpoint winning or losing a single sports bet means nothing. However, the natural tendency is for gamblers to feel indomitable after a winning session, we lionize the winners of the poker tournaments above those who make the best decisions, and the sports betting public follows like schooling fish those who appear to be on a hot streak.

Taleb provides some clues on how to spot these situations, although in general terms. He has elected to not turn Fooled by Randomness into a statistics text book, so his analyses are largely confined to the qualitative. Certainly, this strips the book of some of the possible rigor it might have, but as a consequence it appeals to a much broader audience.

The book is not content merely to point out that human beings are often deceived into finding patterns where there are none, it delves into the fields of neurobiology and evolutionary psychology to explain, to the best of our understanding, why we are so susceptible to these fallacies. This is a good discussion, as I believe it really helps the reader understand that we don't make these errors out of a lack of understanding, we're really hard-wired to misunderstand much of what goes on in the world around us.

The book concludes with some thoughts by the author on what we can do about it. As it turns out, the author is far more defeatist than I am regarding how we can retrain our minds to compensate for our natural predispositions to accept what our emotions tell us. I agree with Taleb that understanding that, in a sense, we're fooling ourselves a lot of the time is the most important step, and I also agree that no matter how hard we try, we will always react emotionally to some situations where such a response has no benefit. This doesn't mean that we shouldn't be relentless about trying to continually minimize the distortions through which we view the world. Taleb does recommend that a mind-set of classical stoicism (as in the Roman poet/philosopher Seneca the Younger, not Mr. Spock) can assist, and I believe there's merit to his view.

Not to blow my own horn, but over the course of my life I have come to many of the same realizations as has Taleb, although my overall philosophy wasn't as fully developed into a narrative, nor did I have his understanding of the physiological underpinnings of our self-delusions. Much as has the author, I came to realize how much of our circumstances that are due to chance we tend to attribute to skill or the lack thereof. As such, watching the televised news or reading interviews with successful people typically nauseates me. Consequently, I'm pleased to find someone who has formulated a cogent approach to an understanding of what is predominantly a probabilistic universe. I believe this is an important book, and I believe that anyone who reads it and isn't persuaded by its world view probably hasn't understood it.

That's not to say that I don't think the book has faults. Throughout the book, I found the construction of Taleb's argument to be unnecessarily serpentine. I also believe he's excessively harsh with some of his subjects. For example, he rightly berates Merton and Scholes for the Long Term Capital Management debacle, but that doesn't mean that their work on pricing options wasn't worth the praise it has received. After all, the considerable time Isaac Newton spent studying alchemy in no way reduces his contributions to physics and mathematics.

Just as Newton's shortcomings don't detract from the man's contribution to science, the few complaints I have with Taleb's book don't diminish the validity of his argument. It's my opinion that most people who read Fooled by Randomness will be treated to a whole new way of looking at the world in which they live. I believe that it's a profoundly useful way of understanding our place in existence. I believe this will be true for all people, but especially for those who frequently deal directly with the capriciousness of random events, such as those who gamble professionally or as serious amateurs. This is a remarkable book that deserves a wide audience among the general populace, as well as among the gambling community. I strongly recommend it.

Capsule:

In Fooled by Randomness, Nasim Taleb explains that much more of human history as well as the things that affect our daily lives occur due to chance than we might expect. He also explains why it is that human beings do such a poor job of understanding that this is so. This is a ground-breaking book that turns on its head our perception of the world around us. Even though the author rarely makes direct comparisons to the gambling world, the connections should be blatantly obvious to any gambler reading this book. I have some quibbles with the writing style, but the message of Fooled by Randomness is so persuasive, that any shortcomings are clearly outweighed by the message. I fully expect that this book will change the way the reader looks at the world, and I recommend it.