Wednesday, 12 March 2014

Book Review: Fooled by Randomness

Title: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2nd edition, updated)
Author: Nassim Nicholas Taleb
Year Published: 2005; first edition 2001
Genre: Non-fiction, Economics, Philosophy

So the two take-home lessons from this book are:

1. People underestimate the role of chance in their lives; and
2. Nassim Nicholas Taleb is smarter than you.

Of course, there are more nuances involved, but that’s the general gist of it. Fooled by Randomness basically tells us about the role of probability in life, how people perceive this role, and how they are wrong. The author posits that people tend to see patterns where there are none and attribute to skill what has happened by luck. The book explores a number of interesting logic concepts, including that of hindsight bias, survivorship bias and a number of others whose technical names I don’t know. These ideas are generally associated with how people construe “success” and are usually explained in the context of trading.

Now, in matters of probability, finance and philosophy, I am about as knowledgeable as Jon Snow; I don’t have an interest and I really only read this book because my brother recommended it. As such, I’m probably not the target audience here and I can’t (won’t) assess how “sound” the author’s ideas are, especially when he discusses theories made by people I’ve never ever heard of, and especially when he doesn’t explain said theories fully. To give you an indication of my level of knowledge (or ignorance), I had to look up what “bullish” and “bearish” meant, and was slightly disappointed to discover that the terms had little to do with animals.

For me personally, the most interesting ideas were the concept of “it ain’t over ‘til it’s over” – you can’t judge a thing until it’s done – and how the time frame you take as a reference point alters the significance of any event. The only explicit bit of “financial” advice I could spot was in the author’s musings over the “black swan event” – the rare but disastrous random event – and how he prefers to guard against this while being accepting of other smaller losses. So if you’re reading this to get rich then, well, good luck. Anyway, that’s how I interpreted it all, though what would I know? I mean, what you’re reading now are essentially the thoughts of a peasant.

The writing has a distinct style that reeks of the author’s personality. You may like it, you may hate it. I was surprised at how dense the prose was, right from the get-go. The author, who has had a long career as a trader (I don’t even know what that means), fancies himself an intellectual who is above those other, lesser, money-grubbing, MBA-holding kind of traders. He comes across as arrogant, self-indulgent and pretentious, and adds so many philosophical/classical/historical namedrops and references that at times I found it impossible to understand what he was on about (but then again, I am a peasant). Even so, Taleb has a certain charm; he’s interesting and funny and he writes to the reader as if to a fellow comrade-in-arms – as if you, like him, are one of the intelligent elite (unless of course, you’re a journalist, have an MBA and/or are a liberal left-wing “pseudothinker” – then he despises you). At the same time, you get the feeling that if you ever met him in real life, he’d probably think you’re an idiot.

As mentioned, the author discusses a number of interesting concepts. However, the problem for this idiot is the way these concepts are presented and how the style and structure of the book affect them. Taleb occasionally spells them out, but most of the time they’re couched in anecdotes and blend into other messages or ideas. It’s a bit like going to a lecture where the speaker goes off on tangents, but due to the alien nature of the topic, you’re not really sure when and if he’s getting to some important point or if he’s just gone rogue. You can try to learn but the guy does not make it easy. Some ideas are very clearly explained (like the Monte Carlo engine – always wanted to know what that was), yet at other times, everything gets muddied. The author often sort of mentions something only to change the topic without having fully explained it. If this helps at all, Fooled by Randomness is the sort of book where (a) chapters don’t necessarily delineate topics (for example, the “it ain’t over” idea is sort of explored in dribs and drabs here and there); and (b) the author may occasionally veer into rants about a particular journalist he hates.

I can’t shake the idea that this book could have been much, much shorter. The author makes the same point again and again but in slightly different ways, as if unable to decide which way he likes best. Unfortunately, this just makes everything harder to understand. In the end, I was also left with the impression that nothing had been explored in very much depth, despite the fact I read an entire book. As interesting as Mr Taleb’s ideas – and personality – are, the end result is not very accessible to the average idiot reader. To someone with a background in finance or philosophy though, this book will undoubtedly hold more value.

If you’re looking to learn, you’d be better served reading a bunch of Wikipedia articles on logic and reasoning. If, however, you’re after an evening of interesting conversation with a clever, bookish, finance-y guy, then Fooled by Randomness is probably just the thing for you. 

Alex’s Rating: 3/5