Reviewing Fooled by Randomness
Review of "Fooled by Randomness" by Nassim Nicholas Taleb
2nd Edition
Thomson Texere
The short review. Go out and buy this book.
The longer review.
This is an interesting, eclectic and wonderful book. I showed this book to a friend of mine, one of the smartest guys I know, as I was reading it. My friend made a very interesting comment, Taleb doesn't reference the right people". Well as Taleb notes, this is not an academic tome, its a reflection that he developed over time. In fact it is difficult to categorise this book. Part popular science, part memoir, part advice on the markets, it is wholly facinating.
The central point of this book is that the world is more random than we think. "The real trouble with this world of ours , as Peter Bernstein author of 'Against the Gods:The Remarkable Story of Risk' wrote, "
is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogility; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness waits for you". Where Bernstein did a wonderful job tracing the history of statistical analysis and approaches to risk, Taleb does a better job of focussing on this inexactitude, our habit as a pattern matching species, of attributing patterns to results where no patterns exist, of being literally fooled by randomness.
The approach he takes to the task is eclectic. The book takes us from the Stoics of ancient Greece to the mad traders of New York and other cities who profit from, and ultimately fail due to this inexactitude. Taleb describes the inexactitude of the world in terms of 'Black Swans'. This stems from the inductive logic that allows us to conclude that all swans are white on the basis that all observed swans are white. The appearance of single black swan immediately falsifies this notion. The appearance of this black swan can have a nasty effect of breaking the bank if you've bet all your money on white again.
What Taleb is pointing out is that we don't really understand the world. It's more random than it appears. This might appear as capriciousness. Having experienced a 'Black Swan' myself with the sudden death of my father, a man the stoics would have liked, the appearance of 'Black Swans' can make the univerise appear malign. But then ascribing intentionality where there is none is something we humans do well. Its part of the failing that allows us to be fooled by randomness. The real story of the univerise is that it doesn't care, things are more random than they appear and what we see as information is often only noise we haven't managed to understand properly.
The book takes the reader on a wonderful adventure through the looking glass into a wonderland. The important thing is that this strange wonderland is the real world, and our intuitive perception of the world is what is distorted. The book takes us on an informative, entertaining and engrossing ride that ranges from the use of Monte Carlo tools to simulate the range of possible outcomes, through the problems of induction posed by Hume and onto the falsification theories of science posed by Popper. The use of Popper is quite interesting as he is a pivotal character in the philosophy of science. There are criticisms of Poppers claim that falsification is at the heart of true science. What is interesting in this context is that this is a practical application of philosophy predicated on the basis that "some types of knowledge did not increase with information - but which types we cannot be certain". A place where scepticism is a healthier and safer stance than faith.
As I look over my very annotated, heavily underlined version of Talebs book I realise that if I am to do a review that covers everything that caught my attention that this review could go on for days. The scope and breath of this book is staggering. Taleb encompasses classical philosophy (and some of the more modern variety), the neurobiology of emotion as presented by Damasio, and the contributions to economics and decision making of Kahneman and Tversky. He captures the essence of modern statistical quality methodologies such as six sigma (without realising it) when referring to the importance of checking your measurement instruments. His discussion of path dependence of beliefs illustrates why it can be difficult for good new ideas to take root, the issue of paradigm shifts in science described famously by Kuhn in his 'Structure of Scientific Revolutions'.
Taleb uses an interesting and engaging device throughout the book. He presents the example of another trader called Nero Tulip, who is a thinly disguised version of Nassim Taleb. (I stand to be corrected on this one). You have to wonder about what happens to Nero at the end of the book, but you'll have to read the book itself to understand that comment.
Is there anything I didn't like about the book? Well there are a few albeit minor criticisms. Taleb suggests stoicism as a solution to the emotional vagaries of life, such as the 'gentlemen of Victorian England'. I'm not sure this rationally detached group is much of a model for anyone. "The stoic will thus be immune from life's gyrations as he will be superior to the wounds from some of life's dirty tricks". Unfortunately to turn us into stoics would I believe deprive us of the Art and Culture that Taleb so obviously enjoys, art which is in its essence a human emotional responce to the world that affect and effects us. He does recognise this of course recognising that stoicism like other "things can be carried to the extreme". The tone of the book at times borders on arrogance, something Taleb recognises with a small measure of schadenfreude thrown in for good measure. Taleb doesn't suffer fools gladly, and he can be very pointed in his comments as when he refers to "The economics prize in honour of Alfred Nobel awarded by the Swedish Central Bank". The comment, well taken, points out that the "Nobel Prize for Economics" was not created by Nobel, but by some economists so they could give awards to other economists, basking in the reflected prestige of the actual Nobel prizes.
Ultimately the book benefits rather than suffers because of this. By taking this approach Taleb avoids the dry sterility that plagues so many more 'worthy tomes' which implode under their self importance and bombast. Its nice to see someone so open in his thoughts and so passionate in his beliefs, and most importantly there is nowhere that Taleb is obviously wrong in the points that he makes.
There are a few final points that I think are worth making. The first has some profound consequences. The extension of some of the ideas in the book that people prefer a little continual pleasure now even with the risk of a big pain in the future rather than small amounts of pain followed by a big pay off is that we will have serious problems in making society a healthier place. Why the immediate pleasures of the junk food, alcohol and tobacco so easily displace the benefits of longer life and health, that can be achieved through continual rational denial is now obvious.
The penultimate point, posed wholly tongue in cheek is that Taleb is a success, as evidenced by his wealth and success. Is it possible that his success is itself due to luck rather than his application of skill and his attempts to avoid falling into the traps of human fallibility? Is it possible that irony of ironies that the success of Nassim Nicholas Talib is noise rather than information?
Consider this as the work of a renaissance man, someone more interested in getting at the truth where ever it may be found. Talebs unorthodox enquiring mind is worthy of the the men of the renaissance who in an open minded fashion brought together art and science, and were the midwifes of the enlightenment and of modern science. Buy this book. Read this book. Learn to understand this book.