by Valentin, September 8 2023, in books

Fooled by Randomness (Nassim Nicholas Taleb, 2001)

Fooled by Randomness explains how we attribute meaningful narratives to series of events which were, in fact, random. The book illustrates the idea with the trading world, which the author comes from. He recounts numerous examples of "foolish" traders unable to see that their fortune, as well as their succeeding downfall, is only the result of randomness, and not of some grand market theory.

The way we are fooled by randomness is when we fail to understand that the current course of events, in spite of being the current "timeline", has in fact no particular relevance in comparison to other timelines that could have happened, within the bounds of all matters at hand subjected to randomness.

The cognitive bias at hand depend on whether our timeline is an unsuccessful one, or a triumphant one. In the unsuccessful case, we are subjected to hindsight bias, which makes us falsely believe that the course of events was obvious from the start ("knew it all along!"), when in fact the available information back then could have yielded many other possible timelines. It is randomness that put unsuccess on the way.

In the triumphant case, we are subjected to survivorship bias. It worked! The fact that it worked must prove that we did the right thing! Again, it is randomness that put success on the way. It worked for us. It didn't work for all the others who did the same things, but who didn't have the same chance, and ended up in the unsuccessful timelines. Sure, success requires many skills and much work and all that (which successful people will write books about, since they identify it as their recipe for success), but those are necessary, but not sufficient. Lady Fortuna will take care of the "non sufficient" part with a secret recipe of her own.

What insights does such observations give us about the future? Well, at least when it comes to the markets, that we should put investment strategies to the test of the author's favorite toy: the Monte Carlo simulator. Such tool is meant to simulate the various "timelines" that can happen to a portfolio, and a good portfolio is one which only loses small on the worst timelines, and wins big on the best timelines. This is consistent the investment strategy described by Taleb in the rest of the Incerto books: lose small often, win big rarely.

On a more spiritual note, the author dives into a bit a stoic philosophy in search of answers on how to live a life in which randomness occupies so much place. He finds that the best answer is probably dignity:

No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word. We are left with only dignity as a solution — dignity defined as the execution of a protocol of behavior that does not depend on the immediate circumstance. It may not be the optimal one, but it certainly is the one that makes us feel best.

Surprisingly, Taleb ends the book with a confession that he, in spite of his hyper-rational discourse, has superstitious tendencies (he recalls the time a taxicab dropped him at the unusual entrance of his building, he had chance on the market that day, and the day after, he asked the taxicab to drop him again at the unusual entrance). He assesses that nothing can be done about human emotions, and that one must devise strategies to manage emotions (such as staying away from daily market results, or from any other newspapers, for that matter) rather than try to suppress them. He also establishes that when emotions are harmless, the line should be drawn at aesthetics: "superstitions can instill some poetry in daily life".


On the one hand, I try to define myself and behave officially as a no-nonsense hyperrealist ferreting out the role of chance; on the other, I have no qualms indulging in all manner of personal superstitions. Where do I draw the line? The answer is aesthetics.

Pseudoscience came with a collection of idealistic nerds who tried to create a tailor-made society, the epitome of which is the central planner. Economics was the most likely candidate for such use of science; you can disguise charlatanism under the weight of the equations, and nobody can catch you since there is no such thing as a controlled experiment.

Often when a large event takes place, you hear the "it never happened before," as if it needed to be absent from the event's past history for it to be a surprise. So why do we consider the worst case that took place in our own past as the worst possible case? If the past, by bringing surprises, did not resemble the past previous to it (what I call the past's past), then why should our future resemble our current past?

The virtue of capitalism is that society can take advantage of people's greed rather than their benevolence, but there is no need to, in addition, extol such greed as a moral (or intellectual) accomplishment.

Consider that those who started theorizing upon seeing a tiger on whether the tiger was of this or that taxonomic variety, and the degree of danger it represented, ended up being eaten by it. Others who just ran away at the smallest presumption and were not slowed down by the smallest amount of thinking ended up either outchasing the tiger or outchasing their cousin who ended up being eaten by it.

One of the most irritating conversations I've had is with people who lecture me on how I should behave. Most of us know pretty much how we should behave. It is the execution that is the problem, not the absence of knowledge. I am tired of the moralizing slow-thinkers who pound me with platitudes like I should floss daily, eat my regular apple, and visit the gym outside of the New Year's resolution.

I ran into world-class probability experts who had a gambling habit on the side, throwing all of their knowledge to the wind. A former colleague of mine, one of the most intelligent people I have ever met, frequently went to Las Vegas, and seemed to be such a turkey that the casino provided him with complimentary luxury suites and transportation. He even consulted a fortune teller prior to taking large trading positions and tried to get reimbursed by our employer.

Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath.

Surprisingly, MBAs, in spite of the insults, represent a significant portion of my readership, simply because they think that my ideas apply to other MBAs and not to them.