Book Review: Fooled by Randomness — The Hidden Role of Chance in Life and in the Markets

1. Who Should Read This Book

Fooled by Randomness discusses a ubiquitous phenomenon in our everyday lives: the role of chance and uncertainty and how we deal with it with our ill-equipped reasoning faculties. If you are interested in such topics (philosophy, epistemology), have a sceptical and curious mind, or looking to boost your informal education and soft skills, this book is a MUST-READ.

Informal Education, Soft Skills, and Timeless, Universal Topics You Often Miss at Engineering School

2. Synopsis

Fooled by Randomness — The Hidden Role of Chance in Life and in the Markets is the first instalment in a series of five books by Nassim Nicholas Taleb titled Incerto. The four other books are The Black Swan (2007), The Bed of Procrustes (2010), Antifragile (2012), and Skin in the Game (2018).

The book examines the role of chance in our lives; the author attempts to draw a line between a chaotic, random, and unforeseeable series of events and the deterministic narratives that our minds spin to explain them.

The author was a professional trader and naturally used this exposure to explain his points of view. Despite this, the theories he puts forward are universal and widely applicable to almost every area of our lives that involves a degree of uncertainty.

Inspecting the reviews for this book will show two opposing camps of readers and critics: those who liked the book and those who hated the author’s style and tone (more on that later). If you can get past the style, you will find the book fascinating, thought-provoking, rich, and enjoyable.

The book is divided into three parts, which we now discuss.

Part 1: Solon’s Warning — Skewness, Asymmetry, Induction

The first part of the book discusses three ideas:

Fortunes that were acquired by luck can be ruined by luck. Those developed by skills are more resistant to uncertainty. Taleb presents a novel “accounting” method for measuring the quality of decisions made, which he refers to as alternative histories.
The problem of induction and rare events, which the author calls black swans. The latter is defined as an event so rare that it is constantly discounted but whose effects are overwhelming should it occur. The author brilliantly uses the analogy of an urn full of black balls with a rare red ball and a mischievous child replacing the balls under the urn.
The skewness of adverse events. In the author’s words: it does not matter how much something succeeds if failure is too costly.

The author also presents a fascinating perspective on the role of serotonin-induced happiness and momentous success in perceiving our abilities and how this correlates with our leadership skills.

A chapter is dedicated to the problem of induction and the solution proposed by Karl Popper. The essence of Popper’s ideas is that a scientific theory can be proven wrong, but it is far more difficult to prove it true.

Part 2: Monkeys on Typewriters — Survivorship and Other Biases

In Part 2 of this book, the author discusses predicting future success based on past events. He uses the analogy of an infinite number of monkeys clicking away randomly on typewriters, with one of them eventually coming up with a known work of fine literature.

Taleb argues that calculating the probability of success of such an event is meaningless until you consider the number of monkeys participating in the experiment. The skill of the winning monkey can only be established if the number of monkeys in the experiment is small.

The author states that:

Survivorship bias (counting only those that succeeded) ensures that we overestimate the odds of a rare event
A successful rare event can be safely attributed to chance
Humans are ill-equipped to understand the probability

This part is dedicated to exploring these three ideas. The beauty of Taleb’s work lies in the richness of its content; there is always a central idea he would be trying to drive home, but alongside this idea, a vast number of examples, stories, anecdotes, and seemingly tangential arguments abound.

One of those tangential ideas that I found very relevant to discussions we usually have on this website relates to business management and the immense role of luck (rather than skills) in the organisation’s evolution.

Part 3: Wax in My Ears — Living with Randomitis

Part 3 of the book is the shortest of the lot; it represents a series of reflections on randomness, chance, and daily dealing with them. It also strangely sounds like a personal biography of the author, making it an exciting read.

3. Has the Book Achieved Its Aim?

The author’s ideas and arguments were ample and rich enough to give the reader a sense of satisfaction and fullness. The discussion rigorously drove the views home with elaborate explanations without overly technical talk. The book, in my opinion, did a marvellous job at closing the gap between our common perception of luck’s role and reality.

4. Themes

Randomness
Role of Luck in Success
Risk
Rare Events and Black Swans
Induction
Philosophy and Epistemology
Cognitive and Behavioral Psychology
Skewness and Asymmetry
Risk Management

Loss and Gain
Stock Trading
History of Science
Probability
Statistics
Evolutionary Traits of Judgment
Rationality
Business Management
Greek Philosophy and Mythology

5. Structure

The book is a collection of paragraphs and chapters, some small, some average-sized, with each dedicated (usually) to a single idea. The ideas, however, are not easily linkable to the central theme of the section and will require some effort to fit with the rest of the text. Some paragraphs are more like an autobiography; others are anecdotes and exciting stories from Greek or Roman mythology. The structure (small sections discussing simple and seemingly isolated ideas) compensated for the (sometimes) tangential content.

6. Original Content

The book’s content carries the author’s signature views that I have not seen anywhere else. In effect, the author’s opinions challenge the mainstream ideas on the nature of success (luck vs skills) and evolution of events (deterministic vs random) and provide compelling arguments on why everyone else got it wrong. The multi-disciplinary approach (technical, philosophical, biological, psychological, and philosophical) that the author uses to promote his ideas is unique and gives his content a lot of originality.

7. General Tone

The book’s tone is subject to debate in the review panels. Some find it assertive, insightful, thought-provoking, rich, and original, while others believe it’s overly bold, sometimes arrogant, and reads more like a long rant. I happen to be of the former view, and I enjoyed reading it.

8. Practical Usage

Randomness and luck are ubiquitous in our daily lives, and an appreciation of their role in our successes and failures can be illuminating. Despite all the heavy arguments on luck’s omnipresence and hidden potency, the author admits in Part 3 that we reason with our hearts and not our minds, and immediate and natural responses are usually emotional and not rational. Despite the clear, logical views, it is pretty challenging to change our behaviours radically. Still, in the author’s opinion, it pays off to be aware of its limitations at a minimum, which is why I believe this book is essential for almost anyone.

9. Depth

Fooled by Randomness presents the author’s opinions in an in-depth, straightforward analysis. By no means is a thorough textbook on chance and luck, but the amount of detail and rigour in the discussions satisfies the curious mind. Taleb mentions all his references in the text, making looking for extra material or checking external references exceptionally easy.

10. Authority

The author’s authority on the topic is undeniable, and he is well-known in the financial world. He has published several financial and risk analysis papers and is working on a technical Incerto for the tech-savvy reader. The first volume in this series is already available under the title Statistical Consequences of Fat Tails: Real World Preasymptotics, Epistemology, and Applications.

11. Biography

Nassim Nicholas Taleb is a Lebanese-American essayist, statistician, former trader, and risk analyst whose work concerns randomness, chance, and uncertainty problems. The Sunday Times labelled his 2007 book The Black Swan one of the 12 most influential books since World War II.

He has been a professor at several universities, serving as a Distinguished Professor of Risk Engineering at the New York University Tandon School of Engineering since September 2008. and a co-editor-in-chief of Risk and Decision Analysis since September 2014.