Fooled by Randomness, by Nassim Taleb (2001)

This is the second time that I have read Fooled by Randomness. I felt that this time I was able to comprehend it better, but it did not hit me as the revolutionary work as it did the first time. In this book Taleb discusses his philosophy on randomness, using examples from his life and stories often related to the markets. The markets are a good space to illustrate his points, for their obvious separation between results and skill, but also their heavily quantified nature. I have written this a few weeks after reading the book and did not take detailed notes when reading so the below is an approximation of the key points I maintained from the book, rather than a more thorough snapshot I’d typically like to write.

Firstly, what does Taleb mean by being ‘fooled by randomness’? In short, it means when we think something that is deterministic, or related to skill rather than random factors. For example someone winning the lottery will be fooled by randomness if they think they won based on skill rather than randomness of the numbers they selected.

Taleb opens the book with a few characteristics of randomness. Firstly, it ain’t over until it’s over. We are never safe from randomness, very wealthy people can become poor very quickly and vice versa. Practically this is a reminder to be vigilant and even grateful for what we have as it could all go quickly. On the upside it gives us a reason for hope, things can improve too.

Taleb than explores how to think about randomness and in a way how to manage it in our life. He warns against simplification, saying that oversimplifying things can be dangerous. For example, you might think that even opening a bottle of coke is safe – but of course should that bottle be frozen opening a bottle could be dangerous. When modelling the world, or at least thinking about it, we need to careful not to oversimplify, or at least not to trust oversimplifications at face value.

He goes on to explain his experiments with Monte Carlo simulations. A fascinating set of characteristics are revealed in his simple lessons. Firstly some paths are more variable than others i.e. there may be more extremely wealthy traders but on average, dentists may make more money. Consider the variability of different paths, and not only can it guide towards the variability you want but it can also help you spot biases or examples that, for lack of a better term, aren’t fair. Given an unlimited set of paths, some are bound to succeed, even from the most unlikely sources. This is why dumb people can end up being rich, and why footballers from strange places can make the world stage. Often if there’s enough of them, a few will work out.

But Taleb doesn’t stop at describing the number of available paths, he touches on skewness and asymmetry. Simple statistics such as average or volatility don’t tell the whole story and we need to consider more than that. The distribution, the domain dependence, the change in factors over time, the nature of profit and loss (i.e. are we risking money or pride in a particular endeavour). He follows on from this by examining human weakness in understanding randomness but also touches on the upside.

In short, humans aren’t built to think of their world in terms of statistics or randomness or numbers. Discrete options and determinism is somewhat wired into us. Randomness as such can be beautiful, like a cloud that looks like your old pet, but our inability to see it for what it is can lead to errors. Taleb touches on our underestimation of ‘rare events’ as well as behavioural economics that reveals bias. Survivorship bias, confirmation bias etc. Taleb exemplifies this by deconstructing the nature of randomness in the world around us, for example even evolution can be random, rather than the ‘survival of the fittest’. In a way Taleb shows us that it’s actually the ‘survival of the good enough’, the resilient even rather than the best. The QWERTY keyboard is a novel example of this, as it is by no means the most efficient way of laying out a keyboard. As I’m sure he goes into in his later books, the ‘antifragile’.

Once these things occur though they become their own beast. Taleb touches on these non-linearities and can help us see them around us. I don’t want to think in terms of up or down, that is misleading, non-linearities are rather leaps in any direction up, down, left right, not going towards anything in particular, but simply going a leap at a time I guess.

So what do we do? We are not built to comprehend the nature of this world in our brains? How do we battle probability blindness. hindsight bias, prospect theory, overconfidence, option blindness? Well knowing our own faults is on thing. Taleb goes as far to jest wax in our ears. I take it like how I think about social media. I can’t win, so the best thing to do is not go on. So with randomness, if I can’t win or comprehend it I should be careful with what randomness I engage with.

Taleb touches on stoicism being a form of defeating randomness. I should probably re-read this part, but for me it means living with honour, controlling what you can control, your behaviour and your reactions.