Fooled by Randomness -- A Book Summary
Five big takeaways from one of the most interesting books I've come across, written by Nassim Nicholas Taleb.
This newsletter corresponds to a 7.5 minute animated Youtube video. If you prefer to watch that, go here:
A Mysterious Letter…
You receive a mysterious letter in the mail on January 2nd saying the market will go up. In February, you receive another mysterious letter saying the market will go down.
The letters are right every month until July, when you get one asking you to invest $200K offshore, which turns out to be a scam.
You go cry to your neighbour, who says he also got the letters but that they stopped in February — the letter your neighbour got in February said the market would go up.
The person doing the scam sent out letters to a whole bunch of people and discontinued the letters for which the predictions were wrong.
This scenario is from Fooled by Randomness, a book by Nassim Nicholas Taleb. Fooled By Randomness (Luke and I like the abbreviation ‘FBR’) contains various essays and thoughts about the susceptibility of human beings to extreme confirmation bias, over-confidence and misguided self-belief.
The book draws heavily on Taleb’s career as an options trader, a world where foolishness can be rewarding in the short-term, but catastrophically expensive in the long-run. Taleb’s fellow traders often thought they’d found winning strategies and intelligent models. Smitten, they married their positions, but became blind to mounting risks.
Once the honeymoon period was over, these positions divorced them, stripping them of all they owned and leaving them red-faced.
Us people cling to our ideas about life, politics, success, religion, career — everything really. We know how things should be done, that our way is the right way, and that no one knows how to drive properly except us. Rather than see reason, our priority is finding a way to believe what we want to believe, which we do over and over.
My big takeaway from Taleb’s book is that we overvalue our skill, knowledge and personal agency, and undervalue luck.
So, in the interest of understanding the beautiful fools around us, and reducing our own randomness-induced foolishness, let’s dive a little deeper into Fooled By Randomness, exploring five big takeaways.
Takeaway #1: $10 million earned through dentistry is not the same as $10 million earned playing Russian Roulette.
Life often feels like the Mysterious Letter Scam — a trail of breadcrumbs positively reinforcing us down the path to disaster. The Wizard of Oz, the scammer lurking behind the curtain is, in fact, Reality, with all her beautiful randomness and potential for mixed signals.
As Taleb says in the book:
Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security... One is capable of unwittingly playing Russian roulette — and calling it by some alternative “low risk” game.
—Nassim Taleb, Fooled By Randomness.
Consider Taleb’s point that $10 million earned playing Russian Roulette does not have the same value as $10 million earned through the diligent and artful practice of dentistry. The $10 million earned through Russian Roulette comes in one concentrated and adrenalin-laden lump, like lottery winnings, which are often squandered. $10 million made through dentistry is earnt the steady way, so the mind treats it differently. These $10 millions buy the same things — in the eyes of the market they are totally equal, and yet their value differs. We do not typically look at or understand the world on this level — most of our narratives stop at a surface-level picture.
Takeaway #2: We are Probability Blind.
It gets worse, because as Taleb points out, we’re probability blind.
Who makes more money, rock musicians or dentists? Most likely, dentists, because the average rock musician is not in the minority of mega-rich rock superstars. U2, Bryan Adams and the Rolling Stones represent a small sample of visible winners, while the large number of ‘failures’ are typically invisible, biasing the samples we observe.
Taleb gives other examples in the book of our probability blindness — my favourite is of Gould, a man told the median life expectancy for someone with his type of cancer is 8 months.
Following some research, Gould was relieved to find the expected survival is considerably higher than 8 months — the 50% who survive longer than 8 months live much longer than 8 months, till age of about 73.
Then there’s Carlos, a trader Taleb met who kept buying at the dip of the market and holding, justifying his risky approach because of past successes. Every time there was a dip, the market rallied. Until…
It was the summer of 1998 that undid Carlos — that last dip did not translate into a rally. His track record today includes just one bad quarter — but bad it was. He had earned close to $80 million cumulatively in his previous years. He lost $300 million in just one summer.
—Nassim Taleb, Fooled By Randomness.
Taleb also makes fun of the scientific method, using it to establish that George Bush is immortal.
I have just completed a thorough statistical examination of the life of President Bush. For fifty-eight years, close to 21,000 observations, he did not die once. I can hence pronounce him as immortal, with a high degree of statistical significance.
—Nassim Taleb, Fooled By Randomness.
Takeaway #3: We think almost entirely through heuristics
The problem with human beings is that we think almost entirely through heuristics. It’s too inefficient to go through life running complex calculations at every decision juncture, so our minds employ endless rules-of-thumb.
In the book, Taleb introduces the term ‘Satisficing’ — stopping when we get near a satisfactory solution. Our minds do a heck of a lot of satisficing. The price is usually small when compared to the amount of positive results, time and energy saved. Of course, some of the holes left by our rule-of-thumb-heavy operating system are not just small potholes, but huge and risky fissures — the bullet hiding in the chamber.
Takeaway #4: We are not made to view things as separate
We are not made to view things as independent from each other. When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other. Our bias is immediately to establish a causal link.
—Nassim Taleb, Fooled By Randomness.
This is what Taleb calls ‘The Problem of Induction.’
Induction is going from plenty of particulars to the general. It is very handy, as the general takes much less room in one’s memory than a collection of particulars. The effect of such compression is the reduction in the degree of detected randomness.
—Nassim Taleb, Fooled By Randomness.
In his opinion, we have taken observation and empiricism too far, because we cannot scientifically control human factors out of our environment — we are emotional, irrational creatures, who rely on our emotions and irrationality to move us forward when we need to make decisions.
Takeaway #5: We are primarily emotional, irrational creatures
Our emotional minds are not designed to understand things with granular precision, and even what we call rationality and logic is usually retro-fitted to our emotion-heavy impulses and opinions — something we do without realising. When things appear to be going well, we jump to conclusions — we usually feel it has something to do with how marvellous we are, or at the very least feel we know how and why it is happening. Taleb supposes this eagerness to jump to self-reinforcing conclusions is probably so we maintain self-belief when the going gets tough.
And so, we are biased towards overvaluing our skill, knowledge and personal agency, while undervaluing luck. We are condemned to our fate as blind fools of randomness, vulnerable to mysterious letters in the mail.
Lucky fools do not bear the slightest suspicion that they may be lucky fools—by definition, they do not know that they belong to such a category.
—Nassim Taleb, Fooled By Randomness.
You are probably not a lucky fool, so long as you suspect yourself of being one. Taleb says that he himself is not above this reality of the human condition — he shares plenty of his own ‘FBR’ stories, from wearing particular ties and taking certain routes to work for luck in his trading days, to avoiding reading negative reviews online, despite knowing they are trivial and should not get to him. All he is, in his opinion, is more aware of these tendencies than most, surrendering to his irrational, emotional tendencies when they appear harmless.
Too much success is the enemy… too much failure is demoralising. I would like the option of having neither.
—Nassim Taleb, Fooled By Randomness.
Fooled by Randomness, summed up in one quote
Taleb is a mind-bending, complex and dense writer, blending sharp wit, humour and insight. Fortunately, he usually sums his books up in a single line. In the case of Fooled by Randomness, it is a profound capture of the state of our world:
We favour the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.
About the Writer
I’m Joe Wehbe! I’m (currently) an author, podcaster, Youtuber and Real Estate Man/Property Manager, who enjoys people-watching, capturing the human condition and having a laugh.
The thing I’m most excited about at time of writing is my upcoming book with Paul Rowse, Holy Sh!t, It’s Only… Tuesday? — a fiction book, satirising the workplace and our need to feel important, written over two years and coming soon!