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Title: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
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Manufacturer: Random House Trade Paperbacks
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| Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks Very Very Tough Read | Wow, what a tough book to read and try to follow the author's line of thought!
I guess the author's main point of the book is to take a different viewpoint of risk. For example, Black Swan events (10 sigma +) do occur and try to always understand the probabilities involved with any issue.
One chapter is dedicated to criticizing the book The Millionaire Next Door by Stanley. The author claims having a lot of millionaires to study is a product of extraordinary times, e.g. the 1982-2000 Bull Market. The author claims there would have been fewer millionaires to study if the time period was the Bear Market of 1968-1982.
Although the author might be right in there were fewer millionaires by number in the early 1980's versus the 1990's, he is dead wrong about the percent of millionaires depending on the stock markets. Pareto, the Italian economist, found that only 10% to 20% of the population owned 80% to 90% of the wealth in Italy and England in the late 1800's and early 1900's. In fact, in the U.S. today, about 10% of the population owns 90% of the wealth. I'm surprised the author is not aware of the Power Law and Pareto's 80:20 Rule as a subset of the Power Law. Based upon Pareto's work in the late 1800's which still holds true in the 21st Century, Stanley's Wealth Accumulators have always existed.
Stanley's finding that millionaires lived below their means and invested the difference is no big secret per Charles Dickens (1812-1870) in his 1849 David Copperfield, "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."
The author also argues that Stanley's studies suffered from survivorship bias. He argues that if Stanley had included all the people who saved and invested in losing investments, the net worth of his average millionaire would have been cut in half. I hate to let the author in on another secret that has been around for 2,000 years: don't put all your eggs into one basket as elegantly said in the Talmud, "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve." I disagree with the author saying that all investors ignored this age-old advice to diversify their investments.......and therefore drive Stanley's average millionaire's net worth down by 50%.
I do agree that survivorship bias is an important item. When comparing actively managed mutual funds to passively managed index funds, one should always remember that only the "survivor" actively managed funds still exist. If the actively managed mutual funds that died or were taken over were included in the numbers, passively managed index funds would be the actively managed by a higher margin.
I found Mauboussin's book, More Than You Know, to be much easier to read and much more thought provoking than this book. If you are interested in actionable behavior you can take as an investor to overcome behavioral finance tendencies, I recommend Pompian's book, Behavioral Finance and Wealth Management.
See other great books about investing below:
Index Mutual Funds: How to Simplify Your Financial Life and Beat the Pro's
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing | | Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks A random collection of ramblings (buy Black Swan instead?) | | I managed to read the entire book (which means its an easy read and decent enough. I will not go so far as to say its worthless, as I say its a 'decent' book). So, here's my bottom line. Each chapter has the same unfounded examples-- Taleb casually mentions someone did something and concludes 'see, its random'. He does this over and over again. Fortunately, he concludes the book by acknowledging he's as dumb as the rest of us. His thesis does seem to have 1 definitive source of proof: by random chance many, many people (including me) have been fooled into buying this random book. Maybe his 2nd book, Black Swan, is an improved version-- I would suggest (randomly, since I haven't read it) to just start with Black Swan. | | Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks Mediocre, but better than most rubbish out there |
Certain parts of the book are enjoyable and a good reminder of how emotions skew rational thinking. Furthermore, the authors explanation of probability versus expectation is also written in a pretty entertaining manner.
Basically, he is saying that majority of traders trade strategies where probability of making small amounts everyday is high and the probability of a catastrophic loss is much smaller ... and that, they eventually blow up. What is insane about this author is that, he implies this in multiple places, he is trading where others blow up (loose money most of the time and make it big on a few occasions). How is this any scientific and rational? given just as those traders cannot foresee that they will blow up, this literally over developed author/trader type cannot tell he will make money because a big event will happen tomorrow and his bet is on the right side. This author probably has option positions out there betting on aliens will invade 20,000 years from now. Too bad, he won't be around to see the outcome.
Another point, he is quite popular right now, in various magazines, articles, people seeking his advice... However, this is also ex-post. If a credit sequeeze hadn't happened in the last year or so, he would not get the same attention he is getting now. I wonder if he is thinking about that sometimes. This reflects his trading style, this is a brief moment in his life, where he hit the jackpot. He will probably ride this as long as he can. I don't think his book will leave serious mark, because he does not even come close to answering any of the fundamental questions he is debating. Also, at places in his book he is discussing technical terms like ergodicity. I don't think he fully understands the meaning but he tries to find some verbal explanation for it based on everyday experiences. Sometimes, mathematical concepts may not have a direct translation in life. They are abstract. He does not discuss "stationarity" at the same level for example, and even if he did readers would have little to gain from his explanation. | | Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks Best ten bucks spent ever | This book is one of a kind. It is a thought-provoking essay that presents the author's philosophical views on randomness, which originates from his long-time experience as a trader and from his vast knowledge of the western philosophical tradition.
I think the book is wonderfully written, although I understand some reviewers' comments about the arrogant style. There is actually some self-sufficiency in Taleb's writing, but I think it actually gives the book a very special ironic and personal touch: you can feel there is an author there, he is not trying to be neutral. I ended up loving it and asking for more. I have also read The Black Swan, but I must say that Fooled by Randomness is the first I read and the one that caused me the greatest impact. | | Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks "We demand the right to contradict ourselves!!!" | I'm stunned. People are still making the same mistake--intelligent people, at that. The mistake? They contradict themselves in boldface statements and are proud of it. Nassim Nicholas Taleb makes the mistake throughout "Fooled By Randomness" and what's worse, he loves himself for it. Taleb's general theory is that everything is simply random (to some degree)--especially equities trading--and "nothing can be accepted with certainty." Sure, there is some aspect of randomness at the subatomic level and there is seemingly randomness throughout our worldview, but to say that "nothing can be accepted with certainty" means that even that statement can't be accepted with certainty, which presents an instant contradiction and causes the argument to self-destruct like a Mission Impossible tape.
The self-professed skeptic Taleb doesn't think his idea self destructs however, he is simply content to have realized that there aren't gifted traders, just lucky ones. Traders are fooled by the randomness in the markets, according to Taleb, and think they're good at what they do, until they blow up (lose everything beyond expectation). Taleb admits he's one of these fools, but if that's so, and the market is unpredictable, then the only reason he hasn't blown up (if he hasn't) is because he's lucky and doesn't have any wisdom to impart. So why are we reading his book? What information does he have that would be helpful to us beyond, "it's a coin toss?"
It turns out that Taleb does actually have wisdom to impart. Once the reader gets past the hypocritical class warfare diatribe in the first half of the book, "Fooled" gets good. The author delves into the Kahneman & Tverski studies about how arbitrary anchors influence our estimates and the two systems of reasoning among other interesting studies.
I admit that Taleb's book was great mental fodder for my forthcoming book, but if you're not interested in analyzing self-defeating mentalities, there are much better books to consider including Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics and my book, How to Take Advantage of the People Who Are Trying to Take Advantage of You: 50 Ways to Capitalize on the System. | | Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks Product Description | “[Taleb is] Wall Street’s principal dissident. . . . [Fooled By Randomness] is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-nine theses were to the Catholic Church.”
–Malcolm Gladwell, The New Yorker
Finally in paperback, the word-of-mouth sensation that will change the way you think about the markets and the world.This book is about luck: more precisely how we perceive luck in our personal and professional experiences.
Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill–the world of business–Fooled by Randomness is an irreverent, iconoclastic, eye-opening, and endlessly entertaining exploration of one of the least understood forces in all of our lives. | | Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Random House Trade Paperbacks Amazon.com | | If the prescriptions for getting rich that are outlined in books such as The Millionaire Next Door and Rich Dad Poor Dad are successful enough to make the books bestsellers, then one must ask, Why aren't there more millionaires? In Fooled by Randomness, Nassim Nicholas Taleb, a professional trader and mathematics professor, examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill. This eccentric and highly personal exploration of the nature of randomness meanders from the court of Croesus and trading rooms in New York and London to Russian roulette, Monte Carlo engines, and the philosophy of Karl Popper. Part of what makes this book so good is Taleb's ability to make seemingly arcane mathematical concepts (at least to this reviewer) entirely relevant in evaluating and understanding everything from the stock market to the success of those millionaires cited in the aforementioned bestsellers. Here's an articulate, wise, and humorous meditation on the nature of success and failure that anyone who wants a little more of the former would do well to consider. Highly recommended. --Harry C. Edwards |
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