Before reading the review, consider the following two question:
1) If the average human life is 72 (let’s ignore gender, race, income, location, etc, just to keep the question simple), how many more years should you expect to live?
2) A test for some disease has a 5% rate of giving false positives (and a 0% chance at a false negative). The disease occurs in 1 in ever 1000 people, and everyone is tested regardless of whether they show symptoms. You are tested and the test comes back positive. What are the odds you have the disease?
(Answers at the end.) A shockingly high number of people get these questions wrong. Not just ordinary people, but doctors, statisticians, and other people who really shouldn’t be messing this up.
Fooled by Randomness, The Hidden Role of Chance in Life and in the Markets is not for the feignt of brain. Taleb explores the role chance plays in our daily lives and in the daily lives of Wall Street traders. Written in 2004, Fooled by Randomness isn’t just a response to the current financial crisis that looks back on the past with 20-20 vision. Taleb also isn’t going to give you any advice on what stocks in invest in.
While I found the book extremely fascinating, I’m sure many people won’t. It’s not just a book on randomness or a book about financial markets. It’s part economics, part psychology, and part anecdotal story telling. It’s also part asshole, as Taleb doesn’t come across as the nicest guy to be around, especially with how much he talks about how great he is at embarassing and intimidating people. (People who brag about such skills typically are insecure about it and not really that good at whatever they claim. A rich person doesn’t need to tell you he’s rich, a smart person that he’s smart, or a good looking person that he’s good looking.)
I found this book to be not quite as dense as Taleb’s The Black Swan, which deals with pretty much the exact same issues. There are a lot of interesting stories and anecdotes to keep it moving, but at times it seems like Taleb would rather write drama than write about randomness, or that he just needed something to fill up the pages. Taleb probably could have gotten all his points across in 50 pages, instead of 260 (not counting end notes and index).
In Fooled by Randomness you’ll learn about the errors in reasoning you make, but unfortunately probably won’t learn what to do about it. In many examples Taleb shows how people who specialize in avoiding these mistakes professionally end up making them all the time in their personal lives, just like how a celebrity can fly in a personal jet on the way to giving a speech about reducing carbon footprints.
While I enjoyed Fooled by Randomness, it was a bit too scatterbrained and lacking in a conciseness that would make it easily consumed, and I think ease of consumption is a big factor in a book about how to avoid really common (and seriously costly) mistakes. Three stars:
Answers:
1) Take 72 and substract your age. You answer should be MORE than that number. Why? You’ve survived up to the age you are now, while some people have not. If you are 50 years old, your odds of making it to 80 are more than someone who is 10 years old. If you’re 80 your odds of getting to 72 are even better than the 50 year old’s. Think about that the next time you make a decision regarding your retirement planning.
2) Odds you have the disease are just under 2%. If we test 1000 people, only 1 will have the disease (and will test positive). But, with a 5% false positive rate, another 50 people will also test positive, for a total of 51 positive tests. Odds you’re not a false positive are 1/51, or just under 2%. Thank God we tend to only see the doctor when we have symptoms (which of course increases the odds that the test is correct and not just a false positive, because a disease is far more common in people with symptoms than the general population).
P.S.: Next time you meet a trader, ask them if they believe in the efficient market theory. If so, ask them what the hell their job is.
