He was a trader, in an intensive way, so to say. He wrote books about trading, markets and more specifically, randomness is his favorable playground. Since his debut bestseller – Fooled by randomness, Nassim Taleb increasingly won the public attention and praise for later books. One of them – The Black Swan was awarded as one of the most influenced book since the World War II. Regardless of what people appraise, Nassim Taleb prefers to be considered as an essayist. This book review is about his debut bestseller: Fooled by randomness.
This is a decent book about traders. To be precise, it is about traders who are fooled by their knowledge in the world of randomness. Or at least, knowledge is what they name until it screws up their assets and careers. This is how Nassim Taleb linked traders with his favorable topic – randomness:
At any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the markets, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists – because these professions are more immune to randomness.
As he was a trader in most of his career path, Nassim Taleb viewed this connection (traders and randomness) from the very insight.
Source: Yen Tran
Nassim Taleb started this book in a pretty attacking way: My motto is “My principal activity is to tease those who take themselves and the quality of their knowledge too seriously.” You will see how strong he committed to accomplishing this task throughout the book. To some extent, he did it quite well. Always keep yourself and your knowledge skeptical is what came up to my mind on reading this book. Thanks to history, people draw conclusion of thing’s nature. However, later on we have to change our knowledge since future events occur differently from what they were. To be more detailed, what you see decide thing’s nature, not the features of things themselves. And there is nothing you can do to change it. But in this book, Nassim Taleb showed us the way to protect ourselves from being trapped by the illusion of knowledge. Lessons are not for free. People have to exchange their precious things for it, i.e. time, money and very frequent, their confidence. As someone said, “Nowhere in this world, the price of lesson is as high as in the trading exchange”. Nassim Taleb told us stories of market participants those made fortune in years and ruined life career within days. What did they do wrong? What lesson can we learn from their mistakes? Also, the price they paid for these lessons, how high was it? Most importantly, is it true that this world is full of randomness? And if so, how do we survive in it?
Carlos and John were traders who became specialists in their field for gaining huge profits for their employers over years. Yet, they blew up their fortune and careers in quite similar way. “Carlos had earned for his bank close to $80 million cumulatively in his previous years. He lost $300 million in just one summer.” The same tragedy happened to John – a respectful and considered-skilled trader for years. The question is that, when will they recover from this failure? Perhaps never, replied Nassim Taleb. The fact that he blew up wiped out his confidence. More importantly, John might be never skilled in the first place. We tend to think that traders were successful because they are good. Perhaps we have turned the causality on its head; we consider them good just because they make money. Does this conclusion evoke some thought for you? Heroes are heroes because they are heroic in behavior, not because they won or lost. Survivorship bias and mass media nowadays distort our judgement about things in life. The viewers are only told about stories of winners. We view one’s life story because one makes fortune. We like being told about success, not failure. And for that reason, we learn nearly nothing from history except for satisfying our entertaining demand.
A significant side effect that you cannot miss in this book: Nassim Taleb changes the way we judge this world. He introduced us the judgement methods that we seemed to take for granted. You will be surprised by how exactly he defines out loud our mental bias, i.e., highsight bias – the “I knew it all along” effect. A mistake is not something to be determined after the fact, but in the light of the information until that point. Our minds are designed not to understand how the world works, but to get out of trouble rapidly. Even when you get failed, say, kicked ass, you seem not to understand what really happened (Still, you think you finally get the point since you pay a high price for it. Sorry folk, you do not!). What you see is all there is, said Daniel Kahneman in his bestseller – Thinking, fast and slow. For the ones who look for a judgement (or research) method in academic world, Nassim Taleb rejected induce methodology and introduced Popper’s theory. Basically, a theory cannot be verified since it is never proved to be right, i.e., we will never know if all the swans are white. On the way to prove the precision of a theory, your approach is already wrong.
According to Popper, there are only two types of theories:
- Theories that are known to be wrong, as they were tested and adequately rejected (falsified).
- Theories that have not yet known to be wrong, not falsified yet, but are exposed to be proved wrong.
This is one of the most skeptical research approaches ever. I believe that Nassim Taleb made this point clearer and more persuasive in his masterpiece: The black swan. Currently, we would have it pended for that blueprint.
There is one characteristic that all good books contain: thought-provoking. Fooled by randomness is such a book. Nassim Taleb is certified as a brilliant essayist, the hottest thinker in the world. He is solid and aggressive in his opinions. In the World Economic Forum in 2009 in Davos, he was treated as a rock star and aggressively criticized the bankers. Also, Nassim Taleb called for cancellation of Nobel Prize since the damage of economic theories can be devastating. One step further, Nassim Taleb refuses all awards and honours as they debase knowledge by turning it into competitive sports. To me personally, it is very nice to know Nassim Taleb via his blueprints. I hope you agree on this once you take time to read his ideas.
YEN TRAN
*I would like to thank my partner – Tran Nguyen for her support. I owe a lot to my editor – Xuan Nguyen for helping me complete this review.
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