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Book Review: Fooled by Randomness
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Book Review: Fooled by Randomness


By Jake Cornelius Wednesday, March 11, 2009

I've just finished reading Nassim Nicholas Taleb's Fooled by Randomness: the Hidden Role of Chance in Life and in the Markets. I know, I'm late to the game on this one as his follow-up; The Black Swan has been a best seller for a few months now. I wanted to go back though and see where the black swan premise came from before I dive into that book.

As indicated in the title, Taleb's interest, and his profession, is all about how we get tricked by ignoring outlying data and put way too much emphasis on forecasting. His focus is on Wall Street, but the methodology can be applied to everyday life as well. Think about weather forecasting, or even the traffic on your drive into the office: we expect one thing, but sometimes get another for no apparent reason.

As humans, we like to know why things happen and sometimes apply the wrong cause to an effect. Even when we are 99% sure about cause and effects, if we try to use this data set, we will encounter errors when we forecast. Also, we might just be looking at a period of data that has yet to run a course, thus skewing our expectations of the final result. These are just a few of the reasons Taleb gives for being so skeptical of forecasting that we might just as well ditch the whole process anyway. In fact, Taleb seems skeptical about practically everything that the human being does when thinking about their individual futures!

I prefer to think about the flip side of this: What we don't know just might be a pleasant surprise! Imagine if we woke up every morning expecting the day to be just like the day before, and the day before that…like Groundhog's Day. But, we don't. No matter how we try to keep a routine, something unexpected happens. Even when we know the odds are good for an event to happen, we don't know quite when it will. For example, we may have prior knowledge that we will receive a tax refund; the odds are in our favor then for it to happen anytime. Will it be today? Likewise, the more we drive ourselves around, the better the chances become to have an accident: will that happen today as well? Will we spend our refund check on a new fender or on a new TV?

I realize that I am over-simplifying this; most of the time, we contribute to making our own luck and we have a general idea about the final result. We try to drive safely and to avoid accidents; we don't plan for them and leave for work an hour early every morning! We don't spend all our money and hope that the tax refund will cover it. In other words: planning for randomness may be more foolish than trying to skirt around it!

I read Fooled by Randomness for pleasure, not for a lesson or an explanation of anything. It's not a self-help book or any kind of investment guide. It is, however, an interesting book about decision-making, whether in business or life.

 

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