Fooled By Randomness – Book Review

The human brain’s greatest skill is to find patterns. We can find patterns anywhere. This human bias is not new. Same biases derive from the fact that humans try to attribute anthropological meaning to nature. Likewise the Aztec tribe performed the rainmaking ritual, where a bunch of males dressed up with weird costumes started performing disconnected dances to arouse Tlaloc (The Rain God) to save them from famine.

As a Yiddish proverb says, “To a worm in horseradish, the world is horseradish” (thanks to Malcolm Gladwell for this amazing proverb). Meaning that we are often so blinded by our beliefs that we are not able to see farer than our nose. But how is possible that the most intelligent species on earth, the same species that produced people like Descartes who once said “Cogito ergo sum” (I think, therefore I am) could be so biased?

Biases and Heuristics

Would you be happy to earn $100,000 per year? Of course you would! But would you really? What if I tell you that it all depends? Indeed, let play this thought experiment. Let’s say that you live in a neighborhood where all the people around you make $90,000 per year. Would you still be happy with your $100K? I guess so, right? But what if you lived in a neighborhood where most people make $105K per year? Would you still be happy? Chances are you will not. And this has nothing to do with your lifestyle, since $5,000 per year is not going to change your life. That is what is called “pecking order”. In other words we associate a higher salary with higher social status. Although, this may be irrational (driven by emotions) we can’t help to feel frustrated. This is just one of the many (built-in) biases that our “perfect” human brain carries. Also acknowledging the fact that we are biased may not lead to less frustration and more happiness for what we know. But why do we need to know our biases if reason alone does not make us avoid those mistakes?

A Modern Skeptic

Nassim Nicholas Taleb is what could be defined as a modern skeptic. According to Taleb in “Fooled by Randomness” the world is divided in two main categories of people, Utopian and Tragic that (metaphorically) fight against each other. The Utopian try to “simplify” the world in predictable forms while the Tragic attempt to bring a more complex view of the world. In this strife Taleb sides up with the tragic vision. As a modern skeptic he fights against the “screw-up” that life reserves us. How?

Experts, or lucky fools

Taleb performed for most of his adult life as a “quant” or a person who uses mathematical and statistical models applied to financial markets and risk management. Therefore, Taleb obsession has been to prove that there are no experts when it comes to financial markets. In other words, if we imagine a thousand traders in year one where fifty percent will win while the other half will lose (zero-sum game) at the end of year one we will have five hundred successful traders. Let’s imagine that this game will go on for five years. At year one we had a thousand traders, but interestingly enough at year five we will have sixty-three traders. The minority that made it to the fifth year will be extremely reach, and therefore successful. Everyone from the most blazoned business newspapers and magazine will frame them as “Market Guru”. The traders will believe that they made it thanks to their skills although their success was due to dumb luck (to know more about the role of luck see What I learned losing a Million Dollars). Just when all seem too good to be true screw ups happen. Indeed, keep in mind that if we continue the simulation we were playing not long ago, eventually the sixty-three traders will become two by the end of the tenth year! It means that the other sixty-one were swept out and lost everything. Those are just some of the biases that Taleb makes us aware of in his “Fooled by Randomness”.

How to avoid screw-ups

Taleb’s life quest has been that of avoiding screw-ups or the risk that is too big to bear. For example, if you jump from a cliff with no parachute how many chances do you have to survive? Very few, right? At the same time if you invest in the markets without consciousness of what Taleb will later call “black swans” eventually life will reserve you bad surprises. “Fooled by Randomness” is a research (not a conventional one) in the human biases and fallacies. The style of the book is neither (one hundred percent) a novel, neither (one hundred percent) non-fiction. The language used by Taleb is seldom moderate but the most enjoyable trait is Taleb’s wit.

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thefourweekmbateam

Gennaro Cuofano, International MBA. Author of "The Enlightened Accountant," and "The Art of Mentorship."

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