I was intrigued by Nassim Nicholas Taleb’s “The Black Swan: The Impact of the Highly Improbable” and “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” through La Papillon’s book review on his blog and decided to read both books starting with “The Black Swan” first. You can read my earlier review of Taleb’s current best-seller here.

After reading “The Black Swan,” I realised that “Fooled by Randomness” had to be next and here are some of my thoughts after reading his earlier book. Word of warning before you read his book, I think you either love or hate his writing style. It’s hard to be neutral to his very personal voice that is speaking to you through his books.

What is it About?

It’s hard to classify the book because Taleb doesn’t write it like a academic paper (thank goodness!). He himself describes his style of writing “idiosyncratic” because his writing style is informal and weaves narrative of anecdotal stories but supported by concrete examples and logical arguments of his views on probability and how people use and misuse it in social sciences and in the financial markets.

He doesn’t hide his disdain for journalists, financial engineering experts and those who mis-use science and statistics in the social sciences. One of the key points he makes is that in life and in the financial markets, many of the occurrences are due more to randomness than the specific actions of the trader or fund manager.

To compound the issue, we humans are not particularly well suited to understand statistics and probability well in real life applications. We are subject to many biases such as attributing causality between occurrences where there is none. We tend to think we can predict the future (e.g. stock market behaviour) by looking back at history but fail to realise that our historical data could be lacking in size.

We live in a random world and we are human beings that make decisions (more than we’d like to think) using emotions and feelings rather than logic and rationality. The combination of these two factors have resulted in many traders “blowing up” in Taleb’s terms which means to lose unexpectedly large sums of money in trading.

Huh? So What Can I Do About It?

“Fooled by Randomness” can be rather “cheem” (hokkien for deep or intellectually challenging). The key idea that I took away is that the world is more random than we think. The older (but not necessarily wiser) I get, the more I tend to agree that it is more random than we think.

Because of that randomness, while basic hardwork and effort will get you somewhere middle class (a video of Taleb speaking at the airport on this can be found in youtube), luck is the key to becoming a millionaire/billionaire.

I learnt from his book to be more sceptical of journalists and financial media. To be skeptical during Channelnewsasia segment where an analyst gives his 2-3 minute sound bite on why the STI went up or down and where he/she sees the STI in xx months’ or year’s time.

The current financial meltdown where banks CEOs who were making millions in bonuses on Wall Street also shows the flaw in a system where such people are rewarded for taking crazy bets on the market that has since “blown up” based partly on their greed and quest for profitability. Bank CEOs are not the only category of humans who like to attribute success to their efforts but failures to the randomness of markets and of the world.

Randomness is Not Always Bad

Taleb doesn’t prescribe that you should live your life being a fully rational being, i.e. a robot. To be human is to live life coloured with the lens of emotions. The important thing we need to take note is not to allow the randomness to literally kill us (i.e. wear a seatbelt or stop smoking) or to financially ruin us (i.e. buy health insurance and do not put ALL your investment monies in one basket).

An interesting aspect of reading this book is that I am more inclined to want to live the life similar to what Taleb is doing. He spends his time living and enjoying life partly because his trading strategies of benefitting from the positive black swans (unlikely events with big impacts and are retrospectively predictable). It takes a certain degree of financial independence to pursue his intellectual and other pursuits.

Both “The Black Swan” and “Fooled by Randomness” has reinforced in me the desire to read more about the world and to cut down further watching television and especially financial related news programmes as these are more noise than real information. It also prods me to be more skeptical about the statistics and information bandied in main stream media. (Our local newspapers are particularly notorious for portraying statistics in a light that helps “nation building”… but I digress.)

Share with Panzer your thoughts if you’ve read the book too!

Be well and prosper.