I picked up Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, by Nassim Nicholas Taleb, on the recommendation of a mathematician (Vipul Naik, my son). I was expecting a heavy treatise on economics and statistics. It was however a very engrossing book written in a lucid and conversational style, with historical events and everyday situations used freely to provide insights.
Here is the book summary/ key insights (that I picked up from the book):
1) Human beings are wired in a way that they are unable to intuitively handle randomness and chance.
2) We are adept at explaining everything through a cause-effect; because we just can’t handle uncertainty. And a statistical correlation does not necessarily mean one causes the other.
3) Ignoring rare events (outliers) in building prediction models is fooling ourselves – rare events are a part of the process and environment, and their impact is rarely understood or considered by people.
4) We try to explain extraordinary successes as the result of brilliant strategy or business model or formula or leadership skills or intelligence; while it is often just dumb luck. This is more so of domains like stock trading, marketing, and running a business. We try to learn from and emulate the “winners”, without much success ourselves (by trying to implement the so-called strategies of successful people). Basically, according to the book, many of the winners are just lucky fools :-).
5) Nice symmetrical probability distributions cannot be expected of any human endeavor (symmetrical distributions may be used to understand controlled situations like gambling – toss of a coin, or rolling of a dice). When we simplify probability distributions and approximate them to neat curves, the results that we get are unreliable.
6) Though Monte Carlo simulations are looked down upon (“that is cheating, it is not statistics!”) by purists, it is still be the best way to model complex, real situations and understand the potential randomness of the outcomes, and can be used for informed decision making.
7) Past performance cannot be blindly used to predict future performance. Hence, we should not overestimate the accuracy of our beliefs just because we have been successful in the past, we should reexamine our beliefs based on logic, and always have a backup plan.
One of issues with the book is that it lacks structure and tends to jump from topic to topic. The tone is also snobbish and contemptuous at places, and it may make some people (who are secretly think that their success may be attributable to luck :-)) annoyed or even angry.
The author Nassim Nicholas Taleb is Distinguished Professor of Risk Engineering at New York University’s Polytechnic Institute. He has been a mathematical trader, essayist, philosopher, and researcher. He specializes in understanding uncertainty, luck, probability, knowledge, and decision making. Taleb has been described as a dissident thinker, maverick, irreverent, iconoclastic, and unconventional.
Another book by Taleb in a similar vein is The Black Swan – this is an earlier book, and again very interesting to read. Taleb has also authored AntiFragile, The Bed of Procrustes and Dynamic Hedging.
I recommend this book very highly for anyone involved in high maturity implementation of various process models and frameworks.
For people who are looking for quick-fix templates and control chart macros, this book is not for you (as if high maturity practices can be implemented using quick-fix solutions :-).
Here are some details of the book, in case you want to get your hands on it:
Title: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Author: Nassim Nicholas Taleb
Publishing Date: First Version Around 2001
Publisher: Random House/ Penguin
Available as eBook in Amazon Kindle.
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Also, please add other insights that you may have got from the book, using the “comments” feature available at the top of this article/ post.