Library:Fooled by Randomness
| Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets | |
|---|---|
| Author | Nassim Nicholas Taleb |
| First published | 2001 |
| ISBN | 978-1-4000-6793-0 unverified |
| Role | Analysis |
| Domains | Business, Finance & Scams Culture, Religion & Society |
| Tactics | Statistical & Evidentiary Distortion |
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets is a 2001 book by Nassim Nicholas Taleb.
Summary
Nassim Nicholas Taleb, a former options trader who became a writer and scholar of risk, argues in this book that people systematically underestimate the role of luck in success, especially in financial markets. Traders, investors and executives who have done well are often credited with skill when their results may be due largely to chance. The book, first published in 2001 and revised in later editions, was followed by Taleb's The Black Swan (2007), which developed related ideas about rare, high-impact events.
Luck mistaken for skill
Taleb argues that in fields with a large element of randomness, such as trading, a large number of participants will produce some spectacular winners by chance alone. Observers then attribute those winners' success to talent and seek to learn from them. He illustrates the point with thought experiments, including one about a game of Russian roulette: a player who wins a large sum by surviving a round is not wise, merely lucky, and the risk he took was invisible in the outcome.
Survivorship bias
A central theme is survivorship bias: we see the successful investors and companies, but not the many who took similar risks and failed and disappeared from view. Mutual fund performance, business books about successful companies and stories of self-made millionaires are all distorted by focusing on survivors.
Hidden risks
Taleb criticizes strategies that produce steady small gains while exposing investors to rare but catastrophic losses, which can look like genius for years until they blow up. He is skeptical of financial models that assume extreme events are vanishingly rare, and of experts who explain the past with confident stories that do not help predict the future.
Reception
The book was influential among investors and in popular culture. Some critics have found Taleb's style combative and his treatment of opponents unfair, but his central points about luck and survivorship are widely accepted.
Relevance to Bullshitopedia
Fooled by Randomness gives readers tools to resist a common form of financial and business bullshit: the claim that past success proves skill. It is especially useful for evaluating investment track records, business advice and stories of genius.
Related entries
- Bernie Madoff's steady returns
- When Genius Failed (Lowenstein)
- A Random Walk Down Wall Street (Malkiel)
- How to Lie with Statistics (Huff)