Thursday, April 24, 2008

Think Like a Jillian Book Review #3

Fooled by Randomness: The Hidden Role of Chance in Life and the Markets
Nassim Nicholas Taleb

In this book, Taleb puts forth several of his personal theories on randomness and its impact in our lives. Because much of his personal experience is in the world of financial markets, many of his examples and stories come from that world and his advice applies mainly, but not entirely, to investing. He discusses our penchant for finding patterns where there are none (our brains just naturally try to make sense of things) and our inability to accept that any "good luck" that comes our way is just that--we are more likely to attribute our success to our own intelligence or skills.

I must confess, this book is incredibly readable. On the flight from Osaka to San Francisco last week I could hardly put it down. It was interesting and easily comprehensible. Unfortunately, that is where my praise must end. Taleb is undeniably pompous and self-righteous. This tone comes out from the very start. He begins with a prologue explaining to the reader that when he sat down to write the book he promised himself that the ideas involved would come from his own head, not from any book, so he didn't consult any sources. He seems to think this is a benefit to the reader, providing pure originality and freshness, but it seems more likely that he just didn't want to take the time to actually do any research. As a result, the book comes out sounding more like a personal rant than an intelligent treatise. Which is particularly disappointing because the subject matter is so interesting. In addition to the whole no-research thing, he also tells us (brags to us?) that he refused to take his editors' advice to clean up his writing style and organization for improved readability. Again, he claims to be doing a service to the reader by leaving the information in layman's terms and writing in a more relaxed style than most informative non-fiction. In fact, the book's confusing organization (or lack thereof) is a major distraction. Many of his chapters seem to lack a unifying theme.

Taleb uses stories from real life to make his points. Most of the stories are about people he's known in the stock market who were cruising along making money left and right, thinking they had a system, when suddenly they were hit by a "black swan" (Taleb's term for an unlikely but possible event) and they "blew up" (which, apparently, in the financial world means to lose everything all at once). His stories all have a sour and slightly vindictive tone. He is not afraid to admit his distain for rich people, particularly the newly rich. He shows no sympathy for those who were "fooled by randomness" and ended up losing everything, even though some were once his friends. His advice to his readers, then, is take all the probabilities and possibilities into account when making a bet (or investment), including the really, really unlikely. In fact, he makes most of his own money by betting small amounts of money on very unlikely outcomes. Most of the time he loses money, but his occasional wins are very large. On the contrary, most people bet large amounts of money on more likely outcomes. The downside of that, however, is that when a black swan does come along, you lose really big. Taleb's advice is good, but is not necessarily earth-shattering or new and, even though the words are going straight from his head to the page (and not through any reputable sources), the ideas are not necessarily original. If you are a personal friend of Taleb's and are interested in his personal rantings, by all means read this book. If you are interested in randomness and randomness theories for the markets and for life in general, read this book for entertainment purposes only, as it probably won't educate you much.

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