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

The Incerto Series:


buy/sell

This is the third book I've read from Professor Taleb's “Incerto” series. I think the entire series does consistently hammer home the same points from different angles. Professor Taleb builds on the lessons of uncertainty taught in “The Black Swan” and the need to protect against it in “Antifragile”, with the perspective of how Black Swans don't swim in a calm, still pond. Rather, that pond is rather loud, dark, and might even have a few turbulent undercurrents coming in from a strid or something. That's why people don't see Black Swans until it's too late, and it's why structuring your life to be antifragile works in more situations than you may predict.

There's three lessons I took away from this book:

  • Events in “higher-order” matters like finance, economics, and business are highly epistemic. Professor Taleb makes much of quants who believe too much in connecting economic theory with market dynamics, and who consequently lost everything and got thrown out of their companies. There is no all-encompassing economic theory – the more complicated a theory is, the more likely it'll be caught by the next Black Swan. For these kinds of fields, you only know what you know, extrapolate at your own risk. Therefore, always put stop losses on your bets, both in trading and in life, in order to de-risk any downsides. Also, keep your theorems simple; Professor Taleb recommends using a “Monte Carlo toy” in order to run probabilistic simulations of any given bet.

  • Non-linearities remain pervasive. On pg. 173, Professor Taleb mentions building a sandcastle higher and higher, until it collapses. Ultimately, this collapse can be rooted to placing one more grain of sand in the wrong place, a linear action that caused a non-linear reaction. Yet the material difference between that grain of sand and any other grain of sand is small, if existent. Any grain of sand, including those placed previously, could have caused the tower to fall. Therefore, it is impossible to know which single grain of sand caused the collapse, and impossible to protect yourself from said grain of sand. You could say something similar for the specific trade that caused the 2008 recession, or the specific animal that caused the current coronavirus pandemic.

  • People choose between a satisficing or maximizing outcomes. On pg. 258, Professor Taleb mentions how randomness prevents optimization (and especially over-optimization), and how that forces people to slow down and take things easy. He mentions how it's impossible to tell when the NYC MTA arrives at a given station, so the best you can do is plan a buffer, do your thing, and not worry about it. This may improve quality of life, since human beings lived in highly stochastic situations for thousands of years, and a satisficing approach better respects our encoded habits and instincts.