In this review, I look at the book "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets" by the iconoclast Nassim Taleb. I first read the book about 20 years ago in college when I was studying markets, risk and probability. I recently re-read it, as I discovered the second edition had been updated by the author.
"Fooled by Randomness" is a thought-provoking book that delves into the concept of randomness and how it can influence our lives. First published in 2001 and updated in 2007, the book has remained as relevant today as it was when it was first released since it provides valuable insights into the role of chance in our world.
Taleb has written several books on probability, uncertainty and decision-making, including the popular "Dynamic Hedging: Managing Vanilla and Exotic Options" and the more famous "The Black Swan." "Fooled by Randomness" is one of Taleb’s most famous works, and for a good reason. The book challenges conventional wisdom and provides a fresh perspective on how we understand success, failure and luck.
One of the key ideas of the book is that success is often attributed to skill when it could have been the result of pure chance. Taleb argues that we are often "fooled by randomness" because we tend to focus on outcomes rather than the process that led to those outcomes. For example, a successful investor may believe they have superior knowledge and skill when, in fact, their success may be due to chance. Similarly, a failed investor may be dismissed as incompetent, when their failure may have been due to factors outside of their control.
Taleb also introduces the concept of the "black swan," which refers to an unexpected event with a significant impact. Black swan events are often overlooked because they fall outside of the realm of what we consider to be normal. The book argues that black swans are more common than we think and can have a profound effect on our lives.
The author provides several examples of black swans, including the 9/11 attacks, the rise of the internet and the financial crisis of 2008. These events were largely unforeseeable, yet they had a profound impact on the world. As a result, Taleb argues that we should be more prepared for black swans and their potential consequences.
Another key idea is the concept of survivorship bias, which refers to the tendency to focus on successful people or things while ignoring those that failed. For example, we may study successful businesses to understand what makes them successful, but we fail to account for the many failed businesses that did the same things but did not succeed. Taleb argues that survivorship bias can lead us to make flawed assumptions about what it takes to be successful.
The author also discusses the role of luck in our lives, arguing that it plays a much bigger role than we realize and that we should be humbler in acknowledging its impact. Taleb also notes that we should be more accepting of our own limitations and that of our knowledge.
Taleb sometimes comes across as arrogant or dismissive of others' ideas. He is highly critical of the financial industry and its practitioners, which may annoy some readers. However, this is also part of what makes the book so compelling. The author is not afraid to challenge conventional wisdom, and his critiques of the financial industry are particularly relevant given the events of the past two decades.
Overall, "Fooled by Randomness" is a fascinating book that challenges our assumptions. Taleb's writing is engaging and accessible, and his ideas are thought-provoking. Some readers may find his ideas controversial or even unsettling, but the book is an important reminder that randomness and chance play a significant role in our lives (and investments).
GuruFocus readers who value independent thinking and a contrarian approach to investing will likely enjoy the book. Taleb's ideas and insights on probability, uncertainty and the role of luck influence even some of the best investors.
For example, Howard Marks (Trades, Portfolio), the billionaire investor and co-founder of Oaktree Capital Management, praised "Fooled by Randomness" in his own book, "The Most Important Thing: Uncommon Sense for the Thoughtful Investor." Marks cites Taleb's work as an important influence on his own investment philosophy. Further, in a webcast with Investec Wealth & Investment, he said:
"I like to read books that in are indicative of investor psychology and so 'Fooled by Randomness' talks about how important randomness is in the financial markets and how randomness is confused with things happening for a reason."
In conclusion, "Fooled by Randomness" is an important and engaging book that challenges our preconceived notions. The book is particularly relevant today, given the increasing focus on data-driven decision-making and the prevalence of survivorship bias in our culture. Taleb's ideas may be controversial, but they challenge readers to re-evaluate their own beliefs and assumptions. The ideas presented in the book will stay with you long after you have finished reading it. I highly recommend it for anyone interested in understanding the role of chance and uncertainty in our lives and in investing.
