Fooled by Randomness by Nassim Taleb

This is the last book I read in 2004. This book was long ago recommended to me by Nicolas Boullet and the initial inspiration for me to read it came from an article I read a few years back on Taleb in the New Yorker by Malcolm Gladwell entitled Blowing Up: How Nassim Taleb turned the inevitability of disaster into an investment strategy.

This a book worth reading. The subject is randomness — and it is a book with a lot of statistics but at the same time is somewhat new agey (though I am sure the author had little intention to do that). Taleb goes over some of the classic randomness problems and discusses them with real-world conclusions. He also goes on rants on some of the people (journalists, other traders, even scientists) who do not see randomness.

Taleb discusses the black swan problem. Even if you are a swan connoisseur and you’ve seen 4000 swans in your life and all of them are white, you still cannot be certain that all swans are white. However, you only need to see one black swan to know that not all swans are white. Therefore, information is not all equal.

Taleb believes (and I agree) that much of success is due to luck … a role of the dice. If you have a 50% of randomly beating the market each year (which seems reasonable) then you have a 3.125% chance of beating the market five years in a row (0.5 to the power of 5). That means if 10,000 traders were just rolling dice when picking stocks in 1999 (and most of them are), then we should expect 313 of them to beat the market for the last five years. Of course, if you invested in any of those 313, you only have a 50% chance of beating the market next year.

Summation: Fooled by Randomness is a great book and a fast read. If you can get by the sometimes over-reaching stories of the author, you will learn a lot.