Book Club: "Fooled by Randomness" by Nassim Nicholas Taleb

I read Taleb’s book ‘Antifragile’ about a month ago. It’s a much more encompassing read and was intimidatingly complex to summarize in a blog post. So I put it off and bought this book instead, which appeared to focus much more on randomness and probability.

Fooled by Randomness was a great blend of mathematical principal, stoicism, and my own meditations on the randomness of life and financial markets. As a developing trader, the randomness of markets fascinates me. Taleb offers quite a few thoughts on the profitability of traders in this book, and some truly profound insights as to how skewed our view of success is in most all areas of business and life.

Now as for trading specifically, Taleb encourages the reader to wake up and accept the inevitability of the ‘unexpected’ catastrophic event that will shake markets and wipe out previous incremental gains. Some may read that as him saying “Don’t bother investing, you’ll just end up losing your gains in one fell swoop of randomness”, and I doubt that Taleb would argue against you there. However, why not profit from such a move? Taleb does not provide actionable steps to do this per se and I don’t blame him. THe more people that don’t bet on extreme negative market events, the more the people that DO make when they actually happen.

But for the layman, he basically means buy deep out of the money options continuously. Take the small losses as the majority of those options will expire worthless and you’ll lose the premium. The 10% that are winners though, will make significantly more than the initial small losses combined. That’s how Taleb trades, and part me thinks that he wants the reader to come to that conclusion himself while digesting his discussion of randomness.

Taleb also goes to great lengths to expose faults in our human perceptions of randomness. Truly delicious reading for the trader/card player in me and I really enjoyed meditating on the questions he posed. His point is that we are simply not wired to process probability in a logical way all the time. This little notion essentially defeats most economic theories as they tend to operate under the assumption that man is a rational being and always acts in such a way.

Don’t take this book as an instruction manual or a gospel of how to live your life. That is never the intention of good authors. Taleb wants you to think, and he wants to express the massive amounts of knowledge he has in this particular area. Many people search for books telling them how to do things, we are certainly the self-help generation. Instead I encourage to read his book and stifle any personal reactions you may have. This subject will certainly broaden your mind and perspective on a multitude of subjects if you allow it to. For me it helped shaped my ever changing approach to the financial markets, and to negative outcomes in my own life even. Highly recommend.

Here’s the amazon link if you are so inclined. Happy reading!

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto)