Fooled by Randomness

I concluded recently Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Nassim Nicholas Taleb, 2005, 368 pages). And I think it is really interesting and thought-provoking.

This book, which I had never heard of before, showed up on my radar during a couple other readings related to financial investments. But actually, the topics in it transcend finance and markets, although Nassim is himself a renowned investor. The discussions in the book are probably relevant to all of us, in any sort of career.

For, although Nassim may sound pretentious and even arrogant at times, what he covers is some basic flaws in the human perception of probabilistic, statistics, and randomness. And I think he does a great job in that.

The relevance of the topic, and here already inspired by the book, is because we humans basically have a brain that was adapted to a different world than that of randomness. And, yet, randomness plays a huge role in what happens in our current world.

For example, the fluctuations in price for any given stock, in any given day, bring most likely no significance. It is typically noise. Larger variations of the price, however, may indicate some significant change in one or more of the intrinsic aspects of the company or market in case.

Likewise, fluctuations in the general market over time typically fool lots of players, who rapidly create and tell each other stories about how price levels are as they are when, in fact, there is no logical explanation behind. Once in a while, a new crash/correction happens, and it makes clear that many of narratives floating around were baseless.

But this is just one aspect of this title. There are many other interesting reflections on math, statistics, biases, psychology and evolution. All around this topic of how easily we get fooled into taking noise for signal. I think all of us can learn something, or a lot, from this book. Highly recommendable.