Fooled by Randomness: The Hidden Role of Chance in the Markets and Life [Englisch] [Gebundene Ausgabe]

Every person who is interested in investing should read this book!

In investing, few can tell the difference between being lucky and smart. Being successful in the short term can come from either source. If it is coming from unrecognized sources of luck, however, the behavior that the investor associates with success can sink the ship. The cautionary tale of Long Term Capital Management is cited in the book as an example of this point. "If you're so rich, why aren't you smart?" is the wonderful reversal here on the old saw.

I see this effect all the time in my consulting practice with helping companies understand how their decisions affect their stock price. A large percentage of people feel that they know all the answers when their stock price is rising. They keep doing the same things when the stocks are falling. Few survive to still have top jobs when the cycle shifts again. Then a new group of self-confident people take over who often don't know any more than those who preceded them. It's just that their track records look better.

Fooled by Randomness will help make you more knowledgeably humble about what you can expect to accomplish with investments. Not only do fewer than one percent outperform the market averages over long time periods, the ones who do are probably often being aided by luck as well. "Get thee to the index funds as soon as possible" is the message that most should take away from this book. Better yet, buy them when multiples are low!

The book's fundamental point is that there is tremendous volatility in any investment. Ignore that volatility to your peril.

At the same time, you should be cautious about how well you understand the volatility. Stocks at their lows can still go to zero. There are all kinds of events that can happen, that have not done so yet. When they do, throw out all the old rules of investing. The terrorist attacks on the United States last week are probably an example of this. So each investment must be made as though you could be totally wrong. This means that you have to manage your risk exposure to events you don't even know how to expect.

I loved his example of the joint probabilities of having a rare disease if you get a positive result on a test for that disease. Even most doctors apparently don't know how to evaluate that one. If even well educated people cannot quantify two known risks occurring simultaneously in their own field, how can investors be expected to make good decisions?

Dr. Taleb has some very good advice for how to handle the psychology of being able to do this. He upholds the Stoic ideal -- "the attempt by man to get even with probability" which encourages "wisdom, upright dealing, and courage." This means not chasing the latest investment fad or fashion, not looking at your investments very often, and being open to both sides of any idea (it could go wrong as well as right -- what are the consequences of both?). I especially liked his idea of watching CNBC with the sound off so that the "experts" seem humorous and you are less likely to hear and follow their advice. Even more poignant was his advice not to live on Park Avenue where living with all of the arrogant, temporarily lucky can make you feel small. Instead, live somewhere that the results of your cautious approach will cause you to be the envy of all.

Dr. Taleb impressed me with his willingness to tell stories on himself about how quickly he can become superstitious when things are going well, take on excess risks, and start looking too short term. After all, we are only human!

The importance of this book can only be appreciated if you go back and think about your biggest investing successes. How much was luck versus skill? A good way to test is to see if the same approach has continued to work for you whenever you use it. Another good test is to see how often it would have backfired in the past.

In my research on good decision making, I find that those who guard the downside first make the most money in the long run. They are able to find ways to get the best of both worlds!

Remember that the two-edged sword can cut in either direction!

Nassim Nicholas Taleb, professor for risk engineering at the NYU and former trader, describes in this book the underestimated influence of chance and rare events on our daily life and the financial markets.

The first part of the book is about people not understanding the rare event and its consequences, how luck fools us and that things achieved by luck are more likely to be taken away by luck.

The second part of the book deals with the biases of randomness, for example the survivorship bias. As we only see the successful traders, we get a false impression of possible profits in the market. This is also true for the stock indices. If stocks loose a lot of their value they disappear and are replaced by superior ones. What you see is a steadily rising stock indices.

The last part of the book is concerned with the human aspect of dealing with uncertainty and our thinking in causalities and the problems occurring because of that.

An interesting point made in the book is about extreme success. There are always some people who, due to luck, get extremely successful in a very short period of time. But if you look at it in a long-term perspective, you will find that most of them loose everything just as fast as they gained it. Because what you get through luck can be easily taken away again. It is more vulnerable to rare events.

He also writes about the significant difference between frequency and magnitude. In his opinion, the frequency of an occurring event is not important. What counts is its magnitude, in other words the extent of an event. For example, the frequency of gains and losses in an investment do not mean anything. You can loose little money frequently and still be a successful trader, as your few profits are huge. If you manage to not only be not vulnerable to rare events but to actually profit from them you are on a good way to become what he calls a 'crisis hunter'.

I can do nothing but give this book five stars and definitely recommend it to everybody who is willing to get a new perspective on looking at and dealing with rare events.

Nicholas Taleb, ein Wall Street Trader beschreibt pointiert die Mechanik der Märkte und die Rolle des Zufalls. Dabei schildert er sehr eindrucksvoll und mit Geschichten, die man nicht so schnell wieder vergißt, wie sehr doch der Markt und damit der Zufall die Geschicke der Märkte und nicht zuletzt auch unser Leben bestimmt.
Einerseits desillusionierend, weil er den Einfluß des Einzlnen auf seine "Börsengeschicke" drastisch in Frage stellt, andererseits könnte man hier ein paar lebenswichtige Reflexe lernen. Tips für Börsengewinne wird man hier nicht finden aber einen fantastischen Spiegel an dem man seine Selbstüberzeugung sehr gut testen kann.
Für alle, die sich mit Märkten oder auch nur dem Lauf der Dinge beschäftigen ein lehrreiches Buch, das sehr vom individuellen Erzählstil des Autors geprägt ist.