Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets [Kindle Edition]

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!

This book is admirable in its courage to address the subject of uncertainty and coincidence and its willingness to stand up to it. It is one of a kind in that it can help you cultivate and indulge in an attitude of critical thinking, in a strive for maturity. But I would caution you to contemplate that it likes a certain attitude of black and white, of simple pro and contra. Also, it uses cliché, that is long standing relatively simple ideas of popular knowledge. I am aware, that many well educated people do that too, but that is not the point here. The perhaps too weighty power of the books standpoint in my opinion comes from the fact that it jumps to and fro from generalities to special cases in a very free, actually even in a selfindulgent way. To my mind, it is a bit too obliquious to the fact that the people it critisizes are often very intelligent, experts in their field with a history of many years weighing different ideas against each other and prioritising them. Of course, such people can be selfindulgent too, of course they can at times take advantage of others, that are less knowledgable and less versatile in their thinking, by presenting false ideas of certainties and securities. But they do not always do it, or as a general rule. They do not routinely lose their way. My point of criticism is, that this book is a bit too arrogant in the absoluteness of its comments. My advice to you then would be to read it, to teach yourself to think critically, to learn to recognise certain patterns while staying acutely aware of the fact, that nobody knows everything, that the possibility of mistakes is always there and that luck does play a certain role in life, according to the laws of statistics and probability, that therefore one must be aware, perhaps, that complete certainty is rarely a healthy option and reeks of blunder. However, my advise would also be, to not take this book too seriously, for the reasons given above. Read other books too, eg "How Markets Fail", for a more detailed history of economics. Onesidedness lurks everywhere, even in being conscious of uncertainties. One needs to remind oneself of that from time to time, to retain a healthy balance between determinism and the idea of complete chaos, to be your own best friend. Comment such as this must needs be imperfect, respecting uncertainties, but I do have a point that is worth contemplation, I think. And to the author: Please note that these comments are not anonymous. And another point still: We like control, all of us, embracing uncertainty too emphatically will strengthen ideas of controllism, simply by the fact that it strays to one side of life in too extreme a way. A combination of care and courage may be the best option to prevent controllism from evolving with too much freedom, or doubt with too much power (remember Shakespeare "Our doubts are traitors and make us lose the good we oft might win by failing to attempt"). Be critical, not overly critical.

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.