Monday, November 24, 2008

Fooled by Randomness by Nassim Nicholas Taleb

Taleb examines the underappreciated role that randomness plays in our lives, with an emphasis on traders and markets. I enjoyed this book because it was intelligent, diverse, quirky, accessible and informative. The first part discusses ideas of probability and randomness and how they affect what we (can) know. The second part provides information on the various cognitive biases that humans have. I found the latter less useful because of prior exposure, but because these biases are so pernicious a review is always welcome.
I was pleased that Taleb explored an idea I’ve been thinking about the last little while – how much luck might have influenced the life of someone who is successful. An analogy is if you had a national coin flipping guessing tournament surely someone would be the winner by guessing correctly 25 times in a row. But the particular winner does not have luck as a personality trait; it is just that luck happened to them. Consequently, this could be true in other areas of life, such as business and markets. Sure enough, if there is a large pool of traders, one can figure out how many would be successful due to luck. This is called survivorship bias. I recommend this excellent overview of randomness, its influences and human cognitive biases.


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