Description

Every couple of years, I come across a book that really opens my eyes by either introducing me to new ideas or helps me synthesize known but unintegrated ideas into larger/new paradigms (yes, I agree that is a much abused/overused word but it also happens to be the right word here, imho).

Recently, I finished Nassim Nicholas Taleb's 2nd edition of Fooled by Randomness: the Role of Chance in the Markets and Life. Fooled was one of these eye-opening books that proved to be a gateway to a new way of thinking. Taleb is a quant-driven trader who uses his understanding of the foibles inherent in being human to make money.

Fooled is Taleb's meditation on evolutionary biology, behavioral finance, philosophy, poetry, statistics, media saturation, and humanity's "epistemic arrogance" boiled down into a very high level overview of Taleb's trading strategy. It is a fascinating, often startling, potentially enraging, but sometimes meandering read.

The Big Ideas

* People don't learn that they don't learn. In other words, people will insist on using the same mental models/rules or, in behavioral finance parlance, heuristics, regardless of solid evidence to the contrary. Compounding this unwillingness to remap heuristics, Taleb observes most people are very chance-blind, meaning that they do not accurately assess probabilities. Understanding how people tend to skew their estimates of the odds can be, as Taleb points out, a very powerful tool. Taleb goes on to speculate about the evolutionary biological roots of such chance-blindness and other seemingly default heuristics w/which most of operate.

* That rare events do happen. When stated this way, most people say, "well, duh!�" But the reality is most people are not prepared for what Taleb calls Black Swans, events that seem so unlikely, based on past experience, as to have never really been considered a real possibility.* But consider: how many of your personal ideas, relationships, businesses/investments, communities, or health/fitness practices make the implicit assumption that conditions will continue to evolve as a more or less linear extrapolation of today's conditions? How well suited are your strategies to the idea of a sudden and unexpected shift? In entrepreneurial circles, a Black Swan might be known as a "disruptive technology". In politics, 9/11 could rightly be considered a Black Swan that caught most people in and out of government by surprise.

While neither of these ideas seem so startling at first glance, Taleb forces the reader to take a deeper look at the manifestations, implications, and ramifications of our aforementioned "epistemic arrogance" in light of our overwhelming tendency to over-optimize for inherently ephemeral conditions. For those of you who want your cage rattled a bit, I highly recommend Fooled by Randomness- I promise it will open your eyes.

* The term "Black Swan" comes from the historical anecdote that Europeans had considered it axiomatic that all swan were white since they had never seen one any other color. Then they got to Australia and discovered that there were, in fact, black swans there.

Updated Oct 28, 2006