Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets is a kaleidoscopic assessment of the human mind which is observed in the environment of Wall street and other trading markets across the world. What is observed by the reader’s point of view, changes with time, if it is viewed by turning the lens. However, outlook of the reader will also decide a number of issues that are raised in this book. Looking from one direction, the book takes notice of the various unlimited borders that have been created by mass media and its noise.
Mr. Nassim Taleb tries to stress upon the fact that the common man lacks sufficient knowledge about the simple issues of probability and statistics. For example, take a steam engine. If one sees a steam engine for the first time, he may not know what is the functioning of the engine, but after a while of careful examination, one can surely get a rough idea of its working and can also predict the behavior pattern. That is one can predict the “future behavior pattern” after closely analyzing a shorter period of behavior.
The example given here is compared to the life in general. There is a lot of un-expectancy in the lives of people and similarly in the stock markets. These trading markets possess a huge factor of randomness that are based upon the complex stochastic issues, and not to forget regular bouncy and spiteful surprises. The behavioral pattern of the stock markets during short time spans is not so significant and is appropriately termed as “noise” by the author. The method of extrapolating values here in this regard seems to be impossible.
Yet people more often do that. They try to sketch patterns where they “do no “ exist and misinterpret the function of unpredictability, search for rationalization for the occasion of probability and strongly believe that they best know about the future. And this is what is stressed in this book. The author of the book, Nassim Nicholas Taleb is a stock market player and is a expert doubter. He proclaims that mathematics is still adolescent and cannot completely explain the science of probability in the stock market.
The author however is clever to understand to give adequate weight-age to the possibility of random occurrences, and their irrelevance at some occasions. He evidently observes that his consideration towards the importance of randomness has more value than the mathematical calculations. “Mathematics is principally a tool to meditate, rather than to compute”. He has been a witness to countless agents and traders who have been hit hardly, “blown up” in the charming phenomenon of the trade. Very often he has observed great flourishing careers brought to an end with some “unanticipated” market crumbling.
On such occasions, people say, “I had never forecasted that”, miserably shaking their heads as they leave the market place. Yes, this is what the author wants to convey with his book – these people have been “fooled by randomness” of the market behavior. There are many ways of getting fooled by the behavior of randomness. The most common and detrimental is to fail to predict the probability of rare occurrences. The author expresses his thought that nothing else is more certain than the occurrence of the unexpected event that is bound to occur sooner or later in future.
People often sleep calmly between safe periods, and forget that the unexpected is about to come any time. Another is to see significance in some random pattern. Taleb explains with crystal clarity why the more often you look at some fluctuating quantity (the value of your share portfolio, for example), the less meaning your observations have. Yet he sees traders who watch prices move up and down in real time on screen – the changes are so small as to be completely random – and think they are learning something.
Another issue which is more subtle yet more dangerous, is the “survivorship bias”: in a haphazard population, some matters will be more observable than others. Suppose for example, a trader who works on strategies that do no better than random behavior of the market, he will face fifty – fifty chances of success and failure every year. Of course, it has never come to his mind, that his success is also random, however his innocent mind believes that his success was due to his superior strategies and not market randomness!
The author’s view on randomness and his examples are not limited only to trade market. In reality, randomness and behavioral fluctuations occur in every field. The effect of these “random nesses” can also be overblown by a optimistic response loop, which he calls as “bipolarity”. For example, a job seeker does accidently well in an interview (although he is not capable, yet it is randomness) and as a result gets better results and more popularity than others who are much more skilled.
Actually, human mind is structured to view patterns, to reason the cause of occurrences, and to firmly believe in those reasons and rationales. The main aspect of Taleb’s book is that the author is very well aware of this behavioral science of the human mind. He knows nothing he says can dismiss the false impression fashioned by unpredictability or randomness and that he is as vulnerable to the unpredictability or randomness as any other common man.
Further he stresses that his only benefit is that he is at least conscious of the weak spot, and often tries to play in order to prevent himself from these situations. For example, he very often tries to ignore any form of “hot news” or any scrap information. The book’s short but excellent final section deals with this Zen-like problem of trying to break oneself out of a mould of thinking that cannot be broken, even though one recognizes its shortcomings.
The main characteristic of the book – “Fooled by Randomness” is that the author is very close observing a true picture of the markets with the eye of a successful trader as well as being a insider guide to non belief. “True traders, I believe, dress sloppily, are often ugly and exhibit the intellectual curiosity of someone who would be more interested in the information-revealing contents of the garbage can than the Cezanne painting on the wall. ” (Taleb). The author does not avoid any situation of the market in his book. His examples are crunchy and repeatedly atrocious.
His aggression on an assortment of features of the monetary firmament, are hurtful and luminously argued. Many people who read his book can find him exasperating and annoying. The book is a small review on the how to trade in complex situations and to closely understand the random behavior of trade markets. However, there are instances where the book is leaving some unanswered queries in the mind of the reader. The author demonstrates a contemptuous and scornful disapproval for investment managers who want to make a fortune for themselves by selling their track records.
Well, later in the book, Taleb mentions that he also wants to be hedge fund manager! Can he do that without showing off his own track record with the customers? Will he take privilege of the random events that occurred to him and gave him a successful track record? Since Mr. Taleb’s elementary statement on the subject of the character of the Market theory is mistaken on some occasions, his evaluation of the neighboring reflections leads to a wrongful evaluation of human behavior and market features.
At times, the reader might feel that the author is oscillating between an illogical estimation of the practical world of money market and his own emotional responses to the every day events of life. At the same time, Taleb also believes his unfinished examination and erroneously pays no attention to the quantifiable collision of various factors within the existing financial economics. This is why by the end of his book Mr. Taleb ends up not just tricked by the phenomenon randomness but to a certain extent maltreated by it.
REFERENCE 1. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, by Nassim Nicholas Taleb