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Fooled by Randomness : Nassim Nicholas Taleb

Although I am quite late in my arrival to the party, Nassim Nicholas Taleb of Black Swan notoriety is my new hero. Doing things in typical backward fashion, I read his first book first and have yet to get around to his (more) famous book.

In Fooled by Randomness Taleb’s ideas act as a kind of conceptual earthquake for the amateur dabbler in markets. They are by no means new but they are indeed profound. My academic background is scientific although my day-to-day pursuits involve writing for investment managers, whose activities I am supposed to understand in theory if not in practice so that I can communicate them to shareholders. Taleb lights a match under all the paper that flows from the financial world that purports to predict what will happen next.

The book’s strength is half intellectual and half stylistic. Its position that economics is a pseudoscience means that the only equations in the book are the ones that are mocked. Its narrative force comes from his rich and often classical background of reading and thinking during strolls and bike rides and gym sessions.

The thrust of the book boils down to two overriding criticisms. The first is the desire of professionals in finance and economics to cloak themselves in scientific disguises. Taleb’s indictment of long-term investment managers’ records of success as consisting of merely, or at least mostly, luck, sounds suspicious at first glance. When we compare his hypothetical managers with the real ones, we see that active managers underperform indices about 75% of the time in a 5-year frame.

In his view active management by its intrinsic nature cannot be a scientific, reproducible process. What then? As a trader, Taleb is himself an active manager — he is a market timer and a opportunity seeker. In his defiance against the faulty application of scientific (or pseudoscientific) dressing to the trading process, and in the evidence of how he trades his own accounts, Taleb seems to be making a wholly different case for the mind of the trader: that he is at base an artist, not a scientist.

Intuition and history (less of the financial kind than the human kind) inform his process, which is based on a profound skepticism of nearly all claims to certainty.

This leads to the easily confirmed realization that the entirety of CNBC, which blasts relentlessly from every trading floor and in every manager’s reception lobby, is a parade of blowhards with little or, worse, only damaging advice to offer in the form of their televised platitudes and prognostications.

Taleb’s criticism of the one-dimensionality of finance’s pseudoscientific boosterism is fair and accurate. CNBC — that hell of mindlessly animated charts and meaningless crawls and coiffured cheerleaders — has been impossible to watch for some time, especially in the wake of the turmoil of 2008 and 2009. It has become its own nonstop fountain of revisionist history, in that lone oddball predictors of the financial crisis who were guest commentators on CNBC were routinely mocked by hosts and other guests before the crisis unfolded, while afterward everyone claims (lying) to have seen it coming. The entire channel is itself a shocking display of hindsight bias, and therefore useless as news, education or even entertainment. (What good is a fortune teller who is often, but never perfectly, wrong?)

The second and more understated criticism provided by the book is of the goal of all this supposed wealth creation. Taleb is not poor but he reserves scorn for those whom wealth has become the single social litmus test, and also for those who have wealth without any sense of how to use it. In the first camp might be the hedge fund manager with the mansion and the garage brimming with the socially correct imported cars, but no books on the shelves. In the second camp he includes the Millionaires Next Door and the Warren Buffetts, the unostentatious monks who live in nondescript suburbs and live like Shakers.

Surely one of the goals of wealth is to live a better life, and just what that means remains pretty much unexamined in the majority of the world occupied by lucky traders. Taleb’s take is more epicurean than philanthropic, so one could argue he is as selfish as any mindless nouveau riche Wall Street captain. But I would rather argue that his aestheticism is a breath of fresh air in the roaring wind tunnel of capitalism.

I read the Second Edition, 2004.


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