Fooled by Randomness: The Hidden Role of Change

By: Nassim Taleb

In this book, Taleb analyzes the role of probability in the world through the lens of human psychology. While the topics can be applied to financial markets, the book takes a broader, qualitative approach to probabilistic fields of study. Only 3 of the 14 chapters use a financial setting. However, understanding different symptoms and patterns of human psychology is important for all financial market participants

Events Are More Random, Not Completely Random

In the current version of the book, Taleb addresses various areas of misinterpretation readers had with the first version of the book. Notably, Taleb clarifies that his central argument is that the events that take place in our lives are more random than we believe, but they are not completely random.

Taleb also discusses causality, and how many actions are necessary to achieve success but do not cause success. One example he uses is that it is necessary to be hygienic (use deodorant, wear a clean shirt, etc.) in order to have a successful career, but the hygiene alone is not what causes the success. An easy way to describe this is: chance favors preparedness, but it is not caused by preparedness.

Timing & Randomness

Another important concept Taleb describes in this book is that much of randomness is concerned with timing. In terms of financial markets and trading, this concept is paramount for understanding price action of assets. For example, a trading strategy that is optimizing your portfolio returns for a given time period does not make it the best trading strategy on an absolute basis. This concept is in line with paradigm shifts in the markets described by many successful traders, such as George Soros.

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Eric Bruin

Eric Bruin

Founder. Kelley School of Business '17. Write about stocks and business news. Contact for business inquiries or to write articles for The Stock Trader Blog.

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