Book Review: Fooled by Randomness

Read "Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life" by Nassim Nicholas Taleb. This is the predecessor to his second book "The Black Swan" I read earlier. I should say this one left me unsatisfied. 

Taleb's main observation is that even the so called experts in various fields, especially in finance, often mistake random occurrences for deterministic cause & effect events. He argues that we as human beings are hardwired to attribute results of our actions to our knowledge and expertise, while in reality they are just random coincidences. It is an important observation. He has divided the book into three parts. In the first part, he looks at the impact of so called rare events (i.e. black swans) and argues that we should analyze all the supposedly successful strategies in the context of entire sample space/human history that will prove practically all strategies to be meaningless. In the second part, he continues elaborating the same idea talking about survivor bias where human beings end up learning only from successes and ignore the failures, thus losing perspective. In the very short part 3, he states that he is also vulnerable to such flaws and is constantly trying to outmaneuver those instincts. 

Some of the examples he has provided are nice easy to understand ones. For example, let us say there were 10,000 investment managers in Wall Street and each year just by luck, half of them make money and the other half lose money and drop out of the business. If this trend continues for 10 years, there will still be about 9 managers who have made money each year in the last 10 years making them look very successful. But since they made money only by chance, their dumb investments exposing them to dangerous black swan events that occur once in a blue moon could wipe them out in one stroke when they happen. But chapter after chapter he repeats this idea in various forms, stories, and anecdotes. He doesn't seem to move beyond this point to explain what else one should do and what are the methods to avoid this pitfall consistently. The basic idea can be explained well in a long article, without the need for a 200+ page long book. While I often wonder if the contents of a book I read could have been succinctly presented in an article lasting just few pages, this time around I indeed came across Malcolm Gladwell's Newyorker article posted  at  http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm that summarizes this well well..! Gladwell's own books suffer from extra fluff as well but his articles are usually well written and convey the central ideas nicely, including this one. The fact that Taleb's investment strategy is to buy options that will bleed him a little money 99% of the days but will make him millions when he hits an unexpected scenario (that usually wipes everyone else out) is better presented in Gladwell's article than in this entire book..! Looks like the hedge fund he tried to run using this idea has been wound up few years back. See http://en.wikipedia.org/wiki/Empirica_Capital 

As I was getting bored, I was wondering if I should give up the book half way through. But kept reading it over a long time thinking there may be more interesting ideas presented further along. But didn't find anything more till the end. In fact after finishing the book looked for a word that describes my inability to let go things incomplete, without pushing myself to finish every task I take up (like reading this book). Quick Google search didn't find me any..! While in general this could be a virtue, I think if I had quit this book early, I might have read two other good books by the time it took me to finish this one. :-)