Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

by Nassim Nicholas Taleb

“my principal activity is to tease those who take themselves and the quality of their knowledge too seriously.”

that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.

it does not matter how frequently something succeeds if failure is too costly to bear.

For Nero swears that no other lawful profession in our times could be as devoid of boredom as that of the trader. Furthermore, although he has not yet practiced the profession of high-sea piracy, he is now convinced that even that occupation would present more dull moments than that of the trader.

He can commit hundreds of millions of dollars in a transaction without a blink or a shadow of a second thought, yet agonize between two appetizers on the menu, changing his mind back and forth and wearing out the most patient of waiters.

The name proprietary comes from the fact that they trade the company’s own capital. At the end of the year they receive between 7% and 12% of the profits generated. The proprietary trader has all the benefits of self-employment, and none of the burdens of running the mundane details of his own business. He can work any hours he likes, travel at a whim, and engage in all manner of personal pursuits. It is paradise for an intellectual like Nero who dislikes manual work and values unscheduled meditation. He has been doing that for the past ten years, in the employment of two different trading firms.

“I am shooting for longevity,”

Mild success can be explainable by skills and labor. Wild success is attributable to variance.

Nero cannot blow up. His less oversized abode, with its four thousand books, is his own. No market event can take it away from him. Every one of his losses is limited. His trader’s dignity will never, never be threatened.

Can we judge the success of people by their raw performance and their personal wealth? Sometimes—but not always.

Heroes are heroes because they are heroic in behavior, not because they won or lost.

This is one of the many reasons that journalism may be the greatest plague we face today—as the world becomes more and more complicated and our minds are trained for more and more simplification.

we live in a world where important events are not predictable—

I try to make money infrequently, as infrequently as possible, simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price. In addition to my own empiricism, I think that the counterintuitive aspect of the trade (and the fact that our emotional wiring does not accommodate it) gives me some form of advantage.

most of econometrics could be useless— much of what financial statisticians know would not be worth knowing. For a sum of zeros, even repeated a billion times, remains zero; likewise an accumulation of research and gains in complexity will lead to naught if there is no firm ground beneath it. Studying the European markets of the 1990s will certainly be of great help to a historian; but what kind of inference can we make now that the structure of the institutions and the markets has changed so much?

The practice of “financial engineering” came along with massive doses of pseudoscience.

Another logical flaw in this type of historical statement is that often when a large event takes place, you hear the “it never happened before,” as if it needed to be absent from the event’s past history for it to be a surprise. So why do we consider the worst case that took place in our own past as the worst possible case? If the past, by bringing surprises, did not resemble the past previous to it (what I call the past’s past), then why should our future resemble our current past?

Maximizing the probability of winning does not lead to maximizing the expectation from the game when one’s strategy may include skewness, i.e., a small chance of large loss and a large chance of a small win. If you engaged in a Russian roulette–type strategy with a low probability of large loss, one that bankrupts you every several years, you are likely to show up as the winner in almost all samples—except in the year when you are dead.

To conclude, extreme empiricism, competitiveness, and an absence of logical structure to one’s inference can be a quite explosive combination.

I needed the backing of my bank account so I could buy time to think and enjoy life.

Popper believed that any idea of Utopia is necessarily closed owing to the fact that it chokes its own refutations. The simple notion of a good model for society that cannot be left open for falsification is totalitarian. I learned from Popper, in addition to the difference between an open and a closed society, that between an open and a closed mind.

By living on Park Avenue, one does not have exposure to the losers, one only sees the winners. As we are cut to live in very small communities, it is difficult to assess our situation outside of the narrowly defined geographic confines of our habitat.

Why is finance so rich a field? Because it is one of the rare areas of investigation where we have plenty of information (in the form of abundant price series), but no ability to conduct experiments as in, say, physics. This dependence on past data brings about its salient defects.

Remember that nobody accepts randomness in his own success, only his failure.

What do people do to survive? They maximize their odds of staying in the game by taking black-swan risks (like John and Carlos)—those that fare well most of the time, but incur a risk of blowing up.

Too much success is the enemy (think of the punishment meted out on the rich and famous); too much failure is demoralizing. I would like the option of having neither.

rules have their value. We just follow them not because they are the best but because they are useful and they save time and effort.

Didn’t you wonder why the person you think knows physics so well cannot apply the basic laws of physics by driving well? Researchers divide the activities of our mind into the following two polarized parts, called System 1 and System 2. System 1 is effortless, automatic, associative, rapid, parallel process, opaque (i.e., we are not aware of using it), emotional, concrete, specific, social, and personalized. System 2 is effortful, controlled, deductive, slow, serial, self-aware, neutral, abstract, sets, asocial, and depersonalized.

As a rational trader (all traders boast so) I believe, as I discussed before, that there is a difference between noise and signal, and that noise needs to be ignored while a signal needs to be taken seriously.

Most of us know pretty much how we should behave. It is the execution that is the problem, not the absence of knowledge.

What characterizes real speculators like Soros from the rest is that their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate.

There is no rational reason to keep a painting you would not buy at its current market rate—only an emotional investment. Many people get married to their ideas all the way to the grave. Beliefs are said to be path dependent if the sequence of ideas is such that the first one dominates.

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.

science is better than scientists. It was said that science evolves from funeral to funeral.

It is worthy of note that before the spread of what can be best called Mediterranean monotheism, the ancients did not believe enough in their prayers to influence the course of destiny. Their world was dangerous, fraught with invasions and reversals of fortune. They needed substantial prescriptions in dealing with randomness.

While shaken with emotion. No stiff upper lip. There is nothing wrong and undignified with emotions—we are cut to have them. What is wrong is not following the heroic or, at least, the dignified path. That is what stoicism truly means. It is the attempt by man to get even with probability.

The only article Lady Fortuna has no control over is your behavior. Good luck.

top management is only paid on result—no matter the process.