Friday, August 20, 2004

Nassim Nicholas Taleb: Fooled by Randomness

A while back (24 March) I mentioned that I thought that Nassim Nicholas Taleb’s book Fooled by Randomness would be worth reading. And I can now confirm that it definitely is. Published by Texere, the book first appeared in 2001, and a revised and expanded second edition was issued earlier this year.

What is the book about? Well, the subtitle is ‘The hidden role of chance in life and in the markets.’ This tells you quite a lot. Incidentally, the emphasis in the subtitle has changed from the first edition: now ‘life’ comes first, and ‘the markets’ second, whereas previously the position was reversed. This reflects, I think, the author’s realisation that he has much to say which is of interest to the general reader as well as to the financial world.

When the first edition appeared, reviewers generally saw Fooled by Randomness as a book about investment management. And Taleb himself makes the point that, when trying to summarise what his book is about, journalists tend to make mistakes. So I am going to be cautious in what I say here. But I think it is fair to say that Taleb does argue that much of the apparent success which is enjoyed by investment-fund managers is due not so much to skill on their part as to pure chance. Or luck, if you prefer.

I have no difficulty in accepting this argument. I am, after all, old enough to have witnessed the rise and fall of such alleged masters of the financial universe as Bernie Cornfeld, Jim Slater, and Michael Milken. Such people, Taleb argues, very naturally perceive any success which they enjoy as being the result of their own amazing intelligence, which is, of course, far superior to that of their competitors. But sooner or later they discover, the hard way, that they are not quite as clever as they thought.

This thesis has many implications, not least for those of us who are trying to build up a pension fund, or have inherited a lump sum which we wish to invest safely. For that reason alone, Fooled by Randomness would be worth reading. But there is far more to it than that. And, as I suspected back in March, much of what Taleb has to say is highly relevant to the worlds of writing and publishing. Before too long, I hope, I will be posting a number of ‘random thoughts on randomness’ in the context of books and publishing.

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