Today’s book, Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets, has been written by the author of The Black Swan, Nassim Nicolas Taleb. In your library, it will stands close to Dance with Chance. In the same idea, the role of randomness in everyday life (with a focus in finance) is shown. Taleb’s concept of “fooled by randomness” is similar to the “illusion of control” of Dance with Chance (or the opposite).
Taleb warns reader against people or situations that may seem impressive, but are due to luck (randomness). This concept is well summarized by the following quote: “Mild success can be explainable by skills and labor. Wild success is attributable to variance.” To demonstrate his ideas, Taleb uses the concept of “black swans” (rare events) and shows that we can’t predict them. One problem is that detecting risks and avoiding them is mediated by the emotional part of the brain, not the rational part (the one which could understand probabilities).
In his book, Taleb has a lot to say about journalists and traders (he is an option trader) for example, and how they are fooled by randomness (but he admits to be himself fooled by randomness: “I am just like every single character whom I ridiculed in this book.“). By the way, here is a good quote for traders: “There is no point searching for patterns that are available to everyone with a brokerage account; once detected, they would be self-canceling“. He also explains that we are not independence-friendly: “When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other“.
To conclude, Fooled by Randomness is an excellent reading full of examples where randomness is a trap. Any decision maker and anybody involved with probabilities should read this book.