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

Author: Nassim Nicholas Taleb

As with the first Taleb book I read, Skin in the Game, I had to work extra hard while reading this to divorce the author’s wisdom from his style.

That wisdom is, in one man’s opinion, worth the effort. If nothing else, he’s keeping it real and letting his personality shine. Taleb discusses risk like nobody else I’ve read. He harps on the same points over and over, and for good reason: it’s the simple points that we mortals keep screwing up in our assessments.

One of the big points that hopefully sticks with me is his discussion of survivorship bias. Here’s a great example: trading stocks/options/etc is a great way to make money because it seems that everyone who has that job makes a ton of money! This is true. But what about the people who once had that job but no longer have that job? Most likely their career change was due to a sudden loss of a ton of money – more than they ever thought they could lose, and maybe more than they had ever made. And most likely that happened all of a sudden, so they “blew up”. What percentage of traders actually have sustained good outcome? I don’t know, but Taleb makes it clear that it’s a much smaller group than we imagine at first glance – all thanks to survivorship bias. We measure only what we see, and fail to measure what we can no longer see. So when we extrapolate based on what we see, we end up with a flawed understanding of reality. Basic, and also profound.

I highly recommend this book to everyone who takes risks for a living (which is probably you).

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Skin in the Game: Hidden Asymmetries in Daily Life

Author: Nassim Nicholas Taleb

I must admit I may have gone about this backwards… Before reading the book, I read this excellent critique of it by Alex Lynch. It definitely helped me keep from getting sucked in to the passion with which Taleb writes.

This was the first Taleb book I’ve actually read, but I’m told that his stylistic approach is consistent throughout his writing – specifically, he writes with an impressive level of arrogance! Also a bit annoying: the book is littered with latin phrases that add no discernible value other than to scream “I know latin!”

That aside, I recommend this book for two reason. First, skin in the game is a concept with plenty of merit, and should be a requirement in more cases than we find today. Many people have managed to get vast upside potential while dumping downside risk on an unwitting public (i.e. bank bailouts) because our system is flawed. Second, there are plenty of interesting stories and anecdotes in the book. Many of them around the old-world, including the code of Hamurabi. And, if you take Taleb in context, his writing can be pretty entertaining.

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