{"id":47341,"date":"2021-08-20T19:53:00","date_gmt":"2021-08-20T23:53:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=47341"},"modified":"2021-09-02T12:43:04","modified_gmt":"2021-09-02T16:43:04","slug":"nassim-taleb-fooled-by-randomness","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/nassim-taleb-fooled-by-randomness\/","title":{"rendered":"Nassim Taleb: Fooled by Randomness\u2014Book Overview"},"content":{"rendered":"\n

What is Nassim Taleb’s Fooled by Randomness<\/em> about? What role does luck or randomness play in success?<\/p>\n\n\n\n

Fooled by Randomness<\/em> is the first work in a five-book series exploring randomness by bestselling author and former options trader Nassim Nicholas Taleb<\/a>. In this book, Taleb examines the outsized role luck plays<\/a> in success, how and why people don\u2019t generally understand luck, and how we can accommodate randomness in our lives once we\u2019re aware of it.<\/p>\n\n\n\n

Below is a brief overview of the key points.<\/p>\n\n\n\n\n\n\n\n

Nassim Taleb: Why Wild Success Is Due to Luck, Not Skill<\/strong><\/h2>\n\n\n\n

Usually, when we see someone fabulously successful, we attribute her success to skill. But skill will generally only earn a person moderate<\/em> success. <\/p>\n\n\n\n

In Fooled by Randomness<\/em>, Nassim Taleb argues that wild success, the kind that comes with outsized wealth and lasting fame, is usually due to luck: a fortunate rare event plus a lack of negative rare events<\/a>. <\/p>\n\n\n\n

This is more true in industries that rely heavily on chance, such as investing, than it is for professions like carpentry or medicine that are built more on perseverance and skill. Often, though, people don\u2019t recognize how fundamentally different chance-based professions and skill-driven professions are in how they each produce success. This misunderstanding, and the tendency to credit success to skill instead of luck, can lead people to make poor decisions<\/a>.  <\/p>\n\n\n\n

Some ways in which we misunderstand the effect of luck on success are explored in the following sections.<\/p>\n\n\n\n

Survivorship Bias Misguides Our Thinking<\/strong><\/h3>\n\n\n\n

People tend to see examples of enormous success as representative of the kind of success any person can expect in that industry. This is called the \u201csurvivorship bias,\u201d by which we see only the people who have \u201csurvived,\u201d that is, thrived<\/em> in any given situation, and we extrapolate lessons from their survival: mainly, that wild success can be reasonably expected. <\/p>\n\n\n\n

For example, when an investor strikes it rich or a writer lands a multi-million-dollar movie contract, we often internalize those successes as a likely possibility for anyone in those fields. However, to accurately evaluate the potential for success in any venture, you must consider not only the observable results but also the invisible alternatives: the possibility that those successful people might have failed had they experienced unluckier circumstances.<\/p>\n\n\n\n

So, to properly determine the likelihood of getting rich as a trader, you must take into account the many people who\u2019ve attempted it and failed, not just those who\u2019ve made a fortune.<\/strong> To properly judge the likelihood of getting rich through writing, you must consider all the authors who couldn\u2019t find a publisher, or those whose published book garnered few sales, not just those who penned bestsellers.<\/p>\n\n\n\n

Looking at invisible alternatives allows you to better see the role luck plays in your successes and failures. What might have happened if the market hadn\u2019t jumped 500 points that morning? What if that large bet you made on that particular stock hadn\u2019t worked out? <\/p>\n\n\n\n

Getting into this habit can take practice. It\u2019s easy to spot the chance inherent in a clearly-defined, hypothetical situation: for example, a game of Russian roulette in which you are offered fifty million dollars to shoot a gun loaded with one bullet and five empty chambers at your head. <\/p>\n\n\n\n

It\u2019s less easy to spot the random nature of professions that hew closer to mainstream sources of income and have less-clearly-defined parameters, like trading. Because there are so many elements involved in trading, the randomness driving it is better hidden and consequently, people tend to be blind to it\u2014they then assume that success in such a field is due to skill in the same way that success in a non-luck-driven field (such as, for example, teaching) would be. <\/p>\n\n\n\n

Rare Events Have an Outsized Influence<\/strong><\/h3>\n\n\n\n

When we speak of luck or randomness determining success or failure, we are talking specifically about rare events and their outsized influences on any particular path. Rare events are infrequent and usually unpredictable events that bring with them either a huge payoff or a devastating wipeout. Very often a person who\u2019s had wild success has merely been lucky enough, so far, to either take advantage of a positive rare event or to elude a negative and devastating one.<\/strong> <\/p>\n\n\n\n

History is littered with rare events, but it\u2019s impossible to know exactly when and where they are going to hit. This is why people tend to ignore the probability of rare events; it is hard to plan for something you can\u2019t predict, and it\u2019s hard to understand something that doesn\u2019t follow the rules. <\/strong><\/p>\n\n\n\n

However, when you don\u2019t understand<\/a> how rare events work and how significant their influence is, you are unable to properly assess risk and opportunities, or to clearly see what\u2019s shaping the world around you\u2014including your success.<\/p>\n\n\n\n

Track Records Are Poor Indicators of Future Success<\/strong><\/h3>\n\n\n\n

Because of the nature of randomness and rare events, given a large starting set of people, a certain percentage will inevitably end up wildly fortunate, regardless of their skill or competence. For example, imagine a set of 10,000 traders, each with a 50 percent chance of either making money or losing money every year. Assume that if a trader loses money, she\u2019s out of the game. After the first year, there will be 5,000 traders left. After five years, there’ll be just over 300 traders left. The continued success of these 300 traders might be due entirely to luck, but in the real world, each of these traders would be lauded for her skill. <\/p>\n\n\n\n

Because of this, it is impossible to judge a person\u2014particularly in a luck-based field\u2014based on her track record, which might indicate nothing more than a lucky streak. You should be wary of anyone touting their excellent track record if they work in a profession that relies on chance. <\/p>\n\n\n\n

Sometimes the Most Qualified Competitor Does Not Win<\/strong><\/h4>\n\n\n\n

Because of the nature of randomness, life can be unfair. The most capable companies and the most skilled people are not the always ones who achieve success. <\/strong>Consider that if we ran the simulation above so that each trader only had a 45 percent chance of making money in a year, at the end of five years we would still have almost 200 traders still in the game. These traders would be celebrated as extraordinary even though they were slightly incompetent (as illustrated by their greater-than-even chances of loss). <\/p>\n\n\n\n

Why We\u2019re Bad at Assessing Randomness and Risk<\/strong><\/h3>\n\n\n\n

People find it hard to properly assess the likelihood\u2014or probability\u2014of randomness for several reasons: <\/p>\n\n\n\n