Book SummaryFooled By Randomness, by Nassim Nicholas Taleb

1-Page Summary1-Page Book Summary of Fooled By Randomness

Fooled by Randomness is the first work in a five-book series exploring randomness by bestselling author and former options trader Nassim Nicholas Taleb. In this book, Taleb examines:

• The outsized role luck plays in success
• How and why people don’t generally understand luck
• How we can accommodate randomness in our lives once we’re aware of it.

While Taleb primarily focuses on examples from the world of investing, his principles are applicable to any field ruled by unpredictability (such as economics and politics) and demonstrate how we’re fooled by randomness in many aspects of our lives.

(Shortform note: To further explore Taleb’s thoughts on randomness, read our summary of his second book in the series, The Black Swan.)

Why Wild Success Is Due to Luck, Not Skill

Usually, when we see someone who’s become fabulously successful, we attribute her success to a combination of skill and hard work. When we see someone who’s never had such riches, or who’s had them and lost them, we consider her simply not as capable.

But people don’t typically realize how much of an influence luck has on success or failure. Skill and hard work will generally only earn a person moderate success. Wild success, the kind that comes with many millions of dollars and lasting fame, is most often due to luck: a fortunate rare event plus a lack of negative rare events.

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’t 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.

Some ways in which we misunderstand the effect of luck on success are explored in the following sections.

Survivorship Bias Misguides Our Thinking

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 “survivorship bias,” by which we see only the people who have “survived,” that is, thrived in any given situation, and we extrapolate lessons from their survival: mainly, that wild success can be reasonably expected.

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.

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

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’t jumped 500 points that morning? What if that large bet you made on that particular stock hadn’t worked out?

Getting into this habit can take practice. It’s 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.

It’s 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—they 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.

Rare Events Have an Outsized Influence

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’s 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.

History is littered with rare events, but it’s 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’t predict, and it’s hard to understand something that doesn’t follow the rules.

However, when you don’t understand how rare events work and how significant their influence is, you are unable to properly assess risk and opportunities, or to clearly see what’s shaping the world around you—including your success.

Track Records Are Poor Indicators of Future Success

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’s 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...

Fooled By Randomness Summary Introduction

Without realizing it, people often attribute luck to skill, randomness to determinism, and coincidence to causality. We confuse noise with signals, forecasts with prophecies, and supposition with certainty. We consider the lucky idiot a skilled investor without understanding the games of chance that created her success. Consequently, we leave ourselves vulnerable to risks and randomness that we should have anticipated, but didn’t.

In his book Fooled by Randomness, bestselling author and former options trader Nassim Nicholas Taleb examines the outsized role that luck plays in success,...

Fooled By Randomness Summary Part 1: Luck Matters More Than Skill to Wild Success

When we talk about luck, we are talking about randomness—more specifically, “rare events”: infrequent and usually unpredictable events that bring with them huge payoffs or devastating wipeouts. Rare events have outsized and uneven effects on achievement, occasionally bestowing success on less competent people and at other times taking it away from those who’ve had long winning streaks.

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’t 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.

In Part 1, we’ll examine how people mistake randomness for skill and how rare events can influence success and failure.

We Often Mistake Luck for Skill

When we see someone who’s had incredible success, we often credit that success to a combination of skill, hard work, intelligence, and perhaps some other mysterious traits that...

Shortform Exercise: Examine Your Own Career

People often underestimate the influence of luck on success. We very often attribute luck to skill and randomness to determinism.

Look back on your own career progression. What were the major turning points along the way—the pivotal moments where you were either faced with a choice or an opportunity found you?

Shortform Exercise: Examine Someone Else’s Career

Though hard work, skill, and intelligence are often necessary first steps toward success, they rarely account for runaway success, which is far more often due to luck: a positive rare event plus a lack of negative rare events.

Think back to your time at school, your early adulthood, or your early days in a new company. List two or three people you considered at that time to be somewhat equally talented and intelligent.

Fooled By Randomness Summary Part 2: We Don’t Think About Probability Correctly

Now that we’ve explored some of the ways in which randomness affects success and failure, we’ll start to examine our difficulty in understanding and anticipating it. In Part 2, we’ll explore three concepts that reflect this difficulty:

• We don’t properly interpret the past.
• We can’t predict the future.
• We don’t insure against risk properly.

We Don’t Properly Interpret the Past

One reason we’re bad at assessing and preparing for risk and random events is that we are not good at learning from the past. We mistakenly believe that because something has never happened before, it can’t happen now. We then defend our lack of planning accordingly: “That had never happened before!”

A longer-term examination of history shows that rare events of all kinds do, indeed, happen. The very definition of a rare event is its unpredictability. History is littered with examples of events that never happened before. If history’s past brought surprises, why shouldn’t our own past do the same?

Even when we do remember a past rare event, we tend to falsely believe that we now understand the events that led up to it, and we therefore think we can “predict” it; that is, if it...

Shortform Exercise: Assess Your Risk Preparation

When people misunderstand past rare events, they misunderstand the likelihood of future rare events and consequently don’t plan for risk appropriately.

Describe a time when you were surprised by an event, either in business, the news, or your personal life.

Fooled By Randomness Summary Part 3: How Our Human Nature Steers Us Wrong

In Part 1, we examined why and how rare events affect success and failure. In Part 2, we discussed some ways in which we fail to understand and anticipate randomness. We’ll now look at why we have such trouble comprehending randomness, and how our brain’s wiring makes it difficult for us to understand probability.

Overall, these reasons include:

• We are guided by our primitive brain, which likes simplicity and dislikes abstraction, and makes decisions emotionally.
• We don’t understand how probabilities work.
• We see meaning where there is none.

We Are Guided by Our Primitive Brain

The first reason we fail to properly anticipate randomness is that we are guided by our primitive brain. To aid our survival, our brains evolved shortcuts of thinking that allow us to react quickly and decisively to threats. We’ve evolved these shortcuts to save ourselves time and mental energy; if we were to stop and think thoroughly about each interaction we have throughout the day, we would either miss opportunities or succumb to threats.

For most of our history, this system worked: Our lives were localized and simple, and we could optimize our survival without accounting...

Shortform Exercise: Examine Your Emotional Response to Surprises

The primitive and emotional sections of our brain pay much closer attention to surprises than to run-of-the-mill news, and we attach greater significance to shocking events even if they are not ultimately important. This can lead us to prepare for the wrong things.

Describe a time you started to prepare for something unlikely because it was in the news cycle. What was the event or circumstance that you felt compelled to prepare for?

Fooled By Randomness Summary Part 4: What to Do With This Understanding

Now that you have a fuller understanding of how and why randomness has such an outsized effect on success, and how and why people generally misunderstand its effects, let’s explore how you can approach risk with these concepts in mind. We’ll examine characteristics of people who fail to anticipate risk properly and we’ll discuss specific things you can do to anticipate risk mindfully.

How Our Misguided Beliefs Lead to Failure

Traders—and others in fields affected greatly by randomness, such as economics or politics—often have the same set of qualities that lead them to misevaluate risk and make poor decisions:

• They are overconfident in their beliefs: They don’t see that what worked for them in the past may have worked because of coincidence. They don’t see that analysis of past events obscures the random element of it. Traders who blow up typically think that they were such experts that the risk of failure was non-existent. When traders take risks under such a misbelief, it’s ignorance, not courage, that drives them.
• They don’t think ahead: They don’t plan for their strategy to fail and they act emotionally to pressure. If the market falls, they may...

Shortform Exercise: Limit Your Exposure to Noise

Ignoring “noise,” or the endless minutiae detailing small changes, can help you see large, important trends more clearly, and can prevent you from getting caught up in—and reacting to—inconsequential triggers.

Describe a kind of “noise” that you frequently come across in your daily life. (It might be related to business, current events, or something else. For instance, do you find yourself bombarded with news about small changes or endless analysis?)

Shortform Exercise: Examine Your Past Positions

People often underestimate the influence of luck on success. We very often attribute luck to skill and randomness to determinism.

Describe a time when you stuck to a position long after it was wise. What were the results? Did you experience any negative consequences because you didn’t change your strategy?