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June 19, 2003

Fooled By Randomness

I finally finished Fooled by Randomness, by Nassim Nicholas Taleb. I initially heard about him via an essay by Malcolm Gladwell, entitled Blowing Up. Gladwell is one of my favorite writers, and he has a knack for making the most obscure subjects exciting. In his essay, he described what it is Taleb does, which is options trading (and options design), and what makes Taleb interesting, which is his views on randomness.

Taleb believes that by and large, the visibly successful figures in the trader's profession are not in fact brilliant and insightful, but simply lucky--for now. As Taleb argues in the interview The World According to Nassim Taleb:

Everybody will tell you that stock investing is a great idea because it's been back-tested by some serious Guru and if you bought one share of some stock during the revolution you would have owned the GNP of some banana republic. But you forget that your back testing is only on stocks that are alive today and did not cover stocks in imperial Russia that a rational investor would have bought at the beginning of the century. Many continental stocks were recycled into wallpaper. When you look at markets you are only looking at the remnants, the parts that have survived.

It's this skeptical attitude towards today's winners that attracted me in the first place. Fooled by Randomness expands on this and other flaws in market trading, and more specifically options. Taleb has a rather snide authorial tone which gets tiresome at times, and the book seldom delves into the actual math and probability underlying his philosophy, but his parables and anecdotes make the reading worthwhile.

Posted by dpwakefield at June 19, 2003 10:22 PM