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Fooled by Randomness

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Fooled by Randomness

The Hidden Role of Chance in the Markets and in Life

Thomson Texere,

15 min read
10 take-aways
Audio & text

What's inside?

Yes it’s true: All the people who are more successful than you might just be lucky fools.

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Editorial Rating

9

Qualities

  • Innovative
  • Applicable

Recommendation

The past decade has witnessed the release of many books about risk management and assessment, but none have managed to illustrate the role that random events play in life and markets as well as Nissim Nicholas Taleb’s latest work. Writing in a leisurely and personal style that makes his complex subject utterly accessible, Taleb instructs us on how to account for randomness in our decision making, and illustrates the many ways in which we confuse luck with skill. getAbstract highly recommends this book, which many investors will wish they had read in, say, 1994.

Summary

A Random Life

You must understand the role of randomness in both trading and everyday life to avoid becoming a victim of your own superstitious foolishness.

Consider the fortunes of two fictional traders, Nero and John:

  • Nero was a proprietary trader – An independent trader with internal funds to invest. He used a conservative, risk-aversive trading style, so he didn’t make as much money as many other traders.
  • John was a high-yield trader – He made considerably more money than Nero, but when a random event caused a rapid shift in the markets in the summer of 1998, John’s fortunes collapsed and he lost everything.

The moral of this story is that sometimes the more cautious style pays off, since it compensates for the potential of the rare, destructive, random event in daily life. Nero’s goal was not to maximize profits, but to avoid losing his opportunity to trade and make money.

Therefore, he rapidly exited trades after experiencing a predetermined loss and never sold naked options, which would expose him to potentially very large losses. His approach didn’t depend on the bull market, so he ...

About the Author

Nassim Nicholas Taleb is the founder of Empirica Capital LLC and an adjunct professor at the Courant Institute of Mathematical Sciences of New York University. He held senior trading positions in New York and London, and worked as a floor trader in Chicago. He is the author of Dynamic Hedging, and was inducted into the Derivates Strategy Hall of Fame in 2001 for his record of debunking myths and false gurus. He received his MBA from the Wharton School at the University of Pennsylvania and has a Ph.D. from the University of Paris Dauphine.

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