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Book Review: Fooled by Randomness (Nassim Nicholas Taleb)

Nassim Taleb is definitely a counter-establishment trader and financial writer and, while usually that means something negative, in this case that property turns out to be a great advantage, as he proves in Fooled by Randomness many times that one shouldn't rely on the general wisdom (which is actually foolishness) of the public markets.

Fooled by Randomness by Nassim Nicholas Taleb

Fooled by Randomness is a book about probabilities in life — both in our daily life and in the financial markets. The problem is that the humans aren't quite fit to be dealing with probabilities. The book tries to approach this matter and states the following theses:

  • Markets are largely probability-based. Trading depends a lot on randomness, in a much greater extent than more "normal" professions.
  • Success in trading can often be attributed to randomness, not skills. The most successful traders are usually just the most "lucky fools".
  • The trading records and past investment performance are of little use as there is no connection between past and future results in random environments.
  • People don't understand randomness and probability. Even scholars in the field often do ridiculous mistakes in considering chances. Those who do understand probabilities often forget to use their knowledge in their daily and professional life.
  • Emotional and psychological traits inherent to humans are huge obstacles in performing well in something connected with randomness (like Forex market, for example).
  • Moderate informational deprivation is important for a trader to filter "signals" out of the "noise" and keep oneself emotionally uplifted.
  • Traders forget about rare events. They act like something really big and unusual will never happen to their strategy. In real world, rare events are destroying accounts of even the most successful traders.
  • Modern economical science is far away from being a real "science". At the same time, it is ridden with all sorts of scientists, failing to see their own mistakes.
  • Overfitting of trading strategies (or overoptimization for expert advisors) and seeking the causality in correlation is a big and popular mistake among financial traders.
  • Traders cannot (and don't want to) get rid of emotions — randomness can control the outcome of their positions and thus their emotions, but they can still control their behavior. A dignity in one's behavior even in the face of losses is most effective response to the kicks of fortune.

You wouldn't even call this book a "trading book" or a "coach book" as it is full of aestheticism intrinsic to the "real literature" and lacks the "teaching mood" of the "self-growth books". To sum up the advantages of Fooled by Randomness:

  • The biggest advantage is its topic, which was rarely touched by other financial writers.
  • Smooth reading — you will often have to make yourself stop reading if you need to do something else.
  • A lot of interesting points and no-nonsense ideas.
  • Perfect examples for even the most difficult cases of probability problems.

Of course, it isn't without disadvantages:

  • The book's general structure is rather dim and there are unexpected "hops" from topic to topic.
  • The language used is far richer and more complex (especially, to non-native speakers) compared to some other trading books you can find. It isn't a big disadvantage but it might make you look into a dictionary a few times.
  • It doesn't teach how to trade but rather shows how not to trade. That isn't a disadvantage per se, but many readers will probably be disappointed.

It must be said that Fooled by Randomness can really impress. It is a rare case of a trading book being useful even if you aren't going to trade in your life. And it is a book that can help you decide to avoid that path. It is worth every penny of its price.

You can also read our review of Nassim Taleb's newer book on randomness, The Black Swan.

If you have any questions, comments, or opinion regarding Fooled by Randomness by Nassim Nicholas Taleb, feel free to discuss this book on our Forex forum.

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