Fooled by Randomness by Nassim Nicholas Taleb [Actionable Summary]

This is a comprehensive summary of the book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb. Covering the key ideas and proposing practical ways for achieving what’s mentioned in the text. Written by book fanatic and online librarian Ivaylo Durmonski.

Worksheet: Download the interactive sheet for taking notes.

The Book In Three Or More Sentences:

The title Fooled by Randomness refers to our tendency to mistake luck for skills and to our misguided conviction that access to more information means a chance for a higher success ratio. Nassim Nicholas Taleb shatters the theory that hard work, alone, will guarantee you fame and fortune. According to his views in this book, you need a dose of luck in addition to your expertise to gain prosperity.

The Core Idea:

When we don’t have all the pieces to the puzzle we tend to imagine that the missing ones are going to turn the tides in our favor while in reality, we’re simply fooling ourselves. Or in other words, the author is saying that a lot of things in life happen by chance. The best thing you can do to guarantee a sort of successful future for yourself is to adequately evaluate your skills at any given moment and to continuously upgrade them.

5 Key Lessons from Fooled by Randomness:

Lesson #1: Hard Work Doesn’t Guarantee Success

“Mild success can be explainable by skills and labor. Wild success is attributable to variance.” Nassim Taleb

So you think that hustling and grinding will boost your social media following and sky-rocket your ass up the corporate leader?

I can’t blame you. I’m, too, brainwashed by modern media that promotes the hard-working entrepreneurial lifestyle where the only thing you do is work and hope for riches.

According to these views, if you work hard and long enough, your spot amongst the blue badge holders on social media will be guaranteed.

But the probability of the above to happen only through Hercules-like efforts is slim.

Think about it for a moment. There are plenty of hard-working people around you, but are they widely successful in terms of money and fame? Not all of them.

Just because some inventions are good and successful doesn’t mean that all new things will reach the heights of the tools we all want/use (think iPhone). The same logic applies to the work you do. Just because some writers are loved by society doesn’t mean that all paper rats can see their name on the cover of a magazine.

Don’t assume that hard work is the differencing factor between living in a 5 bedroom house and living on the street. It’s necessary, yes, but it’s not the only thing you need.

So what do you do then?

Take advantage of the discrepancies that are happening occasionally. Or, as the author writes, “I try to benefit from rare events, events that do not tend to repeat themselves frequently.”

Therefore, you need to observe trends and try to capitalize on them but at the same time don’t get too hooked. Otherwise, you’ll become one of those lottery ticket junkies.

Lesson #2: Filter Noise, Focus on Signal

When we’re about to decide on something important, say purchase a car or a house, we start to surround ourselves with all kinds of data. We burry so deep in information, and we constantly add more, because we think that the next batch of input will tip the scale in favor of what we’ll believe is the “perfect” choice.

In reality, though, this sort of information overload is nothing but noise.

“The more data we have, the more likely we are to drown in it,” says Nassim Nicholas Taleb.

Not only the data we collect cause us to burn out, but we also start to see things as we want them to be. We get biased towards the thing we want (dictated by our emotions) not so by its practicality.

That’s why a lot of folks buy luxury goods that are not as useful as cheaper alternatives – Gucci handbags instead of a piece that costs 50 bucks. They are lead by their emotions as they want other people to see them as worthy, as more authentic.

Put simply, you don’t need all the data in the world to make a decision. You simply need to know which part of yourself you want to satisfy: your emotions or your practical self-image. While the former will want to feel internal content and social acceptance, the latter will lean towards tools that are the best value for their money.

“The details are as follows. As a rational trader (all traders boast so) I believe, as I discussed before, that there is a difference between noise and signal, and that noise needs to be ignored while a signal needs to be taken seriously.” Nassim Taleb

Lesson #3: Don’t Confuse Luck with Skills

Selling 10 cars to a single client visiting your used car shop can be interpreted as being very good at selling stuff. However, what if the person actually wanted to buy 10 cars? Or, we can go even further and say that he walked in your store hoping to buy 20 cars but by constantly interrupting the person you made him reconsider and that’s why he got only 10.

Well, that’s definitely a different way to look at the situation.

Unfortunately, people rarely think like this. That’s why Nassim Nicholas Taleb writes the following in the book: “Remember that nobody accepts randomness in his own success, only his failure.”

While we think that good things happen only because of our impeccableness, we always blame outside circumstances – other people, random events, our cat – when things are not working out the way we want them to.

So, accept the probability that your skills – or the lack of them – can lead to both good and bad things. The opposite is also true: good and bad things just happen, and it’s not always you to blame.

Your lifelong task in life is to always tell the difference between the two so you can adjust accordingly.

Lesson #4: Focus on Things You Don’t Know

What do you do, say, before investing in stocks?

If you’re a pro, you’ll probably surround yourself with data that will show you how the stock traded in the past – ups, downs, probably reasons. The more you look, the more you’ll convince yourself that the asset will go up (or down) in the next months. So, you’ll place your bet hoping for high returns.

But you don’t have to be in the stock market business to understand that this type of strategy doesn’t work so great. The success ratio of traders is around 25% according to the modern trading platforms.

With the above in mind, I’ll add the observation of John Stuart Mill, a famous British philosopher mentioned in the book about swans: “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”

What that means is that thinking something is true just because there is not evidence of the opposite doesn’t make it true. It simply makes it true for you, thus the fooled by randomness title.

That’s kind of the hidden message in the book.

So, to avoid being fooled by randomness, as many people in the stock market are, you need to focus most of your time learning the basic principles of the subject you want to master, not so much on what’s trendy right now. Also, to keep an open mind and don’t be afraid (or ashamed) to change your opinion when the situation requires.

Lesson #5: Don’t Fight Your Emotions, Cope With Them

The best part of the book, no doubt, is when the author confesses that even he – the person who spotted our tendency to be influenced by random events – falls victim to his emotions.

“The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions. Besides, I believe that I need my emotions to formulate my ideas and get the energy to execute them.

I am just intelligent enough to understand that I have a predisposition to be fooled by randomness—and to accept the fact that I am rather emotional.” Nassim Taleb

Two important things from the above quote:

• Emotions are almost impossible to remove: Our emotions are part of ourselves and there is no way you can remove them out of your life. Actually, you need them as much as you need air to survive. They are the reason we get up at 5 AM in the morning to exercise or to work on our passion project. Without them, we’re no better than a gadget with an ON/OFF switch.
• Become buddies with your emotions: Understand the fact that your emotions are the ones navigating you in life: You can’t cleanse them, nor you have to. You simply need to befriend the crap out of them. When you’re buddies, you can simply ask them, “Hey emotions, what kind of events trigger you?” Once you know, you’ll avoid – as much as you can – entering such situations because you wouldn’t want to upset your friend, right?

In conclusion, I would say that regardless of your expertise and your practical way of thinking in most of the cases, there is a chance that some of your future decisions will be influenced by your emotions. Once you’re aware of this, you can become better at spotting these situations and probably reconsider your next move.

Actionable Notes:

• Take advantage of rare events and bizarre sources: If everybody has access to the same amount of information we’ll do exactly the same things and expect the same results. To make the most out of a situation, it’s best to look at different types of infographics. This will give you a fresh perspective, different from what everyone else is doing but it can potentially lead to huge success.
• Limit your info intake: Usually, the more info we consume the more we start believing in the desirable, by us, outcome. You either need to reduce the information you consume or expose yourself to a totally different type of information.
• No theory is ever right: According to the philosopher Karl Popper, who the author admires, there are two types of theories: 1) Theories that we all know are wrong because they were tested; 2) Theories that are not yet been proven wrong. The thing to keep in mind here is that there is always a possibility for something being wrong. This skepticism will force you to triple check before acting.
• Unexpected things always happen: Companies we consider stable go bankrupt and people who we thought noble steal. The best you can do is to prepare for the worst-case scenario and then prepare some more because you probably haven’t thought of even more dreadful scenarios.
• Keep in mind the skewness issue: No matter how good your current situation is, if you can’t handle the potential setbacks, you’ll ultimately fail. This basically means that even if you’re living a lavish life, if you don’t have the skills to handle potential future losses, setbacks, failures, there’s a chance that your current comfortable lifestyle is just temporary.

Commentary and My Personal Takeaway

Some people can get offended by this book because of how the author labels virtually everyone who we, the mortals, kind of admire and think of authority figures. He calls financial economists charlatans and says that journalism is just noise and a waste of time.

Personally, I’m happy to read smart people ranting about things and dismissing the accepted by society ideas as long as they’re not taking themselves too seriously. And that’s exactly what Nassim Nicholas Taleb does in this book. Actually, he’s quite sincere about his limitations and his flaws – making the book even more enjoyable.

If you’re considering reading the book, keep in mind the following: If you’re know-it-all smarty-pants you’ll surely hate the author but at least you might reconsider some of your hardcoded beliefs about the world.

My personal takeaway?

Don’t rely on past events and on social norms to make a decision. Always look for new sources of information, preferably different from your current stance. This will give you a fresh perspective and potentially save you from being fooled by randomness.

Notable Quotes:

“Heroes are heroes because they are heroic in behavior, not because they won or lost.” Nassim Taleb

“The mistake of ignoring the survivorship bias is chronic, even (or perhaps especially) among professionals. How? Because we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.” Nassim Taleb

“Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.” Nassim Taleb