Fooled by Randomness

Fooled by RandomnessNassim Nicholas Taleb’s Fooled by Randomness explores a quite interesting idea of how frequently we confuse causation with pure randomness exhibited in nature. We tend to rever successful war generals, coaches, and corporate CEOs, studying their strategies in search of recipes for success. Success, as Taleb infers, can frequently be attributed to a totally random sequence of events.

Suppose that you have a group of 1,000 who are ready to play a game of Russian roulette once a year, with their chance of survival at 80%. You would have 800 people left after the first year, 640 after the second year, 512 after the third year, and so on. Sooner or later the randomness of the game would bring you to the point, where you had a dozen or so people left alive. Are they really good at plying Russian roulette? Do they have some winning strategies for beating the game? Should we study their family history and consult with their parents on upbringing, so that we can have more of their type? It’s pretty obvious that their path to success in this case was completely random – someone had to be among the final dozen, given the probabilistic chances of Russian roulette, and it just happened to be them.

Change the rules of the game from Russian roulette to financial markets, and all of a sudden the remaining few are treated as financial geniuses with “proven track record” and unblemished reputation. This is frequently one of the randomness scenarios that human brain tends to attribute to some past events having a historical value on influencing the present status quo.

Not to say that success is completely random. When you look at the world of financial markets, somehow one can bet that a Harvard business graduate with superb math skills and understanding of international markets will do a better job on Wall Street than a bum from Calcutta. It’s also quite expectable that a dental student graduating at top of his class from a top school is most likely to do pretty well (financially) in life. Randomness? Or deterministic behavior? Taleb argues that one can always position himself to get a better head start at an occupation, but unless you’re an Olympic runner, randomness has probably a higher role in determining your success, than skills set.

But the book is not about “defining your future.” It’s more about common misconceptions that we have about success. Most of the actors work as waiters, and most movie script writers work at fast food. Yet the public tends to perceive the job as highly desirable because of the slim majority, who actually reached the top of their profession. Human brain tends to underestimate the chances of success, when the potential payout is so large, that it outshines the rest of the 99.9%.