Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets

Taleb recalls a time when he was a young trader living in Manhattan. One day, he hailed a cab, and the driver mistakenly brought him to the wrong entrance of the offices where he traded. That day, Taleb experienced a huge success. The next day, dressed exactly the same as the previous day, Taleb asked a different cab driver to take him to the same wrong entrance. Taleb recognizes this as a nascent superstition. Though he prided himself on his cool and rational trading decisions, he was prone to bouts of superstition. He gives another example of wearing glasses even though he did not need to as often as he did. Taleb discusses how gamblers are particularly prone to superstition, although many super-intelligent people, including one of the most intelligent people Taleb has known, have the same kind of superstitious tendencies.

Taleb discusses whether the tendency to be superstitious is a matter of nurture or nature. He claims that he has been taught that it is almost entirely a product of culture, therefore it is a matter of nurture. Taleb is not convinced. He discusses a famous psychology experiment conducted by B. F. Skinner in which pigeons would perform dance-like gyrations before getting food. Then, when they received the food, the behavior would become conditioned. Taleb wonders if humans also have the same kind of biological impulse toward superstition. As much as Taleb tries to make informed decisions while trading, including having methods whereby he distinguishes the signal from the noise, he admits that “I cannot help it, but I am emotional and derive most of my energy from my emotions. So the solution does not reside in taming my heart” (271). Thus, Taleb takes active measures to ensure that emotion does not interfere too much with his trading decisions. He likens it to hiding chocolates from himself. He tries to separate his appetite from his brain.

Taleb begins the chapter by reiterating that “probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive” (273). He then says that the “elders” or those from earlier epochs of history better understood the true nature of probability and that in this chapter, he will examine some of their methodologies. The first elder is Carneades of Cyrene, a philosopher who came to Rome to argue against a fine that had been levied on his city. Carneades had been a student at New Academy, known at the time (155 BCE) as a “hotbed of skepticism” (273). One day, Carneades presented a speech in which he passionately argued that justice should be valued above all else. The next day, Carneades argued against justice being valued above all else. Taleb notes that the skepticism displayed by Carneades and others set the table for the development of probability as a study, because according to Taleb, “As the skeptics’ main teaching was that nothing could be accepted with certainty, conclusions of various degrees of probability could be formed, and these supplied a guide to conduct” (275). Taleb briefly discusses Cicero and a character from the Marcel Proust novel, In Search of Time Lost, Monsieur de Norpois. The side-by-side comparison of these two reveals a stark contrast. Cicero is known for his skepticism and his willingness to change his position frequently; Monsieur de Norpois changes his views, and he is treated without mercy by Proust. Taleb argues that modern people tend to become too married to a position, and while Taleb agrees that it makes logical sense, it is not a rational way to make decisions. Once again, Taleb mentions George Soros’s uncanny ability to change his mind. Taleb says that Soros is not path-dependent. Taleb also points out that “Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath” (279). People generally become married to their own ideas because of some kind of emotional attachment. Taleb points to an academic who has built a career on an idea. That academic is not going to contradict themselves and jeopardize their career.

Taleb repeats his statement that probability “entered mathematics with gambling theory, and stayed there as a mere computational device” (280). He discusses the emergence of risk management, pointing out that while gambling games have clear and distinct rules that make it easier to accurately calculate probabilities, real life does not. He mentions a Nobel Prize winner, Harry Markowitz, who developed a “method of computing future risk if one knows future uncertainty” (280). This theory, according to Taleb, led to a near collapse of the financial system in 1998, mainly because the theory had made the mistaken assumption that financial markets have clearly defined rules as games do. Markowitz and two of his colleagues, Robert Merton and Myron Scholes, insisted that the near collapse was due to what they termed a “ten sigma event” (281). None of them considered that Markowitz’s theory may have been misguided and that that had caused the near collapse. Taleb uses this anecdote to suggest that people’s attachment to their ideas is an example of the attribution bias, namely that people credit their skills for their success but blame bad luck for their failures. This leads Taleb to argue that while science is great because scientists are human and prone to biases such as attribution bias, it can also be dangerous.

Taleb discusses stoicism as a means of managing encounters with randomness. He argues that heroism is often misunderstood as applying only to life-altering events and says that heroism is a matter of how people react to things. He mentions the importance of maintaining dignity in the face of randomness and says that heroes of the past were more likely to be defined by how they did things rather than what the outcomes were.

Taleb mentions a poem by Greek poet Constantine P. Cavafy, “The God Abandons Antony,” which was read at the funeral of Jacqueline Kennedy Onassis. Taleb describes the poem as an address to Antony, imploring him not to wallow in self-pity and to accept his fate with dignity. He briefly recounts the defeat of Marc Antony at the hands of Octavius. The poem indicates that it is natural for Antony to feel emotional about his defeat, but that he should follow the dignified path. For Taleb, this is what stoicism truly is. Taleb reminds readers that emotion is human, and that “ideas do not truly sink in when emotions come into play; we do not use our rational brain outside of classrooms” (288). One must learn to process one’s emotions in a way that empowers them to maintain personal elegance in the face of ill fortune brought about by randomness.