After reading Taleb’s most recent book The Black Swan
I felt the urge to read his first bestseller, Fooled by Randomness
.
The Black Swan focuses mostly on black swan events which can be described shortly as “An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.” In Fooled by Randomness black swan events play an important role, but the main theme is how much luck plays in our life. Many times we fail to see this luck and attribute it to skill.
Taleb gives an example of a rich foolish trader who makes a lot more money than his neighbor who also trades but has a conservative approach to investing. While at first glance the rich trader seems more successful in truth he is really lucky. He will go around years boasting about his success and will believe that luck has nothing to do with the amount of money he accumulated. However, one day a black swan event will strike (which beforehand was deemed “impossible”), and wipe out all of the rich traders assets. The conservative “poor” trader will end up happier and richer in the end.
Some of the arguments in the book are hard to accept because people who are successful will almost never accept that it is due to luck. In addition, Taleb himself notes that all rich people do not owe their success to luck. A dentist who accumulates ten million dollars in savings achieved his wealth through a lot more skill than someone who bought a ten million dollar lottery ticket. Even the winner of the lottery will likely admit to this fact.
At the end of the book, Taleb summarizes the main point of his argument as follows:
We favor the visible, the embedded, the personal, the narrated, and the tanfiable; we scorn the abstract.
One aspect I take major issue with is Taleb’s assertion that good stock pickers might just be lucky. He uses the familiar argument that if you take lots of people and they flip coins there will be several people in the group who will flip all heads. This is not due to any skill or savvy on their part, rather it is due to the law of mathematics. He applies this coin tossing argument which many of the believers in the efficient market theory use to state that people like Warren Buffett are merely lucky.
However, he fails to note as Buffett does in his superb essay Super Investors of Graham and Doddsville, that a disproportionate number of the people flipping heads come from Graham and Doddsville. It is also surprising that Taleb he completely mocks the notion of the efficient market uses their arguments to support his thesis that stock picking is all luck. One would think that someone as versed in psychology and behavioral finance as Taleb would realize the market overreacts at times, which allows savvy investors like Buffett to profit off these market inefficiencies.
Notwisthanding this minor criticism I found it hard to put down. Nassim Taleb is one of the greatest thinkers of our time when it comes to risk management. While many people are using metrics like beta and alpha many people do not realize the flawed theory that lay behind these metrics. Just as an example from my own experiences, many people state that they try to achieve the highest risk adjusted returns. But how many of these risk adjusted investors can actually define risk, and how many take account for black swan events that take place much more often than “mathematical models” state that they should occur. While Taleb has no exact definition of risk he definitely gives the reader a better understanding of it then any book I have read to date.
To purchase the book on Amazon.com click on the following link-Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Disclosure: I receive free books from book publishers and authors asking me to review them. In addition I sometimes request specific books that look interesting. I try to review the books that I think will be the most interesting. I have a material connection because I received a free copy of this book from the publisher. In addition I receive a small commission if you click on the above link and buy the book (or anything else) from Amazon.com It does not cost you a penny more. So I get a commission, Amazon gets a sale, and you get your book so it is a win for everyone.
http://www.valuewalk.com/
I felt the urge to read his first bestseller, Fooled by Randomness. The Black Swan focuses mostly on black swan events which can be described shortly as “An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.” In Fooled by Randomness black swan events play an important role, but the main theme is how much luck plays in our life. Many times we fail to see this luck and attribute it to skill.
Taleb gives an example of a rich foolish trader who makes a lot more money than his neighbor who also trades but has a conservative approach to investing. While at first glance the rich trader seems more successful in truth he is really lucky. He will go around years boasting about his success and will believe that luck has nothing to do with the amount of money he accumulated. However, one day a black swan event will strike (which beforehand was deemed “impossible”), and wipe out all of the rich traders assets. The conservative “poor” trader will end up happier and richer in the end.
Some of the arguments in the book are hard to accept because people who are successful will almost never accept that it is due to luck. In addition, Taleb himself notes that all rich people do not owe their success to luck. A dentist who accumulates ten million dollars in savings achieved his wealth through a lot more skill than someone who bought a ten million dollar lottery ticket. Even the winner of the lottery will likely admit to this fact.
At the end of the book, Taleb summarizes the main point of his argument as follows:
We favor the visible, the embedded, the personal, the narrated, and the tanfiable; we scorn the abstract.
One aspect I take major issue with is Taleb’s assertion that good stock pickers might just be lucky. He uses the familiar argument that if you take lots of people and they flip coins there will be several people in the group who will flip all heads. This is not due to any skill or savvy on their part, rather it is due to the law of mathematics. He applies this coin tossing argument which many of the believers in the efficient market theory use to state that people like Warren Buffett are merely lucky.
However, he fails to note as Buffett does in his superb essay Super Investors of Graham and Doddsville, that a disproportionate number of the people flipping heads come from Graham and Doddsville. It is also surprising that Taleb he completely mocks the notion of the efficient market uses their arguments to support his thesis that stock picking is all luck. One would think that someone as versed in psychology and behavioral finance as Taleb would realize the market overreacts at times, which allows savvy investors like Buffett to profit off these market inefficiencies.
Notwisthanding this minor criticism I found it hard to put down. Nassim Taleb is one of the greatest thinkers of our time when it comes to risk management. While many people are using metrics like beta and alpha many people do not realize the flawed theory that lay behind these metrics. Just as an example from my own experiences, many people state that they try to achieve the highest risk adjusted returns. But how many of these risk adjusted investors can actually define risk, and how many take account for black swan events that take place much more often than “mathematical models” state that they should occur. While Taleb has no exact definition of risk he definitely gives the reader a better understanding of it then any book I have read to date.
To purchase the book on Amazon.com click on the following link-Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Disclosure: I receive free books from book publishers and authors asking me to review them. In addition I sometimes request specific books that look interesting. I try to review the books that I think will be the most interesting. I have a material connection because I received a free copy of this book from the publisher. In addition I receive a small commission if you click on the above link and buy the book (or anything else) from Amazon.com It does not cost you a penny more. So I get a commission, Amazon gets a sale, and you get your book so it is a win for everyone.
http://www.valuewalk.com/
