Fooled by Randomness

This is the commentary companion to taleb_2001_fooled-by-randomness.

Review

This is a low-effort bestseller bait on the order of the lucky fools it (rightly) criticizes. The only difference is that Warren Buffet is a successful trader.

If you've read or are reading this book and find yourself agreeing with any of its conclusions, try The Failure of Risk Management by Douglas W. Hubbard. Hubbard dismantles Taleb's pessimism point by point, and it's an excellent read besides.

One might be tempted to say that the damage Taleb and this book have done to risk management and adjacent fields is immeasurable, but I'm confident a rigorous model could estimate the damage to an acceptable level of certainty.

Critiques

Intellectual Insecurity

So far I've gotten the distinct impression that statistics hurt Taleb's head, and he is intimidated by academics.

"Logic Without Statistics"

FbR uses few citations, relying on the strength of Taleb's logic alone, by his own stating.

Taleb argues this strategy is perfectly legitimate, which is true, but it does not follow that it makes for the most robust argument. In recent editions of the text, Taleb claims that his editors have implored him to provide figures, graphs, studies, etc. as---he agrees---would be expected for any similar book on statistical phenomena, but he refuses.

I don't find this approach charming at all, especially considering how critical Taleb is of demagogues like Warren Buffet, who could write that their success was foretold burning oracle bones and the book would still be a bestseller. Fooled by Randomness fails to differentiate itself from such books, except in that it was written by a mediocre trader.

Juxtaposing FbR with hubbard_2020_failure, which is a more traditional work of statistical thought--- well researched, and with a thorough bibliography--- Taleb's arguments are considerably less satisfying. When Hubbard is wrong, it's clear his interpretation is flawed in that instance, when Taleb is wrong, I question the foundation of all his arguments. Less politely, I wonder why I'm listening to him just make up justifications for what he already believed.

So far I'm lead to believe what Taleb means by "logic" is only anecdotes and aphorisms. He wants to be Plato, but he comes off as "this came to me in a dream".

[!quote] Chapter 2? (pp.) Scientists can not meaningfully describe the probability of black swans because it would require observing the future.

[!quote] Chapter 2? (pp.) Accountants don't care about probability, if they did they wouldn't be accountants, and if they were they would make an error on your tax returns.

Qualitative Probability

Taleb loses me in the introduction when he states that he defines probability qualitatively.

hubbard_2020_failure gives a comprehensive history of the terms uncertainty, probability, and risk,

Later it's clear he what he means by probability is uncertainty.

[!quote] Chapter 2? (pp.) Certainty is something likely to occur in the largest number of possible worlds, uncertainty concerns what is unlikely to occur in many possible worlds.

The Black Swan

The black swan, or the unforeseen event, is the idea that no quantitative risk management is possible because of the possibility of a single loss that would negate all previous gains.

Hubbard points out that Taleb's position is paradoxical.

[!quote] hubbard_2020_failure#A Note About Black Swans ...he is assessing the validity of using historical examples by using historical examples.

Besides its credibility, the suggestion reeks of intellectual insecurity. It is very convenient to dismiss the whole of statistics based on logic alone, much more so to dismiss the tests used to prove the validity of statistical methods.

False Lucky Fools

Taleb repeatedly conflates legitimate lucky-fools and people with ideas he doesn't like.

hubbard_2020_failure does a much better job of explaining "lucky fools" (see the-failure-of-risk-management#Red Baron Effect).

Nero Tulip vs. John

Taleb uses the story of Nero Tulip, an incredibly cautious investor, and his success over his risk-loving rival "John" to promote the idea that modern quantitative methods (as John is presumed to represent) are inherently flawed.

One of many problems with this presentation is that John is described as young, inexperienced, and of low intelligence. John is a typical lucky fool: there is no indication that he has any strategy, much less that he is practicing modern-portfolio-theory.

If I mistake Taleb's intent, and the story was only meant to convey that experienced, conscientious, and cautious decision-making can lead a person to success, then I'm not sure who he's arguing against.

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