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

“Fooled by Randomness. The Hidden Role of Chance in Life and in the Markets” (English: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets) — a book by American economist and trader Nassim Taleb. The book is part of Taleb’s four-part philosophical essay series on the role of uncertainty in life and economics, titled Incerto, which includes the books: “Fooled by Randomness” (2001), “The Black Swan” (2007), “The Procrustean Bed” (2010), and “Antifragility” (2012).

The book’s main idea is that modern people often don’t know about the existence of randomness and tend to explain random outcomes as if they were patterns.

According to Taleb, people tend to overestimate cause-and-effect relationships—for example, seeing elephant figures in clouds instead of realizing that they are just clouds of random shapes. Because of this, people consider the world more explainable than it really is, and look for explanations for phenomena even when those explanations don’t exist.

Taleb also discusses other, in his view, mistaken ideas about randomness, in particular:

- The survivorship bias. We see winners and try to “learn” from them, forgetting the enormous number of losers.

- Skewed distributions. Many real-life phenomena don’t have equal probabilities—unlike flipping a coin and getting heads or tails—and are instead governed by different patterns that sometimes seem strange and illogical. For example, a 99:1 bet, where you almost always win, but if you lose, you lose all your savings. People can be easily misled by statements like “I won 50 times on this bet.” According to Taleb, traders may have a stable, small income from selling options, but when a market crash happens, they lose everything.