Fooled By Randomness and Lessons Learned

Nassim Nicholas Taleb has written another best seller called “Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets.”

I think everyone should read this book because it provides great perspective about life in general. I’ve been reading the book as a way of getting a handle on risk management in the current economic climate, but I am finding that the concepts Taleb explains could be applied to all facets of life. If you can get past the author’s obvious intellectual snobbery, it’s a pretty good read.

If I had to sum up his concepts, it’s the idea that we human beings are blind to the role that probability and randomness (luck, both good and bad) plays in our daily lives. We tend to take credit for our hard work and skill, if we succeed in life, and we often blame ourselves if we fail. But we didn’t choose where we were born or our parents or the time period in which we live. I’m glad I am not born in Haiti. I’m glad my mother cared for me and was not a crack addict. I’ve been lucky.

Taleb says we commonly mistake luck for skill. He illustrates this concept in numerous ways. One example that illustrates alternative outcomes goes like this. Imagine I provide you with a loaded revolver and offer to pay you $10 million each time you put the gun to your head and pull the trigger. The revolver has six chambers but only one holds a bullet. Before the game begins, there are five potentially happy outcomes and one fatal result. If you live, it doesn’t mean you’re skilled, it means you are lucky and brave, even though the odd are with you that you’ll survive!

Imagine a money manager that has five market beating years in a row. We infer from his track record that he is skilled, when in fact it may just be luck to have been in the right asset class or using a strategy that works in most circumstances. You might hire him because of his good track record, mistaking luck for skill. Past performance is not indicative of future results!

You can apply that concept to nearly any human endeavor. For example, like tens of thousands of other people, I am working on writing a screenplay. Most screenplays started will never be finished, even fewer will ever be read by the right people and only a handful of the plays that are read will be made into a movie. Writing a successful movie script has as much to do with luck as it does with the skill of the writer.

One thing I can say for sure is that if I don’t write the screenplay, I can never be a screenplay writer. (If I don’t pull the trigger, I can never win the $10 million.) It comes down to what you are willing to risk. As Clint Eastwood would say, “Do you feel lucky?”

In the last few weeks I have had numerous conversations with people of all walks of life who are struggling in the current economy. I think people feel that they have done something wrong or made the wrong choices. Somehow they feel they are to blame for loss of a job, income or wealth. Nothing could be further from the truth. It’s just bad luck and it’s not over till the fat lady sings. Better days are ahead.

I’ve gone through good times and bad times in my life. The ups and downs of living are part of the randomness of events we don’t easily see and can’t predict.

Einstein railed against the idea of random chance in physics. He is known for the famous quote that “God does not play dice.” I don’t agree. God invented the game and enjoys watching how we react to our daily wins and losses.