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

“The growth in available information has been exceeded only by the expansion of noise.”

The volume of information people are presented with in the modern world far exceeds our brains’ ability to process. Throughout the book, Taleb highlights ways the signal is lost in the noise and provides his own strategies for making the distinction in a saturated information environment.

“Solon was wise enough to get the following point; that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.”

Taleb uses a parable to frame the first part of the book. The quote speaks to one of the book’s themes: the difference between skill and luck. People often misattribute their success to skill when it was actually due to luck, leaving them vulnerable to future reversals of fortune. Taleb provides a comparative example of this distinction in Chapter 1 when he discusses Nero Tulip and John.

“Intellectual contempt does not control personal envy.”

The quote is a good example of an aphorism, of which the book contains many. Here, Taleb is speaking about Nero (the intellectual) and his envy of John’s greater material wealth. Implied in the statement is that oftentimes, emotions will prevail over intellect, something that Taleb will return to later in the book.

“Lucky fools do not bear the slightest suspicion that they may be lucky fools—by definition, they do not know that they belong to such a category.”

This is another passage showing the theme of human perception of cause and effect. This is an example of attribution bias, which Taleb later discusses in more detail. A lucky fool will likely credit their success to skill rather than allowing that randomness may have had an influence.

“Heroes are heroes because they are heroic in behavior, not because they won or lost.”

Taleb points out the tendency to focus on outcome rather than process. As it applies to trading, Taleb insists that to be successful, one should not favor outcome over process; instead, one needs to consider that the outcome is often caused by randomness.

“Volatility seems to be determined not by the actual moves but by the tone of the media.”

Taleb is critical of the role media plays in the perception of markets. This passage offers another example of Taleb highlighting the way signal is buried by noise. Taleb is so weary of television analysts that he eventually decides to get rid of his television.

“The blowup, I will repeat, is different from merely incurring a monetary loss; it is losing money when one does not believe that such fact is possible at all.”

This is another example of the repercussions of human perceptions of cause and effect and mistakes in the distinction between luck and skill. A true blowup—an utter failure—comes about because when a person attributes their success to their own skill rather than to luck, they believe they have more control over outcomes than they do, and thus becoming unaware of the possibility of failure. Someone who attributes their success to luck is more likely not to push that luck and blow up.

“A mistake is not something to be determined after the fact, but in the light of the information until that point.”

Taleb is using this point to illustrate hindsight bias. It is easier to recognize mistakes after the fact. However, recognizing the mistake in real-time is imperative for it to be avoided.

“The problem with information is not that it is diverting and generally useless, but that it is toxic.”

Taleb offers a forceful rebuke of the information age here. Again, the quote shows Taleb’s outright district of media and implies that controlling the intake of information, especially in bite-sized chunks, is of the utmost importance.

“If there is anything better than noise in the mass of ‘urgent’ news pounding us, it would be like a needle in a haystack. People do not realize that the media is paid to get your attention. For a journalist, silence rarely surpasses any word.”

The use of quotes around the word urgent signals Taleb’s sarcasm. The quote further illustrates his disdain for journalists who are driven by the need to garner attention. Taleb implies here that for many journalists, creating hype is their primary motivating force.

“The wise man listens to meaning; the fool only gets the noise.”

This is another passage that is both aphoristic and also shows the value Taleb places on distinguishing the signal from the noise. The quote also sets up a brief literary analysis of a Cavafy poem that deals with the same theme.

“Even the economists, who usually find completely abstruse ways to escape reality, are starting to understand that what makes us tick is not necessarily the calculating accountant in us.”

Taleb examines the contrast between the cognitive functions of the brain and human emotion. In Taleb’s view, emotion has more influence on the way people make decisions, especially when it comes to risk evaluation, than they may recognize.

“There is a saying that bad traders divorce their spouse sooner than abandon their positions. Loyalty to ideas is not a good thing for traders, scientists—or anyone.”

Taleb’s claim here is influenced by the work of Karl Popper. In science, holding to an idea instead of prioritizing the truth, whether it aligns with the idea or not, is not science at all. In trading, one needs to be open to discovering that their ideas might be wrong to avoid future failings.

“I associate rare events with any misunderstanding of the risks derived from a narrow interpretation of past time series.”

Taleb argues here that a misunderstanding of the past can cause a false sense of confidence. Something never having happened before is not a reason to have full confidence that it will not happen at some point in the future.

“No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”

In this passage, Taleb is describing the difference between deductive and inductive reasoning. Taleb credits the black swan problem to David Hume; it was later used by Karl Popper in his critique of inductive reasoning. It also highlights Popper’s theory of falsification.

“Extreme empiricism, competitiveness, and an absence of logical structure to one’s inference can be a quite explosive combination.”

These are the ingredients, according to Taleb, that make for a blow-up. For much of Chapter 7, Taleb describes the necessity of having some measure of skepticism not to be fooled by randomness. The passage instead highlights a reductionist mindset in which there is certainty which means that randomness is completely underestimated.

“The more data we have, the more likely we are to drown in it.”

This passage is representative of Taleb’s view on data. While he balances this with ways data can be useful, data (especially too much of it) can convolute ideas. It can open the door to over-analysis, which can make decisions more complicated than they need to be. Often, too much data can lead people astray.

“I have repeated that becoming more rational, or not feeling emotions of social slights, is not part of the human race, at least not with our current biology.”

Taleb points to inherent limitations in the human brain. Rather than pretend that something can be done about the way humans are wired, Taleb advises that people accept this part of human nature since it cannot be controlled.

“Remember that nobody accepts randomness in his own success, only his failure.”

This is an illustration of the most common mistake people make about The Distinction Between Luck and Skill. Taleb refers to this phenomenon as the attribution bias. A person is likely to feel this way because of some emotional interference; they do not want the negative feelings that come with owning their own failures and want the positive feelings that come with owning their own success.

“Superstitions can instill some poetry in daily life.”

The quote highlights how Taleb himself makes sense of his own tendency toward superstition, which he discusses in this chapter. He acknowledges that he can be superstitious even despite his scientific, intellectual personality. The contrast between these two provides something interesting to life and reminds him that not everything can be rational.

“Self-contradiction is made culturally to be shameful, a matter that can prove disastrous in science.”

Taleb aims this comment at a culture in which being wrong is unacceptable, making the wrong person feel shame. In general, this has negative consequences on society, but it is especially dangerous for scientists to not admit to being wrong. Taleb views a competitive nature as antithetical to science as it tends to obscure truth.

“One becomes a traitor otherwise. Now I hold that Monsieur de Norpois should be a trader.”

The quote highlights Taleb’s often playful writing style. Here, his pun on trader/traitor is an example of the wit that he displays. Much of the content of this book is serious, but Taleb balances that with moments like these to keep things on the lighter side when warranted.

“People confuse science and scientists. Science is great, but individual scientists are dangerous.”

The quote is another example of Taleb’s aphoristic writing style. It also echoes the central purpose of the book. At the heart of this quote is the assertion that science can be corrupted both deliberately and inadvertently by the human flaws of those who do science.