The Gist: Success may be more random than we’d like to think.
A review of Fooled By Randomness by Nicholas Taleb.
The ambitious are always trying to figure out how to win in life.
Often that search means looking at winners and copying their practices – or investing in their future success. You can read articles by the dozen about how the President won his election with a master communications strategy while his opponent neglected critical voters. You can watch TV after the Super Bowl to find out the diet, exercise regimen, even the sex life that might have contributed to the quarterback throwing the game-winning Hail Mary. You can dial into an earnings call to listen to a CEO diligently explain his strategy for building upon the company’s record-breaking profits from the previous quarter.
But what if a secret to success is randomness? As the old saying goes: better to be lucky than good.
Figure 1. For maximum performance, knock on wood while crossing your fingers and grasping a rabbit’s foot underneath a horseshoe.
This is the question that haunts Fooled by Randomness, the first in a series of books by Nassim Nicholas Taleb, an options trader, about the role of uncertainty in our life. We humans are emotional beings, poorly equipped to evaluate odds, and naturally inclined to construct reasons for events that may not be knowable, much less actually true.
Figure 2. If he hasn’t called, it must be that he joined the French Foreign Legion!
To begin to understand performance, you need to know the size of the sample (how many people tried) and the randomness content of his profession (how significant a factor is luck). How much success could luck alone produce?
If someone accurately predicts 10 presidential elections, the media hail him as a predictive genius, report with big headlines his latest prophecy, delve into his particular analysis of the electorate or the economy or whatever his formula. But you have to seriously consider whether he is better than someone who accurately predicted 10 coin flips. If a million people try to predict something with (almost always) only two outcomes, some will be right by chance alone, whether they base their predictions on deep analysis, gut feeling, or the weather. To extend the example: If a million people try to predict 10 die tosses, there are more opportunities to be wrong so fewer should be right by only luck — but some still will because there are a million participants!
Figure 3. Or, in the case of Nate Silver, you only have to predict one election for the media to rave about you. The next election didn’t quite go as predicted.
In more complicated professions, just because the odds can’t easily be defined doesn’t mean they don’t exist. Talent is relevant but we often overestimate it. If you are identifying the ingredients to success, you have to constantly assess the role of luck. Taleb controversially argues: “I am not saying that Warren Buffett is not skilled; only that a large population of random investors will almost necessarily produce someone with his track records just by luck.”
The role of randomness is far easier to understand from the loser’s perspective. You win and you credit your creativity, genius, and industry. You lose and you blame the odds.
Of course, there could be very good reasons why you or someone else lost. Losers don’t get biographies. But the reason behind winning or losing may really be luck. And that fact doesn’t satisfy our minds that hunger for a story. Yet winning is worthwhile so we study the winners.
Figure 4. Apparently the secret to winning the Powerball is using a combination of the birthday of your first ex-mother-in-law, the number of Budweisers you had last night, your number of unreplaced teeth, and the amount of spots on your coonhound divided by 25.
Isolating performance quickly complicates things. The best wide receiver on the planet has real limits that come with the guy throwing to him, and vice versa. Taleb observes that the performance of a cook in the company cafeteria is far easier to evaluate than that of the company CEO. At a certain point, one can only so often confuse salt and sugar, but at the pinnacle of leadership there are a lot more factors that go into success or failure. And the more factors, the more randomness plays a role.
Figure 5. Yes, it may be said that a cook can better master the ingredients of success than a CEO.
If top performers are identified, analysts will discover commonalities and make the leap: if you share these traits, then you, too, may become a top performer. But the commonalities are rarely put under study. High tolerance for risk is an entirely believable shared trait among billionaires and bankrupt. Taleb again: “I never said that every rich man is an idiot and every unsuccessful person unlucky, only that in absence of much additional information it is preferable to reserve one’s judgment.”
You may also stumble upon something completely unrelated but randomly correlated. Taleb himself is “convinced that there exists a tradable security in the Western world that would be 100% correlated with the changes in temperature in Ulan Bator, Mongolia.” This is called a spurious correlation, itself an amusing website. The examples are silly, of course, but they point to the possibility that a plausible explanation is actually completely wrong.
Even when true statistics are captured, they are prone to misinterpretation. Just because a majority of American presidents were born before 1900 does not mean that the next President is likely to be over a century old. If a surgery with a 99% survival rate has been performed 99 times and you’re next, you still have a 1%, not 100%, chance of death. Insurance is not necessarily a waste just because you have not had to take advantage of it. Our mind does not easily grasp these ideas.
Taleb ends up dividing the world: “I thus view people distributed across two polar categories: On one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.”
For those who take the red pill: “Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance.”
What are some of those methods?
First, be happy you’re already lucky to live in the greatest country in the world. Psychologists have found that people are happier when they make $70,000 a year when everyone around them makes less than to make $80,000 a year when everyone around them makes more. Whatever your circumstances, if you are reading this newsletter, there are people worse off – and yes, perhaps, because of random bad luck. Inform your envy that its objects may merely be beneficiaries of the odds. And take into account just how lucky you are – and how grateful you should be.
Figure 6. Classic financial advice is to own the cheapest home on the block. New happiness advice: own the most expensive home on the block.
Second, be skeptical of the explanations behind success and failure – including the ones you conjure for your own – that don’t factor in luck. News is especially bad: Every day every media outlet screams for attention even when the news does not merit it. Analysts offer immediate speculation without subsequent confirmation. On television, anchors are hired based on their charisma and looks, not their crucial insights. Taleb continues the indictment: “To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing, such as by saying: ‘Today the market went up, but this information is not too relevant as it emanates mostly from noise.’ He would certainly lose his job by trivializing the value of the information in his hands.” To attain distance, I personally gather news and read it altogether at the end of the week. I can read the whole story, rather than each daily update, or decide the story isn’t even that relevant. I have other friends who have unplugged from the news altogether. Another reason to read books instead! But even taking a historical view, “Past events will always look less random than they were… Humans are not wired to understand the impact of randomness in our lives, and so we must be constantly vigilant as to not assign greater significance to things that largely happened by chance.”
Figure 7. Sources confirm that the dog DID NOT chase the cat today. Will this signal a new era in feline-canine relations? Let’s go to our panel.
Third, remember: Winning does not mean the risk should have been taken. Losing does not mean the decision was bad. Never confuse the quality of a decision with the desirability of the outcome. By all means, try to figure out what happened. But judge decisions based on what was known at the time, not whether the gamble paid off. Taleb even gets philosophical: “Heroes are heroes because they are heroic in behavior, not because they won or lost.” Just because randomness plays a role doesn’t mean you shouldn’t work hard and give yourself opportunities to score.
Ultimately, as Robert Heinlein observed, “Certainly the game is rigged. Don’t let that stop you; if you don’t bet you can’t win.” Who knows? Maybe the game is rigged for you.
Figure 8. Click here to buy Fooled by Randomness. 8/10. Taleb’s writing is best characterized as wanderlust, as it does not fit neatly together and he has a unique voice that not everyone will appreciate. But there are outstanding insights scattered throughout, complemented by vivid thought experiments and playful language. He is more famous for Black Swan, but I consider this a better book. His work resists summary and I’ve done my best above – though he argues that book reviews tell you more about the reviewer than the book, so take that as you will. For a review of more of his work, click here.
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I read over 100 non-fiction books a year (history, business, self-management) and share a review (and terrible cartoons) every couple weeks with my friends. Really, it’s all about how to be a better American and how America can be better. Look forward to having you on board!