Fooled by Randomness by Nassim Taleb – Summary With Notes and Highlights

📕 Book Summary in 3 Sentences

What can I say about the book in 3 sentences?

1. We tend to ignore the effect of luck on our success.
2. We must strive to view lives and investments from risk to stability.
3. Emotions are a human bug. We cannot use our minds to control it.

🤔  Major Insights/Ideas

What are the major insights or ideas in the book?

1. Insight 1: Luck plays a far greater role in life than we think. Being successful cannot only be attributed to a good education or better looks.
2. Insight 2: Luck doesn’t care or know anybody. It can happen to anyone. Some millionaires are hard-working, and there are lazy millionaires.
3. Insight 3:If a person attains success through luck. That success can easily be wiped away. The success is based on randomness. Investing in Treasury Bonds from the United States government is safe. It is not based on randomness.
4. Insight 4: When a person is mildly successful, this can be explained by labor and skill. On the other hand, huge success can only be explained by taking enormous risks or being extremely lucky.
5. Insight 5: People have this false impression that they are different. They feel that what happens to another person cannot happen to them. They feel they are immune to bad luck.
6. Insight 6: Our minds are programmed to have children quickly and get out of trouble. We can’t understand the world.
7. Insight 7: Thinking you can control your emotions with your mind is similar to thinking you can control your hair growth rate
8. Insight 8: People who act and show their wealth only tend to deplete the things that gave them status. The wealthy don’t get rich by spending. They get rich by saving.

💬  Notable Quotes

What are your top quotes?

• For the gods perceive things in the future, ordinary people things in the present, but the wise perceive things about to happen.
• Every man believes himself to be quite different, a matter that amplifies the “why me?” shock upon a diagnosis.
• The Millionaire Next Door are the accumulators who defer spending to invest.

✍🏼 My Personal Reflections

How has your life/behavior/thoughts/ideas changed after reading the book?

• I began to perceive my investments on the spectrum of risk. I now allocate my investments in the spectrum of stability and risk.

💡 Actionable Steps/Ideas (if any):

My investments are now divided into

• Holding Cash
  • Local Currency – Ghana Cedis
  • Foreign Currency – Dollar
  • Foreign Currency – Pounds
• Treasury Bills/Bonds
  • Local Treasury Bills (GOG Treasury Bills)
  • Local Government Bonds (GOG Bonds)
  • Foreign Treasury Bonds (Canadian Government Bonds),
• Real Estates
  • Renting Apartments

🔆 Book Highlights

1. This book is about luck disguised and perceived as non luck (that is, skills) and, more generally, randomness disguised and perceived as non-randomness (that is, determinism).
2. Furthermore, as most successes are caused by very few “windows of opportunity,” failing to grab one can be deadly for one’s career. Take your luck!
3. Luck is democratic and hits everyone regardless of original skills. The author notices variations from the general population in a few traits like tenacity and hard work: another confusion of the necessary and the causal. That all millionaires were persistent, hardworking people does not make persistent hard workers become millionaires: Plenty of unsuccessful entrepreneurs were persistent, hardworking people. In a textbook case of naive empiricism, the author also looked for traits these millionaires had in common and figured out that they shared a taste for risk taking.
4. 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.
5. We are still very close to our ancestors who roamed the savannah. The formation of our beliefs is fraught with superstitions—even today (I might say, especially today).
6. In my experience (and in the scientific literature), economic “risk takers” are rather the victims of delusions (leading to overoptimism and overconfidence with their underestimation of possible adverse outcomes) than the opposite. Their “risk taking” is frequently randomness foolishness.
7. It is called the Utopian Vision, associated with Rousseau, Godwin, Condorcet, Thomas Paine, and conventional normative economists (of the kind to ask you to make rational choices because that is what is deemed good for you), etc. They believe in reason and rationality—that we should overcome cultural impediments on our way to becoming a better human race—thinking we can control our nature at will and transform it by mere edict in order to attain, among other things, happiness and rationality. Basically this category would include those who think that the cure for obesity is to inform people that they should be healthy.
8. We are faulty and there is no need to bother trying to correct our flaws. We are so defective and so mismatched to our environment that we can just work around these flaws. I am convinced of that after spending almost all my adult and professional years in a fierce fight between my brain (not Fooled by Randomness) and my emotions (completely Fooled by Randomness) in which the only success I’ve had is in going around my emotions rather than rationalizing them.
9. Delivering advice assumes that our cognitive apparatus rather than our emotional machinery exerts some meaningful control over our actions.
10. If he was not to be considered the happiest man of all. Solon answered: “The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity has [guaranteed] continued happiness until the end we may call happy.”
11. The modern equivalent has been no less eloquently voiced by the baseball coach Yogi Berra, who seems to have translated Solon’s outburst from the pure Attic Greek into no less pure Brooklyn English with “it ain’t over until it’s over,” or, in a less dignified manner, with “it ain’t over until the fat lady sings.”
12. 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.
13. Treasury bonds are safe; they are issued by the United States government, and governments can hardly go bankrupt since they can freely print their own currency to pay back their obligation.
14. His personal portfolio contains several million dollars in medium-maturity Treasury bonds, enough to eliminate any worry about the future. What he likes most about proprietary trading is that it requires considerably less time than other high-paying professions; in other words it is perfectly compatible with his non-middle-class work ethic.
15. Nero believes that risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.
16. 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. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets (our hormonal system does not know whether our successes depend on randomness).
17. It is also related to a problem called denigration of history, as gamblers, investors, and decision-makers feel that the sorts of things that happen to others would not necessarily happen to them.
18. I have seen hundreds of option traders forced to leave the business after blowing up in a stupid manner, in spite of warnings by the veterans, similar to a child’s touching the stove. This I find to resemble my own personal attitude with respect to the detection and prevention of the variety of ailments I may be subjected to. Every man believes himself to be quite different, a matter that amplifies the “why me?” shock upon a diagnosis.
19. Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny.
20. A mistake is not something to be determined after the fact, but in the light of the information until that point.
21. A more vicious effect of such hindsight bias is that those who are very good at predicting the past will think of themselves as good at predicting the future, and feel confident about their ability to do so. This is why events like those of September 11, 2001, never teach us that we live in a world where important events are not predictable—even the Twin Towers’ collapse appears to have been predictable then.
22. For the gods perceive things in the future, ordinary people things in the present, but the wise perceive things about to happen.
    14. If you think that you can control your emotions, think that some people also believe that they can control their heartbeat or hair growth.
    15. Asymmetry in life
23. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists—because these professions are more immune to randomness.
24. By living on Park Avenue, one does not have exposure to the losers, one only sees the winners. As we are cut to live in very small communities, it is difficult to assess our situation outside of the narrowly defined geographic confines of our habitat. In the case of Marc and Janet, this leads to considerable emotional distress; here we have a woman who married an extremely successful man but all she can see is comparative failure, for she cannot emotionally compare him to a sample that would do him justice.
25. Aside from the misperception of one’s performance, there is a social treadmill effect: You get rich, move to rich neighborhoods, then become poor again. To that add the psychological treadmill effect; you get used to wealth and revert to a set point of satisfaction.
26. 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.
27. I would advise Janet to move out, and go live in some blue-collar neighborhood where they would feel less humiliated by their neighbors and rise in the pecking order beyond their probability of success. They could use the deformation in the opposite direction. If Janet cares about status, then I would even recommend some of these large housing blocks.
28. Millionaire next door – The moral of the book is that the wealthiest are to be found among those less suspected to be wealthy. On the other hand, those who act and look wealthy subject their net worth to such a drain that they inflict considerable and irreversible damage to their brokerage account.
29. As we saw, the heroes of The Millionaire Next Door are the accumulators, people who defer spending in order to invest. It is undeniable that such strategy might work; money spent bears no fruit (except the enjoyment of the spender).
30. Randomness – Generate a long series of coin flips producing heads and tails with 50% odds each and fill up sheets of paper. If the series is long enough you may get eight heads or eight tails in a row, perhaps even ten of each. Yet you know that in spite of these wins the conditional odds of getting a head or a tail is still 50%. Imagine these heads and tails as monetary bets filling up the coffers of an individual. The deviation from the norm as seen in excess heads or excess tails is here entirely attributable to luck, in other words, to variance, not to the skills of the hypothetical player (since there is an even probability of getting either).
31. Remember that nobody accepts randomness in his own success, only his failure.
32. What happened? The trick is as follows. The con operator pulls 10,000 names out of a phone book. He mails a bullish letter to one half of the sample, and a bearish one to the other half. The following month he selects the names of the persons to whom he mailed the letter whose prediction turned out to be right, that is, 5,000 names. The next month he does the same with the remaining 2,500 names, until the list narrows down to 500 people. Of these there will be 200 victims. An investment in a few thousand dollars’ worth of postage stamps will turn into several million.
33. Chaos theory concerns itself primarily with functions in which a small input can lead to a disproportionate response.