About the author Nisin ses Tt thoi Cai LLG 2 ‘risishaning hedge find operator, anda fellow atthe Courant Instat of Mathematial Sciences of New York University. He hashed {variety of derivative eading position in New York ad London and ‘worked a a independent flor wader in Chicago, Taleb was inducted in February 2001 inthe Deriatves Strategy Hall of Fame. “Taleb received an MBA from the Wharton Schl anda PhD. from University ParieDauphine. He is the ator of Dynamic Hedging: Managing Vanilla and Exotic Options (Wily, 1997) FOOLED BY RANDOMNESS The Hidden Role of Chance in the Markets and in Life + NASSIM NICHOLAS TALEB TEXERE New York # London.CONTENTS + Preface and Acknowledgments Chapter Summaries Prologue Mosques the Clouds PART I: Sovons WARNING - SKEWNESS, ASYAMETRY, INoucrioN ‘One: If You're So Rich Why Aren't You So Smart? Nero Tai Hit by Lighniog “Temporary Sanity Modus Operan No Work Eis “There Ate Always Sees Jol” the High Yield Trader ‘An Overpaid Hick‘The Red-Hot Sonmer Serotonin a Randomness ‘Your Det Is Rich, Very Rich . “Two: A Bizarre Accounting Method Alternative Hctory Russian Roulee [An Even More Vicious Roalewe ‘smooth Per Relatione ‘Savation Via Aerflt Solon Visits Repine's Night Cb George Will Is No Solon: On Countrinntve Tra Horse in Debates Risk Managers ‘Three: A Mathematical Meditation on History aroplayboy Mathematics The Tooke ‘Mente Carlo Mathematics nin My Aric ‘Making Hitoy glib Ceowsing the tic Dengration of History ‘The Stove I Hot My Solon Disiled Thinking om Your Palle Breaking News Shilke Redox GGeromoracy Phiostrata in Monte Carl: On the Difference Between Noise ‘and Information Four: Randomness, Nontense, and the Scientific Intellectual Rendomnses and the Verb “The Father of Al Peudotinkers Monte Carlo Poetry Five: Survival of the Leas Fit = Can ‘Randomness? Evolution Be Fooled by Carlos the Emerging Markets Wiard "The Good Years, Averaging Down Lines in he Sead Job he High-Yield Trader “The Quant Who Knew Computers and Equations ‘The Traits They Shared A Review of Marker Fools of Randomness Constants ave Evolutionary Theories (Can Evolution be Fooled by Randomness? Six: Skewness and Asymmetry “The Median le Not the Message ‘all and Baar Zoology ‘An Argan 29-YearOld Soa Rare rents Symmetry and Science “The Rare Event Fallacy ‘The Mother of All Deceptions Why Don't Statisisiane Detect Rae Events? A Mischievous Child Replaces the Blick Ball Seven: The Problem of Induction ‘rom Bacon to Hume ‘Coyne Aerats ‘Niederotfer, Victorian Geatleman Sir Karl's Promoting Agent ‘Location, Location Popper's Answer Open Soiety “ “ 6 oe a 2 7” 8 7” a 84 8% 8 93 96 7 9° 100 100 103 1s 106Nobody Is Fefct Pascal's Wager ‘Thank You Solon . PART Il. Moyers ox Tyrewerrins - SURVIVORSHIP AND ‘OrnER Blasts Ik Depends On the Number of Monkeys Vicious Rel Life “This Secton ight: Too Many Millionaires Next Door How To Sop the Sing of Fane ‘Somewhat Happy Too Mach Work You're a Fale Double Surorehp Biases ‘More Experts Visiiity Winners ess Bal Market A Gwen's Opinion Nine: IIs Easiee To Buy and Sell Than Fry an Egg Fooled by Numbers Placebo Investors [Nobody Has To Be Competent Exotic, Life Is Coincident “The Mysterious Leer ‘An Inerapred Tennis Game “The Birthday Paradox Wea Salt Word! aca Mining, tats and Charlatans “The Best Book | Have Ever Read! “The Rackteer A More Unseing Extension 108 ni 14 us us uy 7 ne ne 0 0 m2. m. Bs a m7 ns na m1 rr 12, 12 13 1 1 The Earnings Season: Fooled by the Results Cancer Coes rofessoe Pearson Gots to Monte Carlo (italy Randomness Des Not Look Random! “The Dog That Did Not Bark: On Bassin Sint Kaowledge 1 Have No Conclusion ‘Ten: Loser Takes All -On the Nonlineartes of Life The Sandie Ffect Ee Randomess Learning to Type Mathematics Inside and Onde the Real World Brdans Donkey orth Good Side of Randomness Whew ie Rais Fours Eleven: Randomness and Onur Brain: We Are Probability ‘Blind Pari or the Bahamas? Some Architectural Considerations From Peychoogy to Newrbiology ‘Our Natural Haat Kafka ina Courroom ‘An Abwurd Work Kabneman and Tverky Nesrobiology Examples of Biases in Understanding Probability We Are Option Blind Probable ad the Media (More Journal) {CNBC a Lach Time You Should Be Dead by Now The Bloomberg Explanations Fltesing Methods ‘We De Not Understand Confidence Levels ‘An Admision “7 19 40 a 12 12 4 148 “wr 149 9 150 1 153 154 156 137 158 159 160 1a 18 163 164 166 168 168PART Ih Wax 1 oy Bags - Livise Wirt RaNbosmis 1 Am Not So Inligent The Odyseon Mate Command ‘Twelve: Gamblers’ Ticks and Pigeons in a Box “Taxi Cab English and Couslty The Skinner Pigeon Experiment Phiosrtus Rede ‘Thirteen: Carneades Comes to Rome: On Probability and ‘Skepticism \Carmedee Comes to Rome ‘Prokablity the Cid f Shep Monten de Nori’ Opinions Path Dependence of Bali Compu Instead of Thinking From Fra to Panel Fourteen: Bacchus Abandons Antony [Notes on Jackie Os Faneral Randomness and Personal Elegance Epilogue: Solon Told You So Beware the London Tealfic Jams Notes Ines About TEXERE. 169 2 7m 175 ws 9 182 183 1 185 187 18 190 191 192 14 196 196 17 98 206 PREFACE AND ACKNOWLEDGMENTS + his book is the synthesis of, on one hand the no-nonsense mathematical wader (self-styled “practioner of uncertainty) who pea his life tying to resist being fooled by randomness and tick the ‘emotions associated with uncereiny and, onthe other, the aesthetically ‘obscize, literature loving human beng willing tobe fold by any form ‘of noneene tit is polished, refined, orginal, and tasteful am noe capable of avoiding being the fool of randomness; what I can dois confine ito where it brings some aesthetic gratification. ‘Much has been writen about our bases (acquired or gene) in| ‘dealing with rndonnness over the past decade, My rales whe weing this book hve ben to avoid discassing a) anything that didnot ther personaly witness on the topic of develop independents, and (b) anything that Ihave not dsiled well enough to beable to writen the subject with the sights effort. Everything tha eomotely fe ike work ‘vas out. Thad eo purge the text rom passages that seme to come fom visit co the library, including the scientific name dropping. tied to tse no quote chat doesnot naturally spring fom my memory and does ‘not come from a writer whom { have intimately frequented over the ‘yeas ( detest the practice of random use of borrowed wisdom ~ much fn tha, later). Aut race aut loquere melons silencio (only when the words uperorm silence.| tried to make the minimum out of my direct profession of mathematical trader. Markets ate mere special cate of randomness twaps. I discuss them in an ilsrative way a8 would jn a dinner conversation wit, sy, a cardiologist with intellectual curiosity (Coed 1 model my second generation fiend Jacques Mera) Some acknowidgments frst, I would like to thank frends who can ‘beconsiered righfl co-authors. am gratefl vo New York intellectual and expert in randomness Sean Jonas (do not know any other