“Fooled by Randomness”

My eldest daughter gave me the book “Fooled by Randomness” Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb and I have enjoyed reading it “so far.”

The premise of the book is that life is “random” or at least in large partt driven by likelihoods and probabilities.  Those of you that actually know me, know that I appreciate the random nature of life, and that I believe no outcome is “certain.”  Even knowing that, intellectually, I find myself reflecting on the various lessons in this book, particularly after my recent automobile accident.  In that accident, I started second guessing my decisions.  What if I had gone to Home Depot first?  What if I had decided to go back to the main road to get between stores?  What if I had waited a few seconds before leaving Lowe’s?  What if I hadn’t asked for help, and had left Lowe’s 2 minutes earlier?

The timing of receiving the book (and reading it) helped my put all this in perspective.  All those decision points, and actions arising from those points, are what quatum physicists would call “alternative realities” (and some would tell you they all occured, in parallel universes!)  But there is little one can do to control the outcome.

According to this book (at least, up to my current point in reading it) we see patterns in most things, after the fact.  We play an elaborate game of connect the dots, to make “sense” out of what happened.  We ignore the role of chance, the importance of sheer “randomness” in the events.  The author writes:

Past events will always look less random than they  were (it is called the hindsight bias). I would listen to  someone’s discussion of his own past realizing that  much of what he was saying was just backfit  explanations concocted ex post by his deluded mind.

I realize that, in some way, (perhaps some warped way) I am taking solice in the fact that the accident was just a statistical probability that for some reason, on Thursday, decided to “realize” itself on the side of my car. BAM!

Now, that said, the book also plays a role in explaining the importance of “managing” randomness.  In the book, the author discusses a man, Nero who, as a trader in Chicago, learned early on to play the “game” of moderation.  Nero (being a statistician by education) understood the role of probability even in the market, and understood even better the impact of the “statistically rare event” or what the author calls “The Black Swan.” (He then later writes a longer book on this topic “The Black Swan: The Impact of the Highly Improbable — This one is on my shelf and will be next in my reading queue).

According to Taleb, Nero chose to limit his gains by not seeking the high rewards, because those carry with them the greatest risk, in the event of the “statistically unlikely” black swan. In my accident, Honda helped moderate the risks by providing side curtain and seat-embedded airbags.  We were t-boned, but my wife (sitting on the side that got hit) doesn’t have a single scratch and given the extent of the damage to the door, we believe the airbags protected her.

These are the sorts of things that we teach our students in decision analysis.  Assess the probable outcomes, and the likelihood of the event.  Understand the possible gains and losses.  Then make your decisions based not on the certainty of your ability (flawed) but on your knowledge of the impact of randomness.

This book arrives at just the right time to console me, to remind me that sometimes “stuff happens” and it’s just random.  Accept it, acknowledge it, and plan as best you can.  It’s a great read, and I highly recommend it to all.  But it leaves me with this question:  If it’s arrival was truly at “just the right time” —

Was it’s arrival… Random?