Philosophic Value in Nassim Taleb\'s

¶ … philosophic value in Nassim Taleb's tome, Fooled by Randomness, as there is pragmatic or financial value. To the author's credit, he is able to seamlessly blend his conception of fiscal practices, events and human nature so that he neglects neither philosophy nor practicality while positing a viewpoint that, while not everyone will necessarily agree with it, will certainly provoke analysis. Essentially, what Taleb has done with this particular work is to examine the effects of randomness in financial situations and then apply conclusions that he has drawn from them to larger realms of life itself. The work focuses on probability and how human nature internalizes and responds to it -- which allows the author to produce findings or best practices for fiscal and general life matters.

The central thesis that the author's other themes revolve around is that many events and occurrences in human life are attributable to randomness, or to luck itself. Such a thesis seems highly contentious at best, but the financial writer and trader goes to great lengths to demonstrate its veracity. Such an assertion, of course, is counterintuitive to human nature -- which likes to draw effects from distinct causes and to attribute desired results to preparation, intelligence, and other virtues. Despite the author's specific examples related to trading and other pecuniary practices, the main way he buttresses his contention is by citing the fact (in the third chapter) that all too often, people utilize a narrow time frame when analyzing the odds of a desirable outcome. In this respect, Taleb appears to have a valid point. By analyzing data from a finite epoch, such as a span of say, three or four years, random events can appear exceedingly less so. However, when extending the time frame in which such events are analyzed, one realizes that there are a multitude of other outcomes which may not be as desirable -- which ultimately alludes to the fact that luck, regardless of other factors, played a demonstrable role in such a desired outcome.

Yet just as important as analyzing the outcome of events in too narrow a time space are certain intrinsic aspects of human nature itself. In the second chapter Taleb discusses the fact that it is not uncommon for people to best remember -- and refer to -- examples of winners (be they those who retired from lucrative trading, from building profitable companies or achieving success in some other field) rather than losers. This proclivity in human nature accounts for the fact that many people are willing to overlook simple statistical and mathematical odds and allow their judgment and actions to be determined by 'success stories'. A good deal of Taleb's book focuses on the fact that human nature is counterintuitive to statistical facts. People tend to act based on their emotions, their adrenaline, excitement and a host of other factors that are easily swayed by random events. In the eleventh chapter the author claims that this tendency is explicable in part due to mankind's propensity for considering outcomes in absolute terms in which people consider (and therefore focus on) achieving only one outcome or another. Such temperaments result in people concerning themselves only with outcomes, and not the probabilities that an entire host of outcomes may result.

In terms of stock trading, the author is able to script some excellent examples of the aforementioned concepts that may be of benefit to the prudent financial analyst. The main point he attempts to make in this specific industry is that success in the market has little to do with prowess or preparation, and is instead the result of simple fortune. In fact, he goes so far as to indicate that most of the tools that traders utilize to analyze their prospects are of little use to their overall probability of hitting it big. In this respect Taleb most certainly makes a good point. The relationship between past success and previous ones are tenuous, at best. Therefore, the author widely advocates largely limiting oneself to historical media reports and specific financial analyses in order to funnel out what he believes amounts to noise, in order for traders to perceive true signals. Again, it is crucial to note that doing so is decidedly counterintuitive and the author posits the viewpoint that humans largely tend to determine causal relationships where a long time frame of analysis indicates such casualty simply does not exist. As such, Taleb propounds the notion that psychological and emotional factors -- with which most people use to make decisions, whether it is in stock trading or in other areas of life -- should be muted in order to make the most efficacious choices.

When specifically applied to trading in the stock market, however, this theory of the author's takes on some slightly curious repercussions. In terms of his own personal trading (which by extension serves as an example for other people to use) Taleb bases his strategy on identifying and looking to maximize the utility of what he refers to as rare events. Such events are deviations from the norm that usually serve to cripple or seriously reduce the effectiveness of conventional traders. However, by actively looking to capitalize on such events, traders can actually optimize their practices when such events do occur. The following quotation suitably explains such a strategy.

…there is a category or traders who have inverse rare events, for whom volatility is often a bearer of good news. These traders lose money frequently, but in small amounts, and make money rarely, but in large amounts. I call them crisis hunters. I am happy to be one of them (Taleb, 2004, p. 106).