It’s not easy being human, try as we might to keep a level head and take an objective view of events, we’re routinely hamstrung by innate mental shortcuts and biases. One of these is our under-appreciation of ‘randomness’.

Now, that may in itself sound like a random thing to say. We’re all aware of randomly bad luck – the shoelace that snaps when you’re in a hurry, or the dead laptop that throws your day into chaos, but those are small, if annoying, examples. The true size and shape of randomness and its role and importance in all our lives is something we tend to miss. Not only that, we’re fooled into trying to rationalise random outcomes as quite the opposite.

Here, we’re looking at exactly this innate (and often unhelpful) characteristic in ‘Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets’ by Nassim Nicholas Taleb. This edition’s cover calls it ‘One of the smartest books of all time’, so let’s not assume it’s just a random quote and explore it further.

What makes it great, in a nutshell?

Taleb’s book asks searching questions about how we understand chance and how far we allow ourselves to admit to (or even register) its impact on our lives, our investments and our professional experiences. A good example is how we view entrepreneurs, celebrating them as ‘talented’ or ‘visionary’ without factoring in the role of luck in their success, something Taleb calls ‘Survivorship bias’. Another notable example is the role of luck in wealth management and the undue adulation that often finds its way to ‘superstar’ fund managers.

Looking in the wrong direction

The opening chapter looks at two characters, John and Nero, and the fickleness of fate. When we meet John he’s a high-risk investor with a social status far above his conservative friend Nero. But John’s luck can’t hold forever and when it changes, he loses not only money but status too. Nero on the other hand loses neither.

This allegory leads us to Chapter 2, which is where Tabel gets into the meat of his first big idea –that history remembers winners, but tends to forget the losers. More importantly though, we assume the path those winners followed was the ‘right’ one, because it worked out. Here, we’re showing a clear preference to see ‘because of’, when what we’re really looking at is ‘in spite of’.

Over the next two chapters, Tabel explores how to approach the problem, which is essentially a study in looking at the big picture. He examines our tendency to see patterns where there are none, which is useful in not being eaten, but not so good for complicated modern situations. He notes that while we often need our irrational emotions to reach decisions at all, they can really get in the way. He argues that it’s essential to look at as many events and factors as possible, over the longest timescale available, to truly understand a given situation.

The obvious illustration is the stock market, where six months will look very different to five years, and different again from two decades. Still, it’s easy to zoom in too closely, spot ‘patterns’ that aren’t there and misread the significance (or insignificance) of short-term market movements.

Survival of the least fit?

As the book progresses, Tabel explores the idea that even though we assume the cream will rise to the top, it’s not always that simple. He asks ‘can evolution be fooled by randomness?’, and concludes that yes, it can. Nature may favour the individuals best adapted to dealing with its demands, but it’s not always the case – even the most robust of gorillas will be immediately removed from the gene pool if it’s hit by a falling tree.

In a more serious sense, the same is true of humanity – it’s sobering to wonder how many extraordinary individuals, good and bad, never realised their full potential because they were taken by war, disease or just random events. And the same logic can be applied to businesses and products, which are definitely not assured of success or failure based on quality alone, nor on how much work went into promoting them. Take the QWERTY keyboard for example, which contrary to popular opinion, isn’t the most ergonomic. It was, however, a workable solution to stopping printers from jamming and once it was sufficiently widely adopted, it was simply more trouble than it was worth to change it.

Randomness and investment

Later in the book, Tabel extends his arguments to stocks and shares and we get into his thoughts on fund managers who aim to ‘beat the market’. He argues the market itself is effectively an average, and walks us through an experiment that begins with 10,000 managers, each with a 50% probability of making $10K in a year, but a 50% probability of losing that amount.

Those who lose $10K are removed from the pool, so at the end of the year, we’d expect about 5,000 managers to be celebrating, with another 5,000 given their marching orders. In year two, 2,500 managers remain, each with two good years of performance. After three years there are 1,250 managers, after four years it’s 625 and five years in, we’re down to 313, all with five stellar years on their record.

That’s obviously a simplified (and not very random) set of figures, but Tabel makes the point that these managers will be hailed as exceptional, even though they arrived at their success just by repeatedly landing in the ‘right’ 50%. Further, when these ‘talented’ managers inevitably stumble too, commentators will look for mathematical reasons as to why their otherwise glowing track records took a dive, when in fact, as he puts it – their luck changed more than they did.

So is everything down to luck?

There’s a lot in this book that might be read as everything being down to luck, which doesn’t feel like an inspiring conclusion. But from chapter 10 onwards, Tabel offers some reassurance – “it’s more random than we think, not it is all random” – and sets out what we can actually do with that information.

We can’t change the fact that luck and randomness play a huge part in everyone’s life, but what matters is perspective. As he says:

“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.”

Randomness happens. A lot of things in life happen by chance, and in a call-back to the investor example, he notes that studying whether something is repeatable is a key part of understanding whether it’s down to skill or luck. He suggests the best way to insure yourself is to understand your skills at any given moment and to work to upgrade them continuously – working hard may not be the only differentiator between success and failure, but it’s one of them. It’s important to be receptive to wider trends too, rather than becoming so focussed in one area or another that you narrow your field of vision – less ‘nose to the grindstone’, more ‘see the big picture’.

Finally, stoicism – the art of taking it on the chin. Shoelaces will snap, markets will wobble and sometimes both your successes and failures will surprise you. The key is not to ascribe patterns where there are none. We can’t stamp out randomness – bad luck is unfortunate, but extant nonetheless, as is good fortune. Tabel is clear about having the ability to roll with the punches, to learn what works (and what doesn’t) and get back on track.