Smart or Lucky? (Books in Brief).

Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb. Texere, www.etexere.com. 2001. 203 pages. $27.95. (Order online from www.wfs.org/specials.htm.)

When contrarian economist Robert Shiller warned of stocks' overvaluation and went on the

"George Will indicated to Shiller that had people listened to him in the past they would have lost money, as the market has more than doubled since he started pronouncing it overvalued," writes mathematician and hedge-fund manager Nassim Nicholas Taleb. The Shiller-Will confrontation is symptomatic of the growing tendency to misconstrue random events, or luck, for quantifiable trends. We are increasingly "fooled by randomness," Taleb charges in his new book. The incident also demonstrates the difficulty that serious analysts face in educating the public.

"I could not understand what Shiller, untrained to compress his ideas into vapid sound-bites, was doing on such a TV show," says Taleb. "Clearly, it is foolish to think that an irrational market cannot become even more irrational; Shiller's views on the rationality of the market are not invalidated by the argument that he was wrong in the past."

Wills's notion that Shiller's carefully researched conclusions were attempts to offer prophecies is also symptomatic of a cultural weakness to seek gurus, Taleb suggests. "Such tendency to make and unmake prophets based on the fate of the roulette wheel is symptomatic of our genetic inability to cope with the complex structure of randomness prevailing in the modern world."

In addition to Shiller and Wills, Taleb offers insights from a broad range of characters, from philosopher Karl Popper to financier George Soros to baseball legend Yogi Berra, whose famous proclamation that "it ain't over until the fat lady sings" (a variation on the Brooklynese "it ain't over till it's over") offers wisdom about prophecy, probability, and outcome.

Table of Confusion

Author Nassim Nicholas Taleb, a hedge-fund manager, advises us to avoid confusing the items in the left column with those in the right:

Luck: Skills

Randomness: Determination

Belief: Knowledge

Theory: Reality

Coincidence: Causality

Lucky idiot: Skilled investor

Source: Fooled by Randomness