Book Review: Fooled by Randomness

I hadn't intended this blog to become a collection of book reviews, but I've come to like the idea of keeping a log of my thoughts on the books I've read. If for no other reason, keeping a book-review blog helps me to feel OK about actually donating a book to our favorite non-profit bookstore (Books for America) after I've finished reading it. Anyone who's seen our bookcase can attest that Nicole and I have a book problem.

As for the book Fooled by Randomness by Nassim Nicholas Taleb, there's far too much packed in to do any kind of justice to the book in a reasonable summary. Indeed, my main criticism of the book is that it is poorly written. It's very discursive and often he brings up topics that you would really already have to know something about in order to understand what he's saying. Sometimes I did and sometimes I didn't. In fact, in a postscript, Taleb mentions how boring he finds writing if he's confined to an outline or a deadline or a page limit. He just wants to let it fly and the book reads a lot like the author was writing for himself and is only letting you along for the ride. And this is a shame because this book really has some important and profound things to say.

Basically the book is about how we human beings are constantly trying to tell ourselves a story about what has happened and why it happened. And we almost never want to tell ourselves that something has happened for no reason other than a random, meaningless fluctuation. Even when we know better at some level, we cling to emotional explanations for random events. Taleb's villians are CEOs, bankers, journalists and historians who all try to make money by explaining things that are actually random. Think about it: if you watch the nightly news, every day you hear that the Dow was up or down some amount (which is usually a pretty small percentage change) and then they tell you why. Millions of transactions occurred that day and, if you add them all together, the result was that the market moved a tiny, tiny bit. Isn't the most logical explanation that, in fact, nothing happened today. People traded stocks for whatever reasons (someone is retiring and selling, someone else if saving for retirement buying and neither side of that transaction much cares about whatever went on today) and the market just moved randomly a bit. Day after day. People used to think that the weather was being dictated by the gods too. And they used to pay shamans to make the weather better. Today we think we've evolved, but is your investment adviser really earning his or her keep or they just betting on sun in the summer and snow in the winter and taking credit for being brilliant?

Taleb makes pains to point out however that we are all susceptible to emotional thinking about random events. It's in our nature. And here, the book moves beyond being about investments or markets or the financial crisis or MBAs. It really becomes a book about philosophy. (Indeed there's a section about philosopher John Popper that I didn't really get, except that he's Taleb's favorite philosopher). Because we're not in control of our lives, Taleb favors a stoic disposition. Treat each fortune and misfortune with the same equanimity and you will have risen above the randomness of markets, weather, cancer diagnosis, car accidents and love. I'm not convinced about the philosophy, but I do appreciate the book's call for us to stop inventing stories where none exist. And in this sense, the book is very similar to Malcolm Gladwell's Outliers, reviewed below. We constantly hear stories about why and how this one person succeeded but rarely about how and why all the others failed. Because if we heard about the hows and whys of the failures we might come away with the conclusion that the successful person is just lucky. Taleb certainly would think so.

I can't quite recommend the book, if only because Taleb has (by his own admission) re-written it in a book called The Black Swan. I'll probably read that too in the hopes that someone took a stronger editorial hand in that one. If not, he's supposed to be coming out with a third book which will be the same stuff told in yet another way (again, to his credit, he admits this). So stay tuned for those reviews. In the meantime I might start thinking about things to post that aren't book reviews.

Take this 401(k) plan and Shove it

Automatically enrolling employees in 401(k) plans is all the rage these days. The theory that the mass of people are too stupid or lazy to recognize what's good for them has been around for quite a long time in certain government and academic quarters. But, not surprisingly, this theory turns out to be unpopular with the people themselves (as well as with others in government and academic quarters who've seen how paternalism tends to pan out -- hence William F. Buckley's famous quote about preferring to be governed by the first 100 names in the Cambridge phone book than by the Harvard Faculty).

The paternalists are back now with a brand new idea: "We'll make people do what's good for them, but we'll let them opt out if they really want to do the wrong thing! That way, we can say we're preserving their freedom, but in truth we know that they're still too lazy or stupid to undertake the effort required to opt out of what we're making them do!" Hence, a new oxymoronic name: Libertarian Paternalism. And, hence, automatic enrollment in the 401(k) that you can nevertheless always cancel.

Exhibit A in the libertarian paternalism front today is a new book by Cass Sunstein and Richard Thaler, a law professor and an econmics professor, respecitvely, at the Univeristy of Chicago. Because goofy one-word titles are all the rage in nonfiction books these days (Blink, Collapse, Freakonomics) the book is not called "Libertarian Paternalism" but rather called "Nudge."

So, what's wrong with a little Nudge? Sure it's paternalistic, but hey, if you don't like it you can always opt out right? And I've heard some fairly smart people make arguments against libertarian paternalism that the Nudge authors have ready answers for. I won't rehash those here because I don't have anything new to add.

What I will say is that libertarian paternalism has long made me apprehensive even though I couldn't quite articulate why. Now I'm starting to get an inkling and it comes in the form of that old devil, the law of unintended consequences. The Wall Street Journal recently ran an article about the popularity (with regular folks, not with the paternalistic types) of 401(k) debit cards.(Click here, subscription required) It's always been possible to borrow against your 401(k), but it's a bit of a hassle. Now along comes a card that you just swipe, sign, and viola, you've just made yourself a loan.

Borrowing money from your 401(k) is crazy unless you really need to -- your just robbing yourself. But, according to the Journal, the availability of loans makes people more likely to join a 401(k) in the first place.

The bottom line for Thaler and Sunstein is that a theory is only as good as its practical results. Yes, you can probably get people to contribute to their 401(k) by automatically enrolling them; the laziness that keeps people from enrolling also keeps them from unenrolling. But it's not clear that this changes ultimate behavior. Will people just borrow more on credit cards because they figure they're in good shape for retirement? Or, will they be even more direct and just borrow right of the 401(k) you just put them in? No one knows this for sure yet, so it isn't game over for Nudge. But it's worth considering that the Journal article also mentions legislation that would ban 401(k) debit cards. For everybody. No opt-outs. That's not a Nudge, it's a Shove, and it's where paternalism has always tended to end up.

StickK it to me?

My fiancé Nicole has just finished reading the book Nudge by Cass Sunstein and Richard Thaler. As I understand it, it's a about behavioral economics and its application in everyday life. What is behavioral economics you ask? Simply put, it's the study of how human beings actually behave in the real world and how that behavior challenges traditional economic assumptions about rational actors. One example in the book is the new company called StickK.com which was founded by a lawyer and an economist who specialize in behavioral economics. The idea behind the company is that people have goals that they want to achieve but often have trouble seeing them through. The goal that comes to mind for most people, of course, is weight loss. How many Americans have attempted to lose weight only to fail at their attempt, or to succeed for a time but then fail to keep the weight off? Well, the idea behind StickK.com is that people would have a better shot at losing weight and keeping it off if something painful were to happened to them if they fail. Specifically, at StickK.com you enter into a contract to pay money if you fail to achieve your stated goal. You don't pay the money to StickK.com, but to some other recipient. You can choose to pay the money to a friend or to a charity. But if you pick a friend or a charity that you like, you may not have sufficient incentive to meet your goal. So you can also choose to donate your money to an anti-charity. For instance, if you're pro-life you can donate to a pro-choice organization or vice versa.

Nicole thought this was an intriguing idea and suggested that we try our own StickK.com contract to loose weight. I dissented vigorously. Unfortunately, I sometimes have this tendency with Nicole where, when she suggests a new idea, I immediately and vehemently say no and list all the things that I think are wrong with her idea. This, quite understandably, agitates her immensely.

In the case of StickK.com, I find myself intuitively skeptical of the entire concept. Despite the success stories listed on the web site, I have to believe that the people who have successfully lost weight or quit smoking would have done so anyway. Or at least they might have done so with some level outside encouragement that didn't require them to donate money to charities they disagree with.

I did some research on StickK.com to see what the skeptics might be saying. Tyler Cowen of the Marginal Revolution blog thinks that StickK.com isn't likely to work. He says, "one group of potential customers doesn't really want to change, the other group is unwilling to give up control." I, for one, probably fall in to both camps. The idea of entering into some artificial, frankly silly, contract requiring me to donate money to groups I don't much like (and right when I'm already going to be feeling bad for not having met my goal) just doesn't have a whole lot of appeal to me. But I also have to admit that I don't think I trust my self-control enough to wager a sufficient sum of money to make my commitment contract really bite. For example, one of the founders of StickK.com mentions in the FAQs that he wagered $500 a week on his ability to lose 1 pound a week. This is a substantial amount of money for him, as it would be for me. Indeed after three or four weeks of not reaching my goal I would feel compelled to break my contract. University of Chicago Law School Professor Eric Posner (perhaps among others) has questioned whether a StickK.com contract is actually enforceable. After all, contracts are usually enforceable only when both sides agree to exchange something valuable and it's not clear that StickK.com is providing anything of value to its users. StickK.com would argue that it's providing a "commitment service" to its users, but this is, to say the least, a novel legal argument. What's more, at StickK.com you can select a referee who would tell the site whether or not you've met your goal, but if your referee fails to report for any reason StickK.com will just take your word for it. Yes you might be able to pick an unbending referee, and you do pay the full amount of your wager upfront (StickK.com will dole out the money either back to you or to your chosen recipient) but one can easily see the entire project crashing down the first time someone sues their referee, and StickK.com for good measure. Ultimately, people who aren't that committed to their StickK.com contract are likely to find a way out.

So what has this investigation of StickK.com done for me? Well, it's forced me to question how committed I am to losing weight. I'm not willing to wager a significant amount of money on my ability to loose weight at least in part because I don't think I care enough about weight loss to really force myself into doing it. But I did discover one thing that I am committed to. I set up a StickK.com contract to pay Nicole $10 a week whenever I immediately say no to one of her ideas or suggestions instead of hearing her out with an open mind. We'll see if StickK.com can change my behavior. For my sake, I sure hope it can.