Saturday, May 24, 2008

Book Review: The Drunkard's Walk

Last month, I wrote about the top selling books on stocks for April. This month, I just finished reading an amazing book called The Drunkard's Walk: How Randomness Rules Our Lives, by Leonard Mlodinow. What a fascinating book. It is somewhat in the style of Freakonomics yet it is also completely different.

Mlodinow writes in a style that makes mathematics, probability, and statistics easy to understand, bringing in interesting descriptions of historical figures and mixing in modern real life examples of how probabilities work, and not in ways that you would intuitively think.

Here's an example. Do you remember the TV show Let's Make a Deal? The contestant chooses one of three curtains, one of which has a great prize behind it and the other two with junk prizes. The contestant chooses one curtain which remains closed. The host opens one of the two remaining curtains, showing a junk prize behind it. He offers the contestant the opportunity to change the choice to the third curtain. Are the odds on sticking with the first choice the same as making a switch? If you think the odds are 50/50, you and 92% of all other Americans would be wrong. Mlodinow explains it in a very thorough yet very understandable way why the probabilities show that you would be far better off switching your choice.

He brings in several references throughout the book relating to finance and the stock market. He has a great discussion, and graphs, about how the performance of mutual fund managers that do well during a five year period has absolutely nothing to do with how they will perform during the next five years.

It is amazing how much randomness plays in the life of individuals and society as a whole. Not only did I like the book, but I liked the title and liked the book cover. The hardback book cover has holes in it with letters peeking though, revealing a 'secret code'. I highly recommend The Drunkard's Walk: How Randomness Rules Our Lives as a great read.

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