In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term.” -Nassim Nicholas Taleb
Nassim Taleb’s contribution to the world of finance are two fascinating concepts — essays really — subsequently expanded into book length. The first is Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets, which describes the tendency of investors to find patterns where none exist, and to attribute to skill that which might be better credited to luck.
His second book is a corollary of sorts, almost the inverse to Fooled by Randomness: The Black Swan: Second Edition: The Impact of the Highly Improbable. The key takeaway being that we dramatically underestimate the probabilities of improbable events, as well as their outsized impacts.
Over the weekend, Taleb had a worthwhile essay in the WSJ: Learning to Love Volatility. I can sum it up in Taleb’s 5 rules:
Rule 1: Think of the economy as being more like a cat than a washing machine.
Rule 2: Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.
Rule 3: Small is beautiful, but it is also efficient.
Rule 4: Trial and error beats academic knowledge.
Rule 5: Decision makers must have skin in the game.
Its worth reading the entire thing.
Over the years, I’ve found that Taleb’s essays are the best way to digest his thinking. This one is no different.
This FT Alphavillian has a confession to make. When she first started working in finance, she read Nassim Nicholas Taleb’s Fooled by Randomness and was quite taken by it. She recommended it to friends. Choice quotes by the man in the FT were dutifully clipped out and pinned to the cubicle wall — right next to a chart of monoline CDS spreads widening out and a list of biggest SIVs. Such a crisis groupie, we know…
So, what happened to NNT? And at what point did he get a bit “Deep Thoughts, by Jack Handey”? (For those of you who didn’t grow up with this, here’s a short video. Earphones are optional.)
After Fooled by Randomness, there was The Black Swan. Mixed reviews, that one. Then there was The Bed of Procrustes. We’re not going to try to explain that. In any case, NNT had by that point in time, started going the way of Marmite.
Now there is Antifragile: Things That Gain from Disorder.
There is something attractive about a person trying to solve a gap in the English language that German probably has three subtly different words for already. As Taleb explained to New Scientist:
In your new book you talk about things being “antifragile”. What do you mean exactly?
When you ask people what is the opposite of fragile, they mostly answer something that is resilient or unbreakable – an unbreakable package would be robust. However, the opposite of fragile is something that actually gains from disorder. In the book, I classify things into fragile, robust or antifragile.
But it doesn’t stop at “antifragile”. We also have “inverse heroes”:
Are you saying that capitalism is good, but that 21st-century capitalism has gone too far?
What we do today has nothing to do with capitalism or socialism. It is a crony type of system that transfers money to the coffers of bureaucrats. The largest “fragiliser” of society is a lack of skin in the game. If you are mayor of a small town, you are penalised for your mistakes because you are made accountable when you go to church. But we are witnessing the rise of a new class of inverse heroes – bureaucrats, bankers, and academics with too much power. They game the system while citizens pay the price. I want the entrepreneur to be respected, not the CEO of a company who has all the upsides and none of the downsides.
Are those, errr, “enemies”? Or “bad guys”?
Whatever. Get serious:
Can people apply antifragility to their lives?
In Africa, Asia and the Americas people head-load water – gyms don’t stress your bones, nature does. People also don’t talk about post-traumatic growth but some trauma is good for you. I also believe that people should go against academic education and focus instead on certification of skills.
Note: NNT is based at the Polytechnic Institute of New York University and the University of Oxford.
Up too close and personal:
Do you apply these principles to your life?
I lift stones and do weightlifting. I don’t go to the doctor except when I’m very ill, and when I go to India, I drink a drop of local water. Things like this harness the body’s antifragility. I have never had personal debt and never will. I also picked a profession in which I am antifragile, because any attack makes me stronger. When I write about something, I have skin in the game, and I have benefitted more from attacks on The Black Swan than been harmed by them.
Okaaay, each to their own.
As for where The Economist came down on the book:
“Antifragile” is an interesting idea, but as a book it is not without flaws. Mr Taleb takes on everything from the mistakes of modern architecture to the dangers of meddlesome doctors and how overrated formal education is. He overstretches the argument and is not as iconoclastic as he likes to think. There is a lot of familiar-sounding praise for Steve Jobs and the warnings about the dangers of stability will be well known to followers of Hyman Minsky. The valid reasons why people become employees (pensions, say) or companies become bigger, such as economies of scale, are skated over. But this is an ambitious and thought-provoking read.
It is also a highly entertaining one, thanks to Mr Taleb’s in-your-face nature.
The face in your face:
“Antifragile” is as much about the author as it is about the world. He is a weightlifter and calls himself “an intellectual who has the appearance of a bodyguard”. He avoids fruit that does not have an ancient Greek or Hebrew name and drinks no liquid that has not been in existence for at least 1,000 years. He has little time for copy editors, even less for economists, bankers and those who cluster at Davos. He once spent two years in bed reading every book about probability he could lay his hands on. Whether you find Mr Taleb amusing or irritating, you want to read on.