22 Apr Antifragile
If you have time to read just one book over the next decade, read this one. Assuming, that is, that you are an artist, artisan, entrepreneur, home-schooling mom – anyone who lives by their wits and has “skin in the game,” as author Nassim Nicholas Taleb is fond of saying.
On the other hand, if you are a banker, broker, captain of a Fortune 500 company, or a media pundit of the sort who predicted a Romney landslide in the last election – practically anyone who wears a necktie or its current feminine equivalent — stay away. This book is likely to make you so depressed that you’ll feel your only recourse is to beat a hasty exit from the gene pool (another favorite Taleb expression).
Antifragile represents the next stage in the evolving thought of Nassim Nicholas Taleb, an academic/practitioner in the black art of financial risk management. Taleb’s previous book, The Black Swan, written in 2007 just as the financial crisis was beginning to rear its ugly head, focused on the fact that low-probability, high-impact (usually negative) events are frequently underestimated by classic statistical and risk management techniques. This leads to catastrophes much larger than they would have been had these Black Swan events been given more respect (and a wider berth). Part of what makes Black Swan events so deceptively deadly is that it is nearly impossible to predict their occurrence, or even estimate their likelihood. While Taleb was not the first to discover these concepts, he certainly played a role in raising general awareness, making the phrase “Black Swan” an idiom in the financial world.
Now, Taleb blazes a completely new trail, saying that if we cannot predict the likelihood of Black Swan events, we can however distinguish entities (whether organizations, financial instruments, or health regimes) that are more or less vulnerable to Black Swan events. The former are called “fragile”, the later “antifragile”.
The difference is in how an entity responds to the volatility in its environment – fragile entities are damaged by volatility, ultimately breaking down under its onslaught, while antifragile entities are designed (or have figured out how) to profit from volatility – improving themselves in the process. “Volatility” here means any factor that leads to changing circumstances – environmental changes, laws and regulations, weather, or even just the ravages of time.
Let’s take a simple example from the book. John and George are two identical twins living in London. John is a clerk in the HR department of a large bank with 25 years of seniority. George makes his living by driving a taxi. On the surface, John has the better situation – a regular check, health care benefits, a reputable position in his community. But on closer examination, by insulating himself from small doses of volatility, he has set himself up to be vulnerable to much larger doses (aka Black Swans) such as a corporate layoff he could not predict, and would have no control over. John’s post-layoff predicament, as we have learned over the past few decades, is precarious indeed.
Now let’s turn to George. Like any self-owned business, he is subject to small daily doses of volatility. Some days business is booming, others it just dries up. The cash flow is irregular, the prospects uncertain from day to day. Yet by accepting this daily uncertainty, George protects himself from the type of catastrophic Black Swan even that could ruin John. It is impossible for his income simply to go to zero, unless he just stops driving. His small doses of volatility provide him with daily information, which causes him to constantly re-assess his environment, his “business model”, and the correspondence between the two – he must constantly ask himself questions like “Am I driving at the right times? In the right neighborhoods? Am I doing enough to cultivate a regular clientele? Do I need to upgrade my skills?” The small course corrections are adaptations that keep the gap between business model and reality small, effectively forestalling the catastrophic events that result from a gap that has gotten too wide because it has been ignored.
The Black Swan focused on the fact that low-probability, high-impact (usually negative) events are frequently underestimated by classic statistical and risk management techniques.
George has the “optionality”, or freedom to choose his response to changing circumstances. He can keep working as long as he desires. He can respond to unusual opportunities that lie well outside the bounds of salaried employment – as when a rich client asked him to drive her 2,000 miles to a wedding in the south of France when air traffic was shut down a few years ago due to volcanic activity in Iceland. By embracing volatility, George makes volatility his friend, and avoids (at least some) catastrophic outcomes. By insulating himself from small doses of volatility, John practically insures that it will come in big doses. In short, George is antifragile, while John is fragile.
This is not to say that George occupies the optimal position in terms of winning his daily bread. When it comes to personal economics, or investing, or just about any human endeavor, Taleb is an ardent advocate of what he calls the “barbell” approach – the bulk of your resources are allocated to a stable, risk-free (or as risk-free as you can manage) alternative, while the rest are allocated to risky alternatives with “asymmetric payoffs”, i.e. potential benefits that far outstrip their riskiness. Therefore, , George might seek a day job as a bell hop or security guard, and limit his taxi driving to night life areas, where the clients are more lubricated and the tips (hopefully) larger.
Taleb’s book is the work of the kind of big picture thinker who is compelled to push his paradigm to the ends of the earth. Here’s a synopsis of some of his points:
- Through evolution, nature has become one of the most antifragile entities around.
- We need to respect this – the burden of proof for any intervention against nature must fall on the intervention, not on nature. Where this burden is not borne, we should emulate nature, not the artificial intervention.
- The omnivorous character of the human diet is a perfect example. It is antifragile – we can survive on either plant or animal material, though preferably both. We are built to survive, and even benefit from, volatility in our food sources.
- What benefits from volatility benefits most when there is variation, or even randomness. Looking at nature, we should not expect to eat meat at every meal. In fact, we should not even expect to eat a meal at every meal. Periodic abstinence from meat and fasting from all food are likely to be beneficial, regardless of the currently reigning theory, because this is how animals live in nature.
- Therefore, Taleb, who is a practicing member of the Greek Orthodox Church, adheres to their rigorous schedule of fasting, which can go as high as 200 days out of the year.
The preceding line of reasoning is typical of Taleb in another respect. Without identifying himself as a believer or a traditionalist, many of his arguments wind up in support of the “heuristics” (rules of thumb) advocated by tradition and religion, from periodic fasting to debt avoidance. Like nature itself, religion and tradition have had centuries and even millennia to hone in on the human practices that combat fragility.
Read Antifragile, all the way to the end, where you will find Taleb’s test to see if you are still alive – do you have a sense of adventure? Does the optionality of the unknown still thrill you? If so, you are well on your way to becoming antifragile. If not, you now know what you need to do to get there.
by Albert Regensberger
(Photo Credit: Stuart Chessman, St. Gregory’s Society)