A reader could easily run out of adjectives to describe Nassim Nicholas Taleb’s new book “Antifragile: Things That Gain From Disorder.” The first ones that come to mind are: maddening, bold, repetitious, judgmental, intemperate, erudite, reductive, shrewd, self-indulgent, self-congratulatory, provocative, pompous, penetrating, perspicacious and pretentious. Review from the New York Times
Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events. Daniel Kahneman, psychologist, winner of the 2002 Nobel Memorial Prize in Economic Sciences
Bankers have hijacked the system and people think that’s capitalism. Capitalism is about adventurers who get harmed by their mistakes, not people who harm others with their mistakes. The only way you can have a system that’s robust is when people are punished for mistakes. Nassim Nicholas Taleb
Embrace chaos! This is the message in Nassim Nicholas Taleb’s latest book, Antifragility. This latest book is part of a trilogy which also includes Fooled by Randomness and The Black Swan. In the former he argues that we tend to confuse non-random outcomes with randomness. He talks about survivorship bias, in which we see the winners and try to “learn” from them, while ignoring the huge number of losers. The Black Swan examines the extreme impact of rare and unpredictable events. The subtitle of his new book – Things That Gain from Disorder – reflects his belief that people, organisations and systems need to accept chaos and the unknown. If we are prepared for shocks and randomness, we can actually benefit from them. The ideas of Taleb have already appeared in this blog. Three years ago I did a post about interesting contemporary thinkers, which included this Lebanese-born polymath. Then a year ago another post featured a selection of aphorisms from his book The Bed of Procrustes:
To bankrupt a fool, give him information.
With regular books, read the text and skip the footnotes; with those written by academics, read the footnotes and skip the text; and with business books skip both the text and the footnotes.
Trust people who make a living lying down or standing up more than those who do so sitting down.
The rationalist imagines an imbecile-free society; the empiricist an imbecile-proof one, or, even better, a rationalist-proof one.
The author is an iconoclast who enjoys taking shots at people who take themselves, and the quality of their knowledge, too seriously. He is known for venting his spleen on those he dislikes. This new work maintains that tradition with Gordon Brown, Thomas Friedman Alan Greenspan, and Joseph Stiglitz among others coming in for flak.
Taleb coined the term antifragile because he thought the existing words used to describe the opposite of fragility, such as strong, sturdy, tough and unbreakable, were inaccurate. He asks us to imagine that we are in the post office about to send a gift, a package full of champagne glasses, to a cousin in Central Siberia. The package would have “handle with care” stamped on it in bold red letters:
Logically, the exact opposite of a “fragile” parcel would be a package on which one has written “please mishandle” or “please handle carelessly.” Its contents would not just be unbreakable, but would benefit from shocks and a wide array of trauma. The fragile is the package that would be at best unharmed, the robust would be at best and at worst unharmed. And the opposite of fragile is therefore what is at worst unharmed.
Anti-fragility goes beyond robustness; it means that something does not merely withstand a shock but actually improves because of it:
To fragile systems, shocks are threats.
To robust systems, shocks are irrelevant.
To anti-fragile systems, shocks are opportunities.
It is a wide-ranging book brimming with provocative ideas, fascinating insights, pithy phrases and intriguing digressions. It is impossible to do it justice here. All I can do here is give you a flavour. I have a confession to make: I did commit the cardinal sin of reading it on an e-reader, something which would horrify Taleb.
Taleb distinguishes between organic and non-organic systems. He believes that economies are organic and consequently need stressors. He uses the metaphor of forest fires, which can actually be positive for the ecosystem. If you put out the all the fires immediately, which he is comparing to bailout policy, you do get an illusory stability. But the problem is that the brush starts to build up and then when there is a conflagration, it’s the mother of all fires. This is why Taleb is so irate with Brown and Greenspan. They both thought that it was possible to end boom and bust, nonsense that Taleb rightly pours scorn on. He has a term for such people – fragilistas, those whose naive rationalism causes greater systemic fragility. Greenspan’s successor at the Fed, Ben Bernanke, popularised the term The Great Moderation. We apparently knew how to prevent depressions. We should be very sceptical of this fake stability. Taleb has a memorable metaphor. A turkey is fed by the butcher for a thousand days and every day it declares that the butcher “will never hurt it” with increased statistical confidence – until Thanksgiving arrives. Taleb compares this complacency to Steven Pinker’s decline of violence thesis, which I looked at last year. Are the falls in violence documented by Pinker a similar type of illusion?
Taleb argues that you should never bail out companies, only people. We should promote antifragile sectors that benefit from their own mistakes, such as Silicon Valley or restaurants, and not those whose mistakes endanger the system. He wants to stand up for the entrepreneurs who risk everything. What irritates him most are those are immune to failure. They don’t have skin in the game. This term, coined by the great Warren Buffett, refers to a situation in which corporations are run by people who share a stake in the company. You want those you invest in to have their own money on the line. If the company does badly they will also suffer; this is the best risk management tool ever. Taleb takes us back to ancient Babylon and Hammurabi’s Code:
If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death. If it causes the death of the son of the owner of the house, a son of that builder shall be put to death. If it causes the death of a slave of the owner of the house—he shall give to the owner of the house a slave of equal value.
It is the builder who really knows what lies hidden in the foundations. Thus he can easily hoodwink the inspectors; the person hiding risk has a large informational advantage over the ones who have to find it. The foundations, with the possibility of delayed collapse, are the best place to hide risk. You have to give the builder the incentive to do the right thing. The implications for the banking sector are clear.
Taleb attacks top-down solutions what he terms the Soviet-Harvard illusion – lecturing birds on how to fly and believing that the lecture is the cause of these wonderful skills. He believes that trial and error beats academic knowledge, favouring tinkering and bricolage, not centralised planning. I am reminded of that quote by Hayek:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
Although he has a big fan in David Cameron, it is difficult to pigeonhole Taleb ideologically. He believes that small is beautiful, and it is also more efficient. He is critical of big government, but he also attacks corporate monoliths and centralised states. He is highly critical of leaders who send armies off to war without anything for them to lose. He is deeply averse to excessive amounts of debt and leverage within the financial system. With this debt comes risk and exposure to unforeseen events and market fluctuations. History does indeed show that uncontrolled debt can indeed have catastrophic long-term consequences – one of the major causes of the French Revolution was the excessive debt incurred by the Ancien Régime.
I do agree with some of the negative adjectives used by the New York Times reviewer above to describe Taleb’s work. At times he can be maddening, repetitious, judgemental, intemperate, reductive, self-indulgent, self-congratulatory, pompous, and pretentious. But we mustn’t forget the positive adjectives – this book is bold, erudite, shrewd, provocative, penetrating and perspicacious. Even if you disagree with what Taleb is saying – and you may well do so – he does force you to look at your own biases and assumptions. It isn’t particularly well structured, but you sense this was the intention of the author – make randomness part of the experience. Nevertheless, I feel that after reading the trilogy I do have a better understanding of how our world works.