Antifragile

 

Antifragile: Things that gain from disorder

By Nassim Nicholas Taleb

Preview

We are conditioned to be fearful of uncertainty and see it as something to be avoided at all cost. Systems, processes, and people, all strive towards robustness. Why? Because we think that something that is robust, will survive catastrophic shocks of an uncertain environment. Yes, that is a good thing, certainly better than something which will shatter under stress. However, can we do better? Can we strive towards things which get better under stress? Do we already have such things around us?

About the author

Nassim Nicholas Taleb is a Lebanese American statistician and risk analyst. His main focus of work is randomness and probability, and he advocates a system which thrives in risk. His main works include Fooled by Randomness, The Black Swan, The Bed of Procrustes, and Antifragile. These books along with Skin in the Game make up his philosophical work on uncertainty in five volumes referred as Incerto.

Fragile, Robust, and Antifragile. The trio.

"They called me Mr Glass". In the movie "Unbreakable", Samuel L. Jackson's character reminisces about his childhood, while ruing his physical condition which made his bones prone to break with the slightest trauma. In other words, he was "fragile". Bruce Willis on the other hand, the protagonist of the movie, had super strength combined with a strong sixth sense. Bruce Willis's character was metaphorically speaking, unbreakable, or "Robust". Able to survive catastrophic damage. Even so, his robustness did not make him benefit in stressful or traumatic situations. It wasn't like if he got shot; he would become stronger! No, he would be able to survive the shot, but there is no way he would benefit from it.

What about a character who would benefit from hardships so to speak. Someone who would become better with repeated trauma, something which would thrive under chaos and stress? Superman's fans know Doomsday as the arch nemesis of the man of steel. Doomsday is "Antifragile". His regenerative capabilities are so strong, that he gets immune to whatever causes him harm or damage. He emerges stronger from each trauma, regenerates, and becomes immune to whatever killed him earlier.

Antifragility is closely related to the concept of Hormesis, which means that a little of a bad thing is actually good! Two contrasting examples of this idea are:

1)    Ingesting tiny amounts of a particular poison might make you healthier overall and immune to the poison itself.

2)     Restricting your calories can make you healthier.

In both the examples the focus is on the quantity. Less is better, while more is worse.

When some people face a tough challenge, they tend to "rise to it", and perform well. This is because their body and mind overcompensate for the difficulty of the challenge, thereby pushing their limits. On the other hand, when people aren’t challenged enough, often the body and mind undercompensate, potentially inhibiting the performance. If your performance thrives under stress and challenge, you are antifragile! MS Dhoni anyone?

In modern life, owing to technological advancement, public policies, etc., we have become too comfortable for our own good. We aren’t challenged enough, and hence, we are not able to perform to our potential. Ask yourself how many times do you feel helpless in a new place when google map stops functioning?

Antifragility of a system requires individual constituents to be fragile

If any living organism were to be immortal, then it would have to predict and prepare for all exigencies. This, of course, is impossible, and hence no living organism can be truly immortal. However, a species as a whole, can survive exigencies through diversity; some members of the species can survive a catastrophe, while others do not. The species still proliferates, propagating the traits which made the surviving members survive in the first place. Thus, making the species stronger as a whole. In contrast, the systems and processes in our society have been designed to eliminate shocks and try to cushion every fall.

If we consider our financial systems, then we find that we tend to bail out ailing institutions, instead of letting them fail. This is something which is unnatural, because the thing that won’t fail, will also not grow stronger or more resilient.

Harm to certain individuals may benefit the population as a whole; this is the premise of natural selection and evolution. This knowledge can be applied in real life, as the failures of a few could be a lesson to many. This, of course, is true only if the failures are not interconnected to bring the whole system down.

In the aviation industry, a single crash does not affect the entire industry, thus allowing us to investigate the crash, and work towards better aviation safety standards. In contrast, in the banking sector, a few failures affect the whole system, and can quickly cause a catastrophe. The lesson here should be clear; the banking sector is FRAGILE, while the aviation sector is ANTIFRAGILE.

Antifragility of the system requires the individual units to be fragile. The failure of one, strengthens the system as a whole.

Consider any product that you buy. The existence of the product in the market is partly due to the failure of several inferior products that never made it to the market. Among several entrepreneurs who undertake ventures, only a few succeed. But the few who do, serve as inspiration to the others, and the many who fail, serve as a lesson to the future generation. The success of the few is beneficial to the system, and for this, the sacrifice of the many is a prerequisite.

Tame Uncertainty with the Barbell Strategy

A broken cup will not repair itself, and even if it is repaired or restored, it will always have cracks. Hence, the objective should be to minimize the risk of breaking it in the first place. Always remember that one's survival is of paramount importance, and takes precedence over any other objective. Accounting for fragility is something everyone should do, but few people seem to do it.

Most people seem to employ a middle path strategy, wherein they take medium risks. What they fail to appreciate is that any possible errors in the medium risk bets, can wipe them out completely. Instead, a bimodal strategy, or what is called a Barbell strategy, aims to encourage antifragility by being conservative and aggressive at the same time.

Quite simply have the best of both worlds and avoid the middle. If we apply this strategy to investment, you would be better advised to put 85-90% of your investible corpus in inflation-protected, cash equivalent instruments, and the remaining in high-risk instruments. Even if you lose, you lose only 10-15%, but you stand to make big gains if your bet in the risky areas goes right! On the other hand, a medium risk strategy would give you smaller but more consistent returns, but also expose you to errors in risk computation and systemic failure itself.

The basic premise is to keep in the extremities (very safe and very risky) while staying away from the middle (somewhat risky).

Free yourself from the prisons of your own mind

The times we live in are characterized by almost desperate attempts at removing uncertainty. Predictability is what everyone seems to want. Parents protecting and shielding their kids to the extent of being paranoid, may just be preventing them from developing resilience.

The systematic removal of randomness is a consequence of our desire for convenience. An analogy can be drawn to a tourist, who has his or her itinerary planned to the last detail, and becomes frustrated when the plan is rendered ineffective due to unforeseen events.

Now consider someone who rather than being a prisoner of a plan, acknowledges and appreciates new knowledge encountered at every step of the way, and tweaks his or her plan accordingly. Such a person can be called an opportunist, and an opportunist can make big gains in business or professional life. By being flexible, he or she can pivot in another direction, and seize new opportunities that present themselves. Taleb calls such a person a "Rational Flaneur".

One might say that the flaneur is being opportunistic – a charge which won’t be false – but being an opportunist is a good thing in business and professional life, unlike in one’s personal life, where loyalty and commitment are important. Another mistake is to assume that others know what they want, or where they want to go. Most of the time people do not know what they want, or where they want to go.

Steve Jobs believed in this philosophy. He didn’t trust the market research too much and believed in his own conviction. He believed that people do not know what they want, until they get it. Clearly, such an approach did not do him and the Company he founded any harm!

Reality is non-linear. Globalization makes the world more vulnerable to systemic collapse

Size, or quantity often serves to increase fragility in a non-linear fashion.

Is it better to binge-drink on the weekends and stay sober for the rest of the week? Studies show that binge drinking is harmful, and a better strategy is to space out consumption with moderate intake over the week. To some people drinking six bottles of beer on a Saturday night is equal to drinking a bottle of beer every day for six days. However, this is not true, since the effects of it are not linear. It is well known that many snake-charmers ingest a small dose of poison every day (diluted), and this serves to increase their immunity against the poison.

This is an antifragile strategy which serves to improve a system in the face of a harmful agent. The body's recovery mechanism allows it to produce antibodies which can eliminate the poison. However, if they were to take high doses of poison, they would probably not live long enough to develop stronger immunity. This is because the effects are non-linear. Doubling the amount of poison may not just double the recovery time, it may kill a person, because the immune system may become overwhelmed and unable to respond to the harmful effects.

While Politicians keep touting the benefits of Globalization, the truth is that it has made then entire world a part of a giant system with interconnected parts. The interconnectivity has also made the individual constituents, that is, the institutions, countries, systems, etc., vulnerable to a systemic collapse in case of a catastrophe.

Standing the test of time bodes well for the future as well! The Lindy effect

For the statistically inclined, it is easy to understand that "that which has stood the test of time, is likely to go on and on". For most of us, however, this concept is not easy to understand. Its application depends on the context. For a human being, it is true that the older you get, the likelihood of your death becomes higher. Human beings are mortal. They perish and have an expiry date. What about things which are not perishable in the same way? What about Pyramids for example? Or the technology which built the pyramids? The Lindy effect claims that “For the perishable, every additional day in the life translates into a shorter additional life expectancy. For the non-perishable, every additional day may imply a longer life expectancy.”

Quite simply the old is likely to be superior to the new, because the old would have braved catastrophes and survived the test of time to still exist. The new is untested, and hence, the likelihood of it surviving is low. It must be kept in mind that we are talking about statistics and probability here. It may or may not apply to a specific situation and must be interpreted as a generality.

You will find many people who jump to any new technology and deride anyone using “obsolete” technologies. However, the truth is that the older technologies which have survived, are more likely to be more reliable in general than the newer ones, simply because they have stood the test of time. Among all the newer technologies, only few will survive the test of time; most are likely to be only novelties which go off the shelf in a few weeks or months.

Professionals having no skin in the game are the ones who screw common people

One of the asymmetries of today is that the person who gets the upside of a deal is not always the same person who gets the downside. There are people who could be said to have “no skin in the game”, that is, not exposed to the downsides. The danger here is that since these people are not exposed to the downsides, they are more prone to taking risks than be prudent. An example of this includes today’s politicians, bankers, corporate executives, etc. All of these classes have much to gain from their actions and little to lose.

The 2008 financial crisis served as a reminder that bankers and senior professionals have all to gain and almost nothing to lose if a catastrophic shakeup occurs. Many irresponsible institutions were bailed out with public money, and many bankers got huge bonuses even after having lead teams to take unnecessary risks. At the end of the day, they got away with it scot free, and the common man was laden with debt to bail them out!

In modern-day finance, the scheme of incentives and disincentives is skewed. The financial managers have huge profit incentives, but very few loss incentives (since they work with the money of others). This creates a moral hazard and prompts non-prudential risk-taking.

 

Final Summary

All systems can be divided into three types – fragile (harmed with uncertainty and catastrophes), robust (those which remain resilient to uncertainty and catastrophes) and antifragile (those which gain from catastrophes). The main premise behind antifragility is that for a system as a whole to be antifragile, the individual constituents must be fragile since variations and shocks will remove the fragile individuals and preserve the good ones, which will strengthen the system as a whole.

The natural world is geared towards building antifragile systems, and even the progress of the human society is a result of that. However, in today's world we strive towards removing uncertainty from all aspects of our lives, but in reality, rather than strengthening our society as a whole, such an approach will weaken it. Traits which make systems vulnerable to negative black swans or highly impactful and unforeseen events, would persist in light of policies which support robustness instead of striving for antifragility.

Suggested Reading

·         The black swan

·         Fooled by randomness

·         The bed of procrustes