Diary of a Financier

Bookshelf update: Antifragile

In Bookshelf, Existential on Thu 16 May 2013 at 01:03

More than a month ago, I finished Nassim Taleb’s culminating work, Antifragile: Things That Gain from Disorder.  I’ve now read his entire series, and thoroughly enjoyed most of it.  Thus, I wanted to record some of my favorite passages and takeaways herein, because his hyper-simplistic, radical, against-the-grain philosophy has a profound effect on both my personal and my professional lives…

~~~~

Mission statement

“What I propose is a roadmap to modify our man-made system to let the simple and natural take their course.”

~~~~

The Triad

“This Triad classifies items in three columns along the designation:

  1. Fragile
  2. Robust
  3. Antifragile

“Recall that Fragile wants tranquility; the Antifragile grows from disorder; and the Robust doesn’t care too much… When you discuss an item or policy, the task is to find in which category one should put it, and what to do in order to improve its condition.”

~~~~

Modernity & the Procrustean bed (unnatural smoothing)

“Antifragile systems are hurt when they are deprived of their natural variations (mostly thanks to naive intervention)… We switch from a [antifragile] system that produces steady but controllable volatility (Mediocristan), closer to the statistical ‘bell curve’ (from the benign family of Gaussian or Normal Distribution), into one that is highly unpredictable and moves mostly by jumps, called “fat tails” (Extremistan)…  One is volatile; it fluctuates but does not sink.  The other sinks without significant fluctuations outside of episodes of turmoil. In the long run the second system will be far more volatile–but volatility comes in lumps. When we constrain the first system we tend to get the second outcome.

“Note also that in Extremistan predictability is very low.  In the second, pseudo-smooth kind of randomness, mistakes appear to be rare, but they will be large, often devastating when they occur… anything locked into planning tends to fail precisely because of these attributes–it is quite a myth that planning helps corporations…

“My definition of modernity is humans’ large-scale domination of the environment, the systematic smoothing of the world’s jaggedness, and the stifling of volatility and stressors…. Modernity is a Procrustean bed.”

~~~~

Iatrogenics

Whenever you interfere with a complex system, even though you may ephemerally help it, it is always probable that you’ve introduced unintended, negative consequences, which hurt the system more than help it in the long run.

“The name for such net loss, the (usually hidden or delayed) damage from treatment in excess of the benefits, is iatrogeneics, literally [Greek for] ‘caused by the healer.’

“The iatrogenics is in the patient, not in the treatment. If the patient is close to death, all speculative treatments should be encouraged—no holds barred. Conversely, if the patient is near healthy, then Mother Nature should be the doctor.”

Treatment for non-fatal afflictions weakens the body’s natural immune system, making it fragile, whereas it naturally benefits from the stressors that boost antibodies (and the like).

This reminds me of another book I recently finished, Daniel Kahneman’s Thinking, Fast and Slow, which includes an example of “expert bias”: A psychologist’s experiment had parents take 500 random kids to the doctor, whom the parents told their children’s tonsils hurt.  Of those 500 kids, 250 were told they needed their tonsils removed.  The parents of those 250 “healthy” kids repeated the trial by taking them to another doctor, who told about half of them that they now needed their tonsils removed.  The trials continued and continually yielded 50% tonsil removal diagnoses–when almost none of the children were actually afflicted.

~~~~

Rules for investing

  1. Look for optionality
  2. Open ended upside
  3. Invest in people, not business plans- look for someone who’s capable of changing (pivoting) 6-7 times over his career (e.g. Marc Andresson)
  4. Make sure you are barbelled

~~~~

The Philosopher’s Stone (Convexity Bias)

“Someone with a linear payoff needs to be right more than 50% of the time. Someone with a convex payoff, much less.  The hidden benefit of antifragility is that you can guess worse than random and still end up outperforming.  Herein lies the benefit of optionality–your function of something is very convex, so you can be wrong and still do fine–the more uncertainty, the better.  This explains my statement that you can be dumb and antifragile and still do very well. This hidden ‘convexity bias’ comes from a mathematical property called Jensen’s Inequality… If you ignore [it], you are missing a chunk of what makes the nonlinear world go round.”

~~~~

Implementation & Barbelling

How can we implement an Antifragile approach?  Mr. Taleb uses the nuclear energy industry as an example, specifically the disaster at Fukushima in the wake of the earthquake.  Instead of trying to predict in advance when a disaster would occur (or calculate the probability that a disaster would occur), he suggests that we should instead prepare for the disaster ahead of time.  For example, TEPCo should have spent more money on smaller, more fortified nuclear reactors, instead of building large, fragile reactors and spending so much on modelers, forecasters, and scientists, whose intent was to foresee disaster.

This dovetails into “barbelling,”  the strategy of not interfering (or not taking any risks) when there is little to gain & much to lose, while taking big risks (or many small risks) in cases where there is much to gain & little to lose.  He suggests a bimodal (two-pronged) strategy:

“If you put 90 percent of your funds in boring cash (assuming you are protected from inflation) or something called ‘numeraire repository of value,’ and 10 percent in very risky, maximally risky, securities, you cannot possibly lose more than 10 percent, while you are exposed to massive upside. Someone with 100 percent in so-called ‘medium’ securities has a risk of total ruin from the miscomputations of risks…

“If you have asymmetric probabilities–more to gain than to lose–you’re Antifragile, and you prefer volatility, because it creates opportunity for upside capture…

  1. Fragility implies more to lose than to gain, equals more downside than upside, hence unfavorable asymmetry
  2. Antifragile equals more to gain than to lose, equals more upside than downside, hence favorable asymmetry”

~~~~

Education & the Alternative Process

History is told by the victors, hence those who have the opportunity to write authoritative research or academic papers (often funded by special interests) have the pulpit.  Usually, that which those on soapboxes say becomes indoctrinated as fact, self fulfillingly.

In such a way, we’re blind to the “alternative process,” and we accept that things like traditional education processes are good for us. 

“But, the alternative process’ loop is truly Antifragile:

  1. Random tinkering (antifragile) leads to
  2. Heuristics (technology) leads to
  3. Practice (apprenticeship) leads back to
  4. Random tinkering (antifragile)

Whereas the traditional education process is self-reinforcing:

  1. Practice leads to
  2. Academic research leads back to
  3. Practice”

~~~~

Conclusion

That glass on the table, it’s fragile, inanimate, dead.  You are living, antifragile, long volatility.

“The best way to verify that you are alive is by checking if you like variations.  Remember that food would not have a taste if it weren’t for hunger; results are meaningless without effort, joy without sadness, convictions without uncertainty.”

–Romeo

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