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Dormin111

Nassim Nicholas Taleb (Black Swan, Antifragile)

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I am writing a book review on Taleb's Antifragile and I wanted to get a take on the ideas. I agree with much, but not all of Taleb's writings, but I fear that I lack the in depth knowledge to fully evaluate them. Below is an extremely truncated version of Taleb's thesis in Antifragile:

 

 

 

"A fragile object breaks or weakens under pressure, like a porcelain vase or a heavily leveraged financial portfolio. A robust object is pressure resistant, like a rock or an ancient but unchanged technology like the book shelf. An Antifragile object becomes stronger under pressure, like an immune system or an economy.

 

Antifragile is a word Taleb made up, because he could not find a suitable word for the concept he envisioned in any language. That is not to say that he created the concept; he didn’t and he constantly states how intuitive it is to just about everyone, as are the other two concepts in “the Triad.” The problem is that often people are oblivious to what type of object or system they are dealing with.

 

Professional economists treat the economy like a fragile system, similar to a washing machine which always needs repairs from an external agent. But according to Taleb, the economy is actually more like a cat in that it is self-repairing and internally evolutionary. When politicians under the influence of Keynesian economists like Paul Krugman or George Stieglitz (whom Taleb refers to as, “fragalistas”) tinker with the economy in an attempt to smooth out its bumps, they inadvertently introduce fragility into an antifragile system. Free markets are constantly prone to minute and distributed failures of investment, but these failures make the system stronger by providing information to others on what not to do. What happens when the failures are reduced or eliminated? Errors build up and lead to bigger crashes. Instead of growing under stress, the economy begins to fail under stress.

 

The economy, both at the macro and micro (especially financial) level, is an easy place to demonstrate the Triad, but Taleb argues that the same arguments can be mad everywhere else in life. Throughout the book, he looks into medicine, nutrition, foreign policy, education, etc.

 

On its face, the Triad doesn’t seem very controversial. Where Taleb has invoked the wrath of economists and philosophers is his epistemology, which was more thoroughly outlined in the Black Swan, but underlies all of his beliefs in Antifragile as well. Taleb is a confessed skeptic who claims an epistemological lineage from Al-Ghazali (who has been accused of precipitating the downfall of Islamic culture due to his rejection of Aristotle), Seneca (the Roman stoic), and Karl Popper among others.

 

Essentially, Taleb is highly skeptical about man’s ability to use reason to predict the future. He argues that many trends in life are determined by extremely rare, yet unpredicted “black swan” events whose impacts, positive or negative, out-weigh the effects of predicting the normal event 99% (or more) of the time. For instance, in the modern era of finance, banks engage in what Taleb refers to as “picking up pennies in front of a steam roller.” Banks design financial models based on past data which will be accurate 99.9% of the time in the future, resulting in marginal gains for the portfolio for years or maybe even decades. Then a black swan event will occur (ie. the savings and loans crisis in the 1980s or the 2000s housing bubble) which no model could possible predict since it was unprecedented, and then all of the gains made by the model will be more than wiped out.

 

Again, the same concept applies to many walks of life. The inventions which fueled the industrial revolution were mostly created by random people tinkering with technology in their free time, rather than by the major universities of the day. The greatest inventions of the past fifty years were made by guys messing with electronics in their garage rather than by fully-funded researchers at major corporations. Almost no one ever seems to be able to predict when a war will happen, or especially how long it will last. These were black swan events to nearly everybody, including experts in the given fields.

 

Taleb argues that most people have the relationship between practice and theory backwards. Students spend hundreds of thousands of dollars to go to school to learn the theories behind practices, only to discover that the theories give simplified and inaccurate explanations for the practice (which Taleb calls “Platonification”). There are exceptions, but the vast majority of the time, people see that something works in practice and then create a theory to describe it, rather than vice versa. A child doesn’t need to understand physics to know how to ride a bike.

 

As a result, Taleb considers himself a hardcore empiricist. He sets up a distinction between Aristotelian and Thalesian decision making, the latter being predicated upon theory (betting on a stock because of what a computer model suggests) while the latter is based on pay offs (exercising in way that makes you feel good without an understanding of why). He endorses using the latter model in nearly all cases.

 

Now to tie this all back to the Triad. According to Taleb, people are bad at predicting the future. Acting upon these predictions is fragile, because everything has to go according to the prediction to work out (all of the assumptions of the financial model have to hold). Instead of trying to predict the good in the future to grab it, or predict the bad in the future to avoid it, we should strengthen against the bad effects and expose ourselves to optionality to grab the good effects. This is how to live an antifragile, or at least robust life. Taleb calls it the “barbell strategy” and it consist of alternating between being extremely risk averse and being extremely risky.

 

Much of the book consist of looking at various heuristics and tips Taleb develops to understand how to apply the barbell strategy to your life. In finance, one should only invest heavily in safe assets (gold, t-bills) and extremely risky assets (IPOs, speculative stocks) rather than the “mid-level risk” stocks, since such risk prediction is impossible anyway. He argues that many people do not understand the risks inherent in modern medicine, so when someone is moderately sick, they should take no medication whatsoever to avoid potential side effects, but when extremely sick, an individual should take the riskiest medicine possible. Minor illness is “convex” in the sense that there is little room for gain but a lot of room for error, while major illness is “concave.”"

Edited by Dormin111

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Professional economists treat the economy like a fragile system, similar to a washing machine which always needs repairs from an external agent. But according to Taleb, the economy is actually more like a cat in that it is self-repairing and internally evolutionary.

I don't recall him referring to cats, in fact that analogy doesn't even make sense to me. His best presentation of the concept is that of the package you send in the mail, but where you'd normally put a 'fragile' sticker you instead write 'please mishandle'. Also he refers to muscles in the context of bodybuilding, where in order to grow them you have to challenge them, pushing them to failure so they then repair themselves stronger than before.

He claimed his principal influence was Popper in The Black Swan, then seemed to back off in Antifragile, switching to Seneca and Sextus Empiricus (who you left out). He mentions Ayn Rand's ideas as an example of antifragility, and there's a little detail you'll find if you dig deeper: his right hand man in his trading operation is/was a dyed-in-the-wool Objectivist. Also, Taleb was associated with Victor Niederhoffer, who is a well known Objectivist.

By way of evaluation I'll just say that I find Taleb very stimulating. I mentioned Antifragile here on OO when it first came out, and was thinking of writing a review but never did.

Edited by Ninth Doctor

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Chapter 3 of Antifragile is entitled "The Cat and the Washing Machine." He has also used the example numerous times in lectures, though I also like his package analogy too. 

 

He only mentions Rand once in Antifragile but its only in reference to her book sales and popularity rather than her ideas. He notes that her slaes and popularity were antifragile because they grew as critics viciously attacked her. I didn't know that about his trading friend though, very interesting.

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Chapter 3 of Antifragile is entitled "The Cat and the Washing Machine." He has also used the example numerous times in lectures, though I also like his package analogy too.

Serves me right for not checking the book before commenting! I thought of how cats can fall from high places and not be hurt, but it doesn't make them able to fall from yet higher places as a result, that would be antifragile.

There was an article about Taleb before he was nearly as famous as he is now, where the Rand connection to his 'trading manager' or some such was mentioned. I seem to recall that the Rand fan liked to listen to Mahler while Taleb insisted on hearing Bach's St. Matthew Passion, I'm not finding the article, or no wait a minute, ok I think this must be the guy:

http://www.businessinsider.com/mark-spitznagel-2011-6

I absolutely love Taleb's line about F.U. money. That it's money that allows you to say F.U. before hanging up the phone on some a-hole.

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Here's a new article from Taleb on the relative fragility of various international states. Very interesting, as usual from him:

http://www.foreignaffairs.com/articles/142494/nassim-nicholas-taleb-and-gregory-f-treverton%E2%80%A8/the-calm-before-the-storm

 

For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought—and seemingly placid states turn out to be ticking time bombs.
[...]Those countries that score poorly on multiple criteria are particularly concerning, since these markers are compounding: qualifying as fragile on two counts is more than twice as dangerous as doing so on one.

 

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