Antifragile

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Antifragile How to live in a world we don’t understand

By Nassim Nicholas Taleb Presented By Prof. Eon Smit Inspiring thought leadership

across Africa

Date: September 2014

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“Likewise, the government-sponsored institution Fanny Mae, when I Look at their risks, seems to be setting on a barrel of dynamite, vulnerable to the slightest hiccup. But do not worry: their large staff of scientists deemed

these event “unlikely””

The Author

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Education

• Schooling in Lebanon (exiled at 15)

• PhD (University of Paris)

• MBA (Wharton)

Career

• Independent pit trader (Chicago Mercantile Exchange)

• Owned derivatives firm for six years

• Senior derivatives trader in Credit Suisse, UBS, BNP-Paribas, Indo Suez, Deutsche Bank

• Taught derivatives at New York University

• Dean’s professor at University of Massachusetts

• Professor of Risk-Engineering at NYU-Polytechnic

The Author……..continued

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• Visiting Professor, London Business School

• Advisor on security, model risk, risk management

• Principal of hedge fund and director of companies

• Author and speaker

Interest

• Scholar of applied probability and risk management

• Role of high-impact of events

• Establishing roles for decision making under incomplete information

• Shielding individuals and society from Black Swans

• Philosophy, medicine, classical literature, economics

The Book

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• Follow - up to “The Black Swan”

• Book consist of seven essays – opposite of a textbook – contains autobiographical musings mixed with parables and philosophical and scientific investigations

• Multidisciplinary (history, economics, philosophy, sociology, methodology of science, psychology, finance, forecasting, mathematics, linguistics, comparative culture, storytelling, autobiographical)

• Brilliant in intellectual sweep, but opaque in places

• Rich in intellectual gems and quotes

The Book…………continued

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• Rich in newly-developed vocabulary

• Rich in barbed-wire side-slaps, invective, dismissive of business schools, academics, bureaucrats

• Judges people by name with “uncompromising sincerity”

• Degree of self-indulgence/regards himself as a man of great erudition

• Leaves the reader with the uncomfortable feeling that his examples have been selected purposefully to support his thesis.

The arguments

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• Black Swan is an extremely rare event/severe impact/retrospective predictability

• Positive examples: Internet/Google/JK Rawlings/Taleb

• Negative examples: Market crash 1987/Bank failures 2008/pandemics/Demise of the Soviet block/ 9/11

• At epistemological level it illustrates a severe limitation to our learning from observations and experience and hence the fragility of knowledge

• Unpredictable – Absence of evidence is not evidence of absence/Falsification

The arguments……..continued

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• The family of disorder: uncertainty, variability, imperfect knowledge, change, chaos, volatility, entropy, time, the unknown, randomness, turmoil, stressor, error, dispersion of outcomes, unknowledge

• The antifragile thrives when exposed to members of this family of disorder/the fragile is harmed by it/the resilient resists shocks and stays the same

• Aim is to build a guide to non-predictive decision making/measure fragility – then reduce fragility or harness fragility

• Simple test of asymmetry – anything with more upside than downside from random events (shocks) is antifragile

The arguments………continued

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• Depriving antifragile systems from volatility/stress/ randomness will harm them – examples muscle atrophy/top-down policies/neurotically overprotective parents/absence of “skin-in-the game”/ bureaucrats/ bankers/academics or consultants with no real downside/ accountability

• Bottom-up processes thrive under stress and disorder – discovery, innovation, progress depends on antifragile tinkering, aggressive risk bearing rather than formal education

• Mother Nature is antifragile and best manager of Black Swans

The arguments………continued

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• Debunks the illusion that world functions due to programmed design, university research and bureaucratic funding /evidence that this is an illusion/“lecturing birds how to fly”

• Fragilista causes fragility because of mistakenly thinking they understand what is going on / they deprive antifragile systems of errors / mistaking organisms for machines / engaging in policies and actions where benefits are small and visible, side effects potentially severe and invisible/medical overprescribing/interventionist social planners/ soccer mums/financial experts using risks models that destroy banking systems

Examples of exposure in the Triad

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Class Fragile Robust Antifragile

Greek Mythology Sword of Damocles Phoenix Hydra

Errors Hates mistakes Mistakes just information Loves mistakes

Financial dependence

Corporate employment Dentist, dermatologist Taxi driver, artisan

Political systems Nation-state, centralised Collection of city states,

decentralised

Knowledge Academic Expertise Erudition

Economic Bureaucrats

Entrepreneurs

Reputation Middle Class Minimum-wage earners Bohemian, aristocracy, old money

Medicine Additive treatment

Subtractive treatment

Stress Chronic stressors

Acute stressors with recovery

Medicine Absence of poison Hormesis

Aeronautics Automated flying Hand-on experience

Antifragility………continued

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• Post-traumatic growth building character

• Inverse hormesis/absence of stressors/ horseracing/

busy humans/soft speaking/white noise

• Redundancy/over insurance of nature/two kidneys

• Risk management focuses on worst outcome in past/Fukushima/Greenspan

• Nature assumes worse harm is possible

• Weightlifting examples

• Antifragility of riots/love/book banning

Benefiting from mild stressors

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Mechanic and organic

Non-complex Complex

Needs continuous repair and

maintenance

Self-healing

Hates randomness Loves variation in small doses

No need for recovery Needs recovery between

stressors

No or little independence High degree of independence

Stressors cause fatigue Absence of stressors cause

atrophy

Age with use Age with disuse

Undercompensates from shocks Overcompensates from shocks

Benefiting from mild stressors…….cont.

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• Stressors are information/stay in space/pain is risk management information/weightlifting also strengthening bones

• Crimes against children – eliminating mood swings

• Learning a new language

• The thirst for chance/adventure – sucking out randomness by touristification of life/opposite of ancestral life

• Antifragility by layers/natural organisms/restaurants

• Parts may be fragile to make organism antifragile/ evolution/tension between nature and individual organisms

Benefiting from mild stressors…….cont.

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• Organisms have one lifespan/next generation learns from errors arising from external randomness/also applies to historical systems e.g. single empire dominance

• Antibiotic resistance

• Learning from others’ mistakes/Titanic/Fukushima Plane crashes/learning through errors may cause reliability in yourself or in others

• Bailouts transfer fragility from the collective to the unfit

• Entrepreneurs are at the source of our antifrigility

The denial of Antifragility

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• Hurting systems by playing conductor

• Procrustean bed/cushy and comfortable/harmful modernity

• The bank clerk and taxi driver

• Switzerland/does not have large central government or Central Bank

• Stability in Switzerland due to decentralised administration/local efficiencies vs. bureaucracies/ lobbyists

• Mediocristan and extremistan/caloric intake vs. novel sales/bell curve vs. fat tails

The denial of Antifragility….cont.

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• Turkey problem/mission how not to be a turkey/ antifragile

• Risks in substituting large nation states for small state- lings and city-states in constant tension and shifting alliances

Loving some randomness

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• The governors of Maxwell leading to machine breakdown – the dangers of control

• The folly of fixing prices and eliminating noise traders – in praise of volatility

• The punctual husband/small forest fires/weakness caused by long periods of prosperity/absence of fluctuations in markets will worsen fragility

• Buridan’s donkey – adding randomness/stochastic resonance/annealing in metallurgy/tapping the barometer/stabilising chaotic systems/in praise of regicide/the ancient’s use of random draws

Loving some randomness…..cont.

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• In praise of small wars/the Great War/Egypt before 2011 riots/the risk in Saudi Arabia/US Middle East policy since 9/11

• Introduces “Modernity” – large scale domination of environment, smoothing of jaggedness, stifling of stressors/nanny-state/lion in zoo/violence and financial indiscipline transferred from individual to state

• Introduces “iatrogenic”- hidden or delayed damage of treatment in excess of benefits/ tonsillectomies/ bloodletting/”hospital fever”/agency problem/first do no harm


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• The errors of “theory”/in praise of phenomenology/ the observation of empirical regularity without a visible theory/true in social science – not in physics where errors get smaller

• The iatrogenics of Greenspan and Brown

• Overzealous editor

• Emphasizes the natural fragility of systems and their ability to take care of themselves/looking for a systematic protocol to determine when and where not to intervene


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• In praise of procrastination/doctors refraining from operations/preventing massive losses/preventing calamities/heroes not rewarded

• Difference between signal and noise/the neurotic and imperturbable/data frequency and signal to noise

Prediction as child modernity

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• Prediction is impossible and harmful/causes iatrogenics to risk-takers

• Leads to central idea

- Detecting fragility is easier than prediction

- First make things robust to defects and forecasting errors/making lemonade from lemons

- Antifragility is how things move forward under stressors, also time

• Focus on exposure to failure making prediction irrelevant/make world greed proof/disaster-proof/economic crisis proof

Prediction as child modernity….cont.

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• Remember, in Black Swan terrain events are unpredictable and consequential

• What can be predicted/someone who predicts will be fragile to prediction errors, take more risks, perhaps fail

Solving Antifragility

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• Seneca the Stoic philosopher – advanced a certain indifference to fate

• Mental exercises to write off possessions/ psychological insurance/ planning for shipwreck/resignation letter/mental exercise of worst thing happening

• Seneca showed preference for wealth without being harmed by poverty/upside-downside asymmetry

• Fragility implies more to lose than to gain, equals more downside than upside/equals unfavourable asymmetry

Solving Antifragility…..cont.

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• Proposes barbell strategy/extreme risk aversion coupled with extreme risk loving on other side

• Examples: Investing/Cheating with rock star/Writers being civil servants/Staff on plane/personal risks/social policy – protecting the weak, the strong do the job

• The barbell is the domestication of uncertainty

• Thales’ rental of oil presses and Aristotle’s mistake – the absence of knowledge

• The option – the right and the obligation

• Life is about options/lunch in London/tenant of a rent-controlled apartment/all you need is the wisdom to recognise favourable outcomes


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• Nature understands optionality/spontaneous abortion/trial and error tinkering

• Option = asymmetry + rationality/Fragile has no option/antifragile needs to select best/banks vs. technology

• Life is long gamma

• Wheeled-suitcase demonstrates that technology is only trivial retrospectively/demonstrates lack of imagination

• Randomness plays a role at two levels – the inventor and the implementation


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• Investigates role of academia in technological know-how and practise/learning birds to fly/questions causality/ illusions of cause and effect/education’s relation with wealth and economic growth

Lecturing birds how-to-fly-effects

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Field Origination and development (textbook version)

Real origination and developments

Jet engine Physicists Tinkering engineers with no theoretical insight

Architecture Euclidean geometry Heuristic and secret guild recipes

Cybernetics Norbert Wiener Programmers "wiki-style"

Derivative formulas Black, Sholes, Merton Traders and practitioners

Medicine Biological understanding Luck, trial and error, side affects of other medicines

Industrial Revolution Growth in knowledge, scientific revolution

Adventurers, hobbyists

Technology Formal science Technology/business

Remaining fragilities – via negativa

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• Describing God and sculpturing David

• Charlatans will only offer positive advice/ten steps for …/success depends on avoiding the negatives

• Knowledge comes from a subtractive epistemology /one small observation can disprove/millions can hardly confirm/what you know is robust, the opposite is fragile and speculative

• Simple forecasting models better than the complicated/”fast and frugal” heuristics good for decisions/less is more

Remaining fragilities… cont.

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• Extension of Pareto principle/1% modification of systems can lower fragility by 99%/small number of homeless, customers, disgruntled employees, ill, cost overruns account for most problems or largest costs

• More data lead to missing the main point/more than one reason for doing something, don’t do it/French army/long bio

• Antifragility co-exists with passing time

• Try to forecast future surroundings in twenty years/intuition is to add/test is to take away


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• Consider Verne/Wells/Orwell – almost everything imagined never tool place/today’s new tools were not foreseen

• Amongst the antifragile: cooking utensils, restaurants, wine, glasses, chairs, bicycles, literature

• Difference between perishable and non-perishable – technologies that age are already dead

• Fragility in handling information – books, scientific papers, conferences proceedings/what to read


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• The role of prophets

• Subtraction of medical expenses bound to extend lives/same holds for abstention from food (in general), some products in particular

Addressing ethics

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• Skin in the game mitigates fragility

• Hammurabi’s code/Getting on a plane without a pilot/voting for and sending a son to war/talkers have a free option – no opinion without risk

• Privilege used to come with obligations

• Predicting – free option

• Friedman and Stiglitz/Stiglitz syndrome = fragilista + ex-post cherry picking

• Never ask anyone for their opinion, forecast or recommendation – ask after their portfolio/ same with doctors/Tarek’s armies/Lawrence of Arabia vs Meyer Lansky