Archive for January, 2013

Antifragile

January 3, 2013

 

 “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile.”- Nassim Taleb

 

Nassim Nicholas Taleb, author of The Black Swan and Fooled by Randomness, recently gave a talk alongside economist Russ Roberts, host of the popular economics podcast EconTalk, at the Powerhouse Arena in Brooklyn’s hipster-chic DUMBO area. (That’s Down Under (the) Manhattan Bridge Overpass, man.) The two had their work cut out for them in trying to impress around 100 of what appeared to be Brooklyn’s most Brooklynesque Brooklynites. While Mr. Taleb’s delivery lacked the concision a live audience’s attention span might prefer, his ideas probed the very essence of how we understand the world around us and the events that shape it.  The subject of their talk was Taleb’s new book, Antifragile: Things That Gain from Disorder.              

Mr. Taleb is a Lebanese-born essayist whose resume includes stints working as a hedge fund manager and as an options trader. In addition to being a celebrated author, he is currently a professor at NYU as well an adviser to both Universa Investments and the IMF.  His works, while centering on the subject of uncertainty and probability, also possess a pointedly contrarian viewpoint.

Mr. Taleb is severely critical of social scientists and their attempts to apply scientific methods to quantify and predict what he believes to be inherently unpredictable. This criticism is particularly strong in reference to the current state of the global financial system. While his second book The Black Swan centered on the idea that complex systems are beyond the scope of complete human comprehension, Antifragile proscribes a way of life that relies on foresight and, rather, outlines the next steps leading to a robust non-predictive lifestyle. In his own words, the book is about “how to act when you don’t know what’s going on.”

 

Fragility is a concept that most people understand rather easily. If one were to send a box full of champagne glasses as a wedding present, they would write “FRAGILE” on the side of a package.  The purpose is to inform the mail carrier that the contents of the package will be ruined if mishandled. The best case scenario would be one where the package arrives in its original condition. What then, is the opposite of fragility? Would it be robustness or resilience? If you were to send a box of unbreakable champagne glasses you would define them as robust. In this case, the package would arrive to the recipient in its original condition regardless of the treatment it endured. This cannot be the opposite of fragile since the best and worst case scenarios are the same, the package is unharmed. Imagine instead a package where you wrote “PLEASE MISHANDLE” on the side. In this case you would be sending a box of champagne glasses that, when one breaks, two grow back in its place. This type of package would be defined as Anti-fragile, which is essentially the opposite of fragile.

In Anti-Fragile: Things That Gain from Disorder, Mr. Taleb claims that the key to avoiding disastrous systematic failures is to identify and limit the level of fragility within a system rather than trying to predict the events which may harm it. Additionally, if a system is considered anti-fragile, then depriving it of volatility and stressors will weaken it.

A key example would be the banking system. When banks are bailed out, it deprives the banking system of the volatility that would make it collectively stronger. The problem with the banking system in its current state is that each bank failure does not make the system stronger, but instead, makes it weaker. Institutions with large amounts of highly leveraged debt have very little room for error and in a case where an error does occur, the effects are dramatic. Not only do these vastly interconnected institutions fail to meet obligations to one another in times of stress, but creditors, having been burned once, will be less likely to make the same mistake again. This creates a situation in which shocks must be avoided and when they do occur, the inherent fragility of the system requires intervention from government.

This situation is analogous to a forest fire policy where the goal is to eliminate all fires. One may be able to extinguish the majority of the fires in a timely manner, but by not allowing periodic controlled fires to eliminate the flammable material on the forest floor, but it increases the vulnerability to experiencing the mother of all fires.

Are the reforms posed by Mr. Taleb realistic in today’s political and social climate? Probably not. But when the music stops playing and it comes time to seriously address the glaring weaknesses that characterize the global financial system, Mr. Taleb’s insights may be a bit more difficult to dismiss.

For questions or further discussions on this topic, please contact Mr. Kenny: joekenny@smithsresearch.net

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