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Taleb’s Antifragility

Taleb’s Antifragility

This dossier, built from an analysis of various publicly available papers and talks given in 2011 and 2012 ahead of the book’s release, explores Taleb’s antifragility. It was first published in The Alpine Review's #1 issue, "Antifragility". Using select examples from Taleb, Louis-Jacques Darveau unpacks the essential elements that define antifragility. 


When former New York Times reporter Alex Berenson showed up in Nassim Nicholas Taleb’s office in 2003 with a leaked risk report from Fannie Mae, Taleb recalls having turned pale: an explosive combination of agency problems, moral hazard, and ‘scientism’—the illusion that ostensibly scienti?c techniques would manage risks—meant the global economy was sitting on dynamite. He was right and yet, few saw it coming.

 

Predicting the future has always been left to fools and oracles. Tumultuous, random and volatile, life is beyond our taming, beyond our strategizing. While some would agree with Hobbes that life is “nasty, brutish and short”, it’s an oversimplification to see this rough and messy cycle as negative. Evolution depends on this chaos. Anything with a natural cycle requires stressors to move forward. Our bodies, our governments and our economies all benefit from being pushed beyond the breaking point, so they can be rebuilt, stronger than ever.

 

But we seem to have become allergic to uncertainty. We plan and curate our experience of the world—cutting out randomness and chance as antiquated concepts—despite the fact that the best discoveries are often stumbled upon. Something is wrong when suing over hot apple pie is more American than the apple pie itself. With banners in factories proudly declaring safety a priority over all else and warning labels on teddy bears, it seems we’ve gone overboard on eliminating risks at all costs. 

 

 

For governments and policymakers, the fear of uncertainty translates into ‘interventionism’. Alan Greenspan, once the revered Fed chairman and leading architect of the subprime debacle, thought he could remove cycles from the US economy by over-optimizing it, without proper care for checks-and-balances or the implementation of system redundancies. By supporting a policy of ‘easy money’ (i.e. over leveraging), the Fed and other policymakers thought they could remove the seasons: everyone would be in a state of economic bliss where these inconvenient cycles would have become a figment of the past.

 

Using interventionism, the US government also bailed out ‘too big to fail’ financial companies and weak automakers, avoiding the shake-up that ultimately proves beneficial to a system. 

 

But the phoenix must rise out of ashes.

 

This institutionalized fear of randomness and shock has made governments and businesses overly obsessed with the concept of ‘risk management’. But risk itself is a complex concept: it has no static or universal definition, depending mostly on temporary contexts, shifting configurations and mysterious calculations.

 

 

Risk, fragility and antifragility.

 

Rather than trying to understand or manage ‘risk’, Taleb argues, we should try to understand ‘fragility’—a much more fertile concept. There is no universal definition for fragility but, luckily, there is a way to understand it. According to Taleb, anything disproportionately harmed by large events is fragile. Generally, anything that malfunctions in response to randomness or variations. The best illustration of this concept is air travel. Introduce one random event in this over-optimized system (think Heathrow), like a misplaced piece of luggage or a volcanic eruption, and travellers can be delayed hours, if not days or weeks. However, positive randomness, like favorable winds, will never get you more than few minutes in advance. Consequently, randomness is usually more harmful than beneficial to anything fragile.

 

Exploring the concept of fragility, Taleb also reveals that there is no known antonym of fragility, so he has coined the appellation ‘antifragile’, which applies to anything that benefits from variability. 

 

As it turns out, this provides a great forecasting model, as Taleb uses the allegory of via negativa: “By understanding fragility it becomes easy to look into the future, through subtractive methods: you remove anything fragile. It’s a simple heuristic that works beautifully.” In other words, where traditional forecasting methods try to use the present as a baseline and then add components—flying motorcycles, self-replenishing refrigerators and robots — Taleb proposes looking at the future for what it is not. As a framework, the model Taleb developed is called the “triad”, in which things are classified as either fragile, robust, or antifragile. 

 

Taleb’s view is heavily influenced by ancient Greek mythology. He often uses the mythological Lernaean Hydra as an analogy for antifragility: for each of its heads that was cut off, two more grew in its place. Therefore, this creature benefitted from shock and can be defined as antifragile. The Sword of Damocles is the analogy Taleb uses for fragility: those in power cannot be truly happy when fear constantly looms over them. To explain ‘robust’, Taleb uses the strength and vitality of the Phoenix, that is born out of destruction and chaos. 

 

The beauty of this model is that you can filter almost any concept through it: ways of thinking, finance, political systems, technology, etc. For instance, with respect to finance, Taleb classifies ‘debt’ as fragile, ‘equity’ as robust and ‘venture capital’ as antifragile. With respect to government, nation-states are fragile, while city-states are antifragile. Generally, ‘big’ is viewed as fragile, ‘small’ is antifragile, ‘monoculture’ is fragile, ‘polyculture’ is antifragile, etc. 

 

But the model is not fixed: while a city is naturally antifragile, it becomes fragile when it gets too big or lacks industrial diversification. Detroit is a city that grew around the automaking industry and became huge. But when automakers started choking, the city basically went bust. Unveiling another important element of Taleb’s logic: understanding how fragility gets traded off.

 

 

How fragility gets traded-off in society

 

Taleb uses the notion of ‘skin in the game’ or the captain-ship rule, which, unless you are the captain of the Costa Concordia (in which case you can just take the first available life raft), states that the captain must go down with the ship. An earlier version of that rule can be found in the Hammurabi code — the first ever written code of law, developed during the first babylonian dynasty — which contains 282 laws. Law 229 is of particular interest for architects: it states that if a builder builds a house, does not construct it properly, and the house which he built falls in and kills its owner, then that builder shall be put to death. 

 

In Taleb’s view there are three categories of people: those with ‘skin in the game’, those ‘without skin in the game’ and finally, those with ‘soul in the game’ or ‘skin in the game for the sake of others’.

 

Corporate executives and bankers belong to the second category. They became experts at trading their fragility and eventually made their compensation very antifragile: while investors lost trillions of dollars following the banking collapse, bankers had their best bonus year in 2010. The downside is systematically transferred to somebody else and the notion of moral hazard has, in many cases, been removed. While knights (the medieval kind) had to go to the frontline and risk their lives (skin in the game), the President of the United States can run a war from a distance with massive use of drones and risk very little (no skin in the game).

 

Who, then, has skin in the game? Merchants, activists, entrepreneurs, artisans... “An artisan selling you his product has his ego in it. He makes sure the inside is as beautiful as the outside. Steve Jobs was the only artisan at an industrial scale, for example”. 

 

At the other side of the spectrum, you find people with ‘soul in the game’. Globally, people who take risks for their ideas: local politicians (who meet the victims on a daily basis), artists, innovators and mavericks. “There’s immense reward for that now. They take the downside of society, voluntarily. Without these, society can’t function.”

 

The problem we face is that people with no skin in the game currently have more power and generally sit at the top of our social hierarchy and control our institutions. In other words, we’ve transitioned into a world where people who hold high ranks in society don't have any risk. Accountability and virtue has all but been eradicated from the traditional spheres of power (business and politics) and fragility continues to be shoved downstream in the form of massive privatization of profits and democratization of losses, at the expense of society.

 

Nassim Taleb’s body of work on uncertainty reminds us that we should focus on the non-perishable and avoid some of the pitfalls of modernity, like our constant desire to fetishize the ‘new’. Bicycles, kitchens and cars are all very similar to what they were thirty years ago. “Once in awhile you have a breakthrough like the computer but otherwise, it pretty much stayed the same. If anything, we use technologies to produce old goods in a cheaper manner... If you asked someone 50 years ago to describe the kitchen of 2012, it would have looked like the inside of a flying saucer.” But when you look at today’s kitchen, as Taleb’s observes, it looks relatively similar to a kitchen you would have seen in the ruins of Pompei. 

 


Louis-Jacques Darveau is the Publisher and Editor of The Alpine Review. A multidisciplinary strategic advisor, his client-facing work focuses on new ventures, innovation opportunities, product development, and marketing. His interests include issues related to complexity, ‘turbulence’, good governance and good society.

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