Nassim Nicholas Taleb and Antifragility

At the Royal Society on Thursday I saw Nassim Nicholas Taleb (Distinguished Professor of Risk Engineering at Polytechnic Institute of New York University) in conversation with Rohan Silva (Senior Policy Advisor to the Prime Minister) and Matthew Taylor (Chief Executive of the RSA).

The subject was Taleb’s latest book – Antifragility – which he hopes isn’t as simplified as his previous book (he seemed to dislike the fact that The Black Swan was bought and read in airports by people who subsequently misinterpreted it). I think he has succeeded, as at times I struggled to grasp his arguments.

Nevertheless, I’ll have a go at summarising it. The images below are taken from his slides, available alongside the audio of the event, at the RSA website.

I believe Antifragility draws on Prospect Theory (incidentally, Michael Lewis has recently written about Daniel Kahneman – one of the main proponents of the theory – in Vanity Fair). The thesis is that organic entities are fragile, and that potential harm is non-linear to the size of the event (see below). In fragile systems, potential losses outweigh gains.

Antifragility is the opposite of fragility – where gains outweigh losses (robust is something different). The parallel Taleb drew was:

  • Fragile – Sword of Damocles (risk of fall)
  • Anti-fragile – Heidegger Hydra (cut one head off and get two back)
  • Robust – Phoenix (stays stable)

To give an example, it is more harmful to jump once from 100m than 100 times from 1m.

Taleb-nonlinearharm

This means that the unpredictability of Black Swan effects costs more when the size of the event is large.

Black Swan event

This means (I think) that risk is concave, and there is more pain than gain in an event. For instance, traffic is concave – it is fine to the point of over-leverage, when the cost of travel will suddenly massively increase.

Antifragile events are convex. Taleb believes that bottom-up structures are convex, while top-down dictated structures are concave. We cannot effectively design systems as we cannot fully understand them, and so there will always be more harm than good.

The result of this theory is that large events, large organisations and large governments should be avoided. “Too big to fail” is catastrophic, and Taleb is firmly in favour of smaller organisations – on a moral level (it smaller societies you are close to the result of your decisions and so may feel shame) and an economic level (the cost of liquidating one large bank is far more than the cost of liquidating ten banks one tenth of the size of the large bank).

Uncertainty makes mistakes costly, and thus both businesses and governments should remain small. Taleb suggested that if Tesco suddenly ran into difficulties then the government would have to bail out a supermarket. He feels the government should only intervene in things that can’t organise organically, and is thus advising the government on how to make its institutions smaller (such as splitting the NHS into localised, autonomous units).

Taleb also talked a bit about risk management, and said that the models were flawed as they don’t combine risk and growth –  to get rich you must survive. He feels slow and steady growth is preferable to high growth that cuts corners, since that will ultimately crash. He pointed out that perfect growth is Madoff, and that Greenspan and Brown’s attempts to end boom and bust have led to where we are now (he claimed that Brown was more dangerous than Blair as Brown thought he understood the world).

He also mentioned that within small systems, stresses can be positive. For instance, we fast to kill cancer calls. In exercise, we should combine slow and steady exercise (such as walking) with the occasional intense burst (such as lifting weights at the gym). Up to a point, what doesn’t kill you makes you stronger.

Taleb doesn’t see big as permanent – Google could quite easily disappear tomorrow. To get around organisations growing in size, he recommends a contract saying that if a business wants to have the option to be bailed out then they can never pay out bonuses. Since people will want bonuses, they will intentionally keep their business small in size to not require bail-outs.

He closed by saying organic organisations are perishable and that each day they exist their life expectancy drops by a day. Whereas non-perishable entities – such as ideas – increase their life expectancy each day. For instance, if an idea has existed for 25 years then it will exist for 25 more.

Ultimately, the talk was very thought-provoking but I’m not sure whether I agree with it or not. On the one hand, I can see the diseconomies of scale of large organisations, but on the other hand businesses will have become large through success. That success might have been random and unwarranted, but they nevertheless survived and so must have done a few things correct. Taleb appears to advocate limiting them in order to protect against the possibility of them failing and causing problems for the economy. This risk aversion and diversification may be prudent, but I’m not sure how fragile this system really is (particularly if it made up of bottom-up organisations).

sk

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6 Responses

  1. Not totally certain I understood everything from a quick read but it sounds interesting. And it sounds more complicated to follow than Black Swan – I won’t read it in an airport anyways 😉

  2. It’s certainly complex. The precis I took was “The risk and cost of fail grow greater than the size of the event, so things should be kept small”

  3. I like the idea of smaller and more localised but the question always remains as to HOW small and HOW localised is optimal. Also, what do you do with a growing successful business that reaches the glass ceiling you’ve imposed? Is there really less risk involved in allowing them to continue building what they’ve done successfully thus far than there is in forcing them to diversify into something they’re less experienced in and start again from scratch?

  4. Simon,

    Just to say that I was not at the event but have been following his work on antifragility and just listened to his audio at RSA. Antifragile systems actually benefit and thrive on shocks; it makes the system stronger. So itis more than just being robust enough to withstand shocks. That is why it is like a HYDRA (not Heidegger) where if you cut off one head two more appears etc. It actually thrives on the unknown/uncertain.

  5. Thanks Robert, I’ve corrected the text

  6. The concept of antifragility helped to answer a question that has puzzled me. How can an army lose every battle (including the last one) but win the war? Examples are the US in Vietnam and Napoleon in Russia. The answer lies in the fact that large optimized systems are vulnerable and break down, while smaller and simpler ones get only tougher as they are stressed. Notice that no amount of study of the loss in Vietnam could teach the US generals how to prevail in Iraq and Afghanistan, because the problem is not strategy or tactics, but large, optimized organizations which break down eventually, against small, durable opponents that may suffer defeats but continue to endure.

    Antifragility is an important factor in evolution and in our biology. The human body strengthens under stress and atrophies without it. Astronauts lost bone density when subjected to prolonged weightlessness, for example.

    This most important idea is intuitively understood, and I believe much of Taleb’s work is an effort to bring logical proof to common knowledge. The crux of the matter is that the common sense, intuitive knowledge of the past has been undermined by thinkers who have built elaborate models of risk (for instance) on foundations riddled with faulty assumptions.

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