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.

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

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).

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Research vs Planning

Image credit: http://www.flickr.com/photos/darkumber/

Preamble

I’ve learned a lot from reading and interacting with various blogs. But something has been bothering me for a while now.

What if it is all complete rubbish?

That’s blatantly trolling and patently not true – I read a lot of fascinating and thought-provoking posts. But the extent to which I should implicitly trust their veracity is something that is concerning me.

There are definitely zeitgeist ideas regularly repeated and regurgitated in the blogs I read. They sound sensible but what are they based upon? Thought? Fact? Data? Opinion?

As ideas are communicated, the content and context changes. This form of “peer review” is in many ways beneficial, but facts can be distorted through misreadings or assumptions.

As a quantitative researcher I deal with hard figures and base my findings upon these. Assumptions are should be anathema to what I do. However research methodologies are far from flawless and one of the more problematic attributes is that it represents behaviour or attitudes at a particular point in time.

This is only of partial benefit to strategists and planners, who need to be able to predict trends. This therefore requires a level of speculation and anticipation, but they need to be based on something. But what?

I read the blogs of many successful planners and strategists, and so they must be doing something right. But to what extent should the prevailing themes of the blogosphere be treated as gospel?

In fact, this is more of uncertainty over “social media experts” than strategists per se, but why spoil a good title…

The problem with speculation

Image credit: http://www.flickr.com/photos/lolita8fotos/

This post/rant was prompted by Pew Research publishing their Future of the Internet study.

“Responding to an invitation to participate in an online survey, 578 leading internet activists, builders and commentators submitted their ideas about the impacts networked technologies may have on world societies by 2020, with an additional 618 stakeholders also participating, for a total of about 1,196 participants sharing their views”

In fairness, I haven’t read the study – it was the principle behind it that got me thinking. What were these predictions based on? As experts expressly invited, you’d imagine that their speculation would be based on some form of study and research, but to what extent should all evidence be footnoted to let us objectively assess their predictions?

Now while they are ultimately speculating, speculation from some people is better than that from others. As Mark Cahill said

“I see Social Media experts who are continually spouting the mantras of the lexicon, yet when you look at their “about me” pages (if they even have their own sites) you find they’ve never built anything.”

Despite some bloggers being well known outside of the internet, a blogger’s identity can be carefully constructed to emphasise certain areas and mask others.

The distortion effect

As ideas spread, there is the danger of turning peer review into an echo chamber. Mark Cahill also says:

“Are you really expanding the body of knowledge, or merely parroting the Internet A-listers who catch your fancy?”

What was a snappy soundbite can quickly become a buzzword and then a cliché. How many times has the word “conversation” been used in vain since The Cluetrain Manifesto was published ten years ago? How many times did we hear the word “tribes” before Seth Godin’s book came out, and how many times have we heard it since?

Social media “rockstars” aren’t all characterised by a limited vocabulary, but it is a noticeable trend.

Just because I repeat a quotation – and possibly append it to a pretty picture – does it make it correct? Is there meaning or truth behind it? What is the original context, and how does it stand up to intellectual scrutiny?

A quote can be found to back up any argument, no matter how tenuous. How do we know that the selected quote doesn’t contradict the prevailing wisdom? Chomsky does it all the time, so why can’t we?

While this exchange on the We Are Social blog takes quotes from fiction rather than from a thesis or paper, it is nevertheless a great illustration of what I am attempting to relate:

Media Czar – To quote Inigo Montoya, “You keep using that word. I do not think it means what you think it means.”

Faris Yakob – “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean – neither more nor less.”

A house of cards

Image credit: http://www.flickr.com/photos/gibbons/

Scientific knowledge extends through building theories on top of other theories. In astrophysics, very few of these can actually be proved. So if a new discovery is made that contradicts the prevailing wisdom, then the body of knowledge has to effectively regress to the point of proof.

Is our speculation in danger of being built on shaky foundations? While there is little danger of a paradigm shift that mirrors the current financial crisis, there are often missteps. Speculation frantically repeated becomes hype.

Is Twitter the new Facebook or the new Second Life? Who knows? What I do know is the amazing resilience of newspapers to continue to shape the cultural agenda. Internet society is still very much on the fringes. The various trend sites on the web point to interesting but ultimately isolated examples of new behaviour. How many times have they actually been prescient in predicting new behaviour crossing over to the mainstream? Nassim Nicholas Taleb is now regarded as a genius because he anticipated the financial crisis – should all the financial strategists and risk assessors that missed the problem retire in shame?

Snappy quotes and pretty pictures should support the evidence. They shouldn’t be the evidence.
Themes must be built on accumulation of evidence and observation. A quote or a picture may be a better way to convey the thought, but that doesn’t discount the use of appendices or footnotes to support an argument.

Speculative insight

Strategists produce (or, at least, should produce) insights. Or as Rory Sutherland more accurately puts it, ideas.

“What is the difference between an idea and an insight? My own first stab at a definition would be this. That an insight is a sudden and potentially valuable revelation concerning what is; an idea is a sudden and potentially valuable revelation concerning what might be.”

Ideas should be supported by insights, and insights should be supported by evidence. But are they?

Richard Huntingdon believes that insights come from four areas – within, “real people not respondents”, academics and “weird shit”. Academics and a surfeit of real people can produce documented evidence borne out by real behaviour, but the other two? No matter how well informed or intelligent the person might be (and my impression of Richard Huntingdon is that he is both), they still suggest speculation.

And as Nassim Nicholas Taleb has pointed out, we are pretty useless at predicting the future. Among the reasons listed in this fascinating blog post include

• “Hindsight bias: Past events look more logical, causal and correlated than they really are… It was almost entirely good luck.
• Vulnerability to “noise”: We are such pattern-seekers that we look for sense in the firehose of information, and find it when it isn’t there
• The induction problem: The past always seems deterministic. We expect the future to be a continuation of the recent past… So we constantly overreact to the “latest” news (quarterly earnings reports).
• The survivorship bias: We tend to see only the winners/survivors and lose track of the large numbers of losers.
• The anchoring bias: Our perception of where we are is biased by where we have come from. If we have a million dollars after living our lives poor, we think we are rich. But if we once had two million, we feel poor, a failure.

Because of these biases, we are, he argues, very poor at assessing risks. I would say we are equally poor at assessing opportunities because of these same biases.”

Where’s the research?

Is research the answer? A mixture of quantitative analysis and qualitative ideas that can be extrapolated to predict the future?

If we believe in the Donnie Darko theory of time travel and path dependent lives then sure.

But I don’t.

Going back to what Rory Sutherland says

“Most conventional research, by coating everything in a patina of rationality, completely fails to uncover the baser (and hence deeper) motivations behind human behaviour.”

Crowdsourcing opinions of future behaviour won’t produce accurate results. We are good at understanding our current behaviour, but not so good at understanding our current motivations for that behaviour. So how on earth can we know what our future motivations will be?

The synthesis

Image credit: http://www.flickr.com/photos/panamaxel/

We therefore need to combine both strategic thoughts and research. For all the evidence we may accumulate, it still needs that eureka moment to anticipate how it relates to the future. These ideas are still not guaranteed success, but it may get us closer to the truth than pure guesswork or pure facts.

As Jeremy Bullmore wrote in his absolutely brilliant “Why is a Good Insight Like a Refrigerator?”

“Conventional market research, professionally conducted, can paint an invaluable picture of the immediate past; but companies also need help in forging their futures… To generate hypotheses you need to speculate: you need to progress from the known to the unknown. But you cannot paint the future in the colours of the past… The origins of an insight are usually to be found in numbers. That’s how we know an insight to be more than airy whim; that’s how we know it has substance; that it can be tested and replicated.”

We may not be able to make predictions with 100% accuracy, but we can evaluate our past predictions. An idea or insight needs to be both provable and measurable. To stand up to scrutiny, it needs to be able to be pulled apart and assessed. The alchemy of inspiration and perspiration.

Conclusion

Planning should be based in research. But equally research has plenty to learn from the strategy side. Data that is only accurate at a single point in time dates quickly – researchers can extend the life of their work by searching for these ideas that move our industries forward.

That’s my opinion anyway. But what’s my opinion based on?

Conjecture. In this post I have made several arguments with carefully selected illustrations and quotes. Where is the data and the proof that my opinion is valid?

Is this just how blogs work? Are blogs just arenas to speculate and should I not read too much into the content? After all, would any client sign off a campaign idea based solely on what someone read in a blog?

Or perhaps I have just missed my calling? This blog is packed full of febrile speculation – what sort of researcher am I?

sk

Links – 22nd February 2009

Some of the things I’ve read over the past week and would recommend:

• There have been some interesting events occurring in London over the past week: John Griffiths went to the NESTA workshop, and Anjali Ramachandran and Eaon Pritchard both went to see Seth Godin speak

• A thought-provoking article in the Atlantic on the future of TV. It argues that TV’s USP is immediacy. While there are still cultural reference points via TV, scripted shows will increasingly see TV as just another distribution pattern. TV will therefore move to concentrate on news, current affairs, live reality shows and sport. This makes sense to me given my research – TV excels at events which are essentially DTR-proof, and the most popular shows online are dramas and comedies that can be viewed at leisure and shared/discussed asynchronously. However, I would argue that successful scripted shows still need TV as that anchor point for mainstream cultural crossover.

• Another article on the future of TV, this time in Advertising Age, comes from the perspective of consumer choice in the ad-supported model

• A fascinating post in Salon on Nicholas Nassim Taleb and our weaknesses in risk assessment

• Ana Andjelic has a great post on our general failure to accurately predict the future. Not only does she argue that a lot of campaigns will fail, but also that our limited perspective means we will often follow the same patterns (potentially of failure)

• Tom Ewing takes a line from a Bob Dylan track to point to a problem faced by market research and information consultancy

• Nigel Hollis asks if retail brands are inherently local

• A discussion with Rishad Tobaccowala, Faris Yakob and David Pescovitz on the future of technology and marketing produces some great soundbites

• Writing in Mashable, Whitney Hess gives a nice overview of user experience design

• Business Week seeks to debunk six social media myths

• Caleb Kramer’s lessons learned from brandjacking Burger King on Twitter

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Links – 1st February 2009

Part 2 of the Good Stuff, following on from links yesterday to top articles on insights, marketing and advertising, online video and music.

Social media

I haven’t yet read it but I’m sure it is brilliant: danah boyd’s PhD dissertation

The Vitrue top 100 social media brands of 2008 (with methodology included)

Charles Frith provides an excellent case study of how brands shouldn’t engage with social media. Whether the person was officially representing Miller or not, he got pwned.

A Wired journalist experiments with various geo-aware applications and finds out that they are not all that they are cracked up to be

Mozilla have proposed a free, crowd-sourced usability tool which sounds, from this at least,  fantastic

Technology and the internet

One one hand, Kevin Kelly argues that ownership may soon be a thing of the past, and that access is far more important. Bodes well for tools such as Spotify.

But on the other, Jason Scott argues against the Cloud, as it can’t be trusted to safeguard your “possessions”

John Willshire lists several free tools that can be very useful in tracking online consumer behaviour

Discover Magazine offers a counter-argument to Nicholas Carr’s Atlantic article. Through outsourcing the effort required for recall, Google can in fact make us smarter. Not sure I necessarily buy this, but interesting nonetheless

Business and ideas

A great interview with Nassim Nicholas Taleb, author of the Black Swan, in the (UK) Times

Henry Blodget’s plan to fix the New York Times includes cutting costs by 40%, raising the price of the print edition and – controversially – reconstructing a walled garden for premium content

John Willshire (again) live-blogged the recent PSFK ideas salon in London, and it is well worth a read

Copyblogger has six ways to get people to say yes

A lovely story of a designer recounting his experiences with notebooks. I’ve recently started using a notebook for more than transitional note-taking, but it remains to be seen whether anything useful will come of it

My Favourite Business Book – crowdsourced opinion

And, as always, I’ve been posting slightly more miscellaneous links to my Tumblr blog, which in theory now has comments enabled through Disqus.

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