Book highlights and lessons learnt: “Antifragile” by Nassim Nicholas Taleb
Anything that has more upside than downside from random events or certain shocks, is antifragile, the reverse is fragile.
The antifragile gains from prediction errors on the long run.
Fragility is quite measurable, risk not so at all, particularly risk associated with rare events.
Black swam for the turkey, not for the butcher. The mother of all harmfll mistakes: mistaking absence of evidence of harm for evidence of absence.
Variations also acts as purges. Small forest fires periodically cleanses the system of the most flammable materials, so this does not have the opportunity to accumulate. Systematically preventing forest fires of taking place to be safe makes the big ones much worse. For similar reasons, stability is not good for the economy. Firms become very weak during long periods of steady prosperity devoid of setbacks and hidden vulnerabilities accumulates silently under the surface. So delaying crisis is not a very good idea.
A volatile market doesn’t let people go such a long time without a cleanup of risk, thereby preventing such market collapses. ( the longer and the more stable is a market, the bigger the crash)
Passive achievement. Few understand that procrastination is our natural defense. Letting things take care of themselves and exercise their antifragility. It results from some ecological or naturalistic wisdom and is not always bad. Resist interventionism on things that are antifrigile (your health).
Since procrastination is a message from our natural will power via low motivation, the cure is changing the environment or one’s profession, by selecting one in which one does not have to fight one’s impulses. Few can grasp the logical consequence that instead one should lead a life in which procrastination is good, as a naturalistic risk based form of decision making.
“Green Lumber Fallacy”. One of the most successful traders to ever buy and sell green lumber — which is freshly cut wood — actually had no idea what he was trading. He spent his entire career trading green lumber career believing the product was just wood painted green, and not newly cut trees. His ignorance of the product had no impact on his ability to make money trading it.
About the mental models in VC’s minds. The money should go to the tinkerers, the aggressive tinkerers who you trust will milk the option. Payoffs from research are from Extremistam, they follow a power-law of statistical distribution with big, near unlimited upside, but because of optionality, limited downside. Consequently, payoff from research should necessarily be linear from a number of trials, not total funds involved in the trials. Since the winner will have an explosive payoff, uncapped, the right approach requires a certain style of blind funding. It means the right policy would be the one divided by n. Spreading attempts as a large number or trials as possible. If you face N options, invest in all of them in equal amounts. Small amounts per trial, lots of trials, broader than you want. Why? Because in Extremistam, its more important to be in something in a small amount than to miss it.
Two distinct payoffs, with bounded left (limited losses, like Thales’ bet) and “bounded right” (limited gains, like insurance or banking).
Rules
- look for optionality, in fact, rank things according to optionality
- preferably with open ended, not close ended, payoffs
- do not invest in business plans, but in people. So look for someone capable of changing 6 or 7 times over his career.
- Make sure you are barbelled, whatever that means in your business. barbell (or bimodal) strategy for achieving antifragility, a strategy of going for two extremes that balance each other out.
“I initially used the image of the barbell to describe a dual attitude of playing it safe in some areas (robust to negative Black Swans) and taking a lot of small risks in others (open to positive Black Swans), hence achieving antifragility.” That is extreme risk aversion on one side and extreme risk loving on the other, rather than just the “medium” or the beastly “moderate” risk attitude that in fact is a sucker game (because medium risks can be subjected to huge measurement errors). But the barbell also results, because of its construction, in the reduction of downside risk — the elimination of the risk of ruin.
Rational but undirected trial and error based research. It is exactly like options, trial and error, not getting stuck, bifurcating when necessary, keeping a sense of broad freedom and opportunism. Trial and error is freedom. Avoidance of boredom is the only mode of action, life otherwise is not worth living.
The philosopher stone. The negative convexity bias (concavity bias). The hidden harm of fragility is that you have to be much much better than random in you prediction and knowing where you are going, just to offset the negative effect. If you have favorable asymmetry or positive convexity, options being a special case, than in the long run you will do reasonably well, out performing the average in the presence of uncertainty. The more uncertainty, the more role for optionality to kick in, and the more you will outperform. This property is very central to life.
Mental bias that causes people to believe in the power of some technology and its ability to run the world. Another mental bias causing the overhyping of technology comes from the fact that we notice change, not statics.
We can apply the criteria of fragility and robustness to the handling of information. The fragile in that context is, like technology, what does not stand the test of time. The best filtering heuristic therefor consists in taking into account the age of books scientific papers. Books that are one year old are usually not worth reading, a very low probability of having the qualities for surviving, no matter the hype and how earth shattering they may seen to be. So I follow the Lindy effect and a guide to finding what to read. Books that have been around for 10 years will be around for 10 more. Books that been around for 2 millennia should be around for quite a bit of time and so forth.
The fragile should disappear. Corporations that are large today should be gone since the they will always be weakened by what they thinks is their strength: size.
By issuing warning based on vulnerability, that is, subtractive prophecy, we are closer to the original role of the prophet, to warn, not necessarily to predict, and to predict calamities if people don’t listen.
Via negativa: the non natural has to prove its benefits, not the natural. In a complex domain, only time, a long time, is evidence.
Iatrogenics, being a cost-benefit situation, usually results from a condition when the benefits are small and visible, and the costs very large, delayed and hidden.
Iatrogenics is not linear. We should not take risks with near healthy people but we should take a lot, a lot more risks with those deemed endangered.
Predicting, any prediction, without skin in the game, can be as dangerous for others as unmanned nuclear plants without engineers who built it sleeping on the premises. Pilots should be on the plane. We need to build redundancy, a margin of safety, avoiding optimization, mitigating and even removing asymmetries in our sensitivity to risk.
Betting against the fragile is antifrigile
Central to optionality is Taleb’s assertion that prediction in the modern world is impossible. Instead of trying to predict what is going to happen, position yourself in such a way that you have optionality.
In order for something to qualify as an option, it must be convex. That is, it must have limited downside with large, open-ended upside.
