Monday, February 23, 2015

Antifragile by Nassim Taleb (Book Review #16 of 2015)

Antifragile: Things That Gain from Disorder (Incerto)

I read Fooled by Randomness (my review) in early 2008, before the complete collapse of the housing market and financial system, and it changed my world like perhaps no other book has. I was not really ready to read another Taleb book before I had read so many other works he cites. Since 2008 I have read Plato, Xenophon, Adam Smith, Hayek, Kahneman, Keynes, Mandelbroit, Ferguson, Shiller, and others and studied a good bit about Ancient Greece, Rome, Anatolia, and the Levant. I would probably not currently read the Classics and philosophy were it not for Taleb's rule (not kept by himself either) to not read anything newer than 700 years old.

Nassim Taleb is a flawed individual (aren't we all)? His biggest flaw is his penchant for responding to critical reviews quite harshly, whether wading into the comments section on Amazon, allowing himself to be trolled on Twitter, or writing detailed responses to critics' articles. This is odd because Taleb has written that critics aren't worth regarding, and praises criticism in Antifragile. In Fooled by Randomness, Taleb points out that most philosophers (Karl Popper foremost) live contradictorily to their philosophies-- they are logically inconsistent. While Taleb falls prey to this same problem, he does not readily admit it on these pages.

Taleb reads books that have bad reviews, books that have ticked off the intelligentia, because he knows that book might contain some original thoughts outside the mainstream and therefore be worth reading and probably correct. I've seen bad reviews of this book and think that was their secret point in solidarity with Taleb. I really enjoyed most of this book, too much to savage it, but I hope my praise of it does not keep you from reading.

There is apparently no word in any language that captures the precise idea for the "opposite of fragile." Some cultures, likewise, do not have words for various colors. Ancient Greeks, for example, only had a few colors in their lexicon something which was not discovered and confirmed until the 1800s (by a non-expert, which made it harder for the establishment to agree with). Other cultures have been tested and proven to not be physically colorblind, but they don't distinguish, say red, orange, and yellow in their vocabulary.

This book is ostensibly about how the way we do things-- economics, medicine, politics, genetically modified foods, etc. -- makes our world more fragile, and how we could do things differently to increase the world's antifragility. Taleb vehemently opposes the "Soviet-Harvard" arrogance that complex systems can be understood, predicted, and made less volatile.

Fear of randomness leads to fragility. "Stressors and randomness have their role in daily life." For example, doing the same exercise over and over leads to repetitive motion injuries and rapidly diminishing marginal returns. Mix up your routines to increase stress and the benefit. Fast from food occasionally and see how your body reacts. (One suggestion in Fooled by Randomness was to not set your alarm occassionally, live with the variance of times at which you will wake up for better mental fortitude). Eliminating the randomness neither good nor desirable, evolution itself depends on the randomness. "But try explaining this to politicians."

We want linear outcomes and a normally distributed world, but that's not how the world works. There's convexivity and concavity, second-order effects, etc. Rather than accepting randomness, embracing it, preparing for it, and using options to hedge our risk we instead try to suppress it, dismiss it, ignore it, and then it gets you-- like the housing bust. If I say "It would be terrible and very costly if X broke, but I don't think it will because of _________." What is in the ______? For Ben Bernanke it was "housing prices have never fallen together nationwide before." Just because there wasn't historical precedent (which there was, by the way) does that mean that housing prices couldn't fall? This is the plight of the turkey. Every day the farmer comes in and feeds him well. Over the years, he sees the farmer as harmless and not a threat. Until the farmer eats him. That is the black swan event, a 6-sigma and seemingly impossible event with enormous consequences. Antifragility focuses on those seemingly small events with large consequences.

There is an early diatribe against academia as being petty, vindictive. We send students to business school to be trained by people who have never run businesses and it's like "teaching birds how to fly by lecturing them." Taleb's research shows that academic ideas don't make it onto the trading floor, but vice-versa. Traders find what works. Maybe some day the trading strategies will be researched and end up in a classroom. Likewise, how many drugs has been discovered via research funded by the NIH? Very few. The vast majority have been found by private industry. The industrial revolution was largely spurred by private tinkerers, many of the foremost "experts" of that era were titled "Reverend." Academics of that era were mostly lecturers, not experts expected to produce cutting-edge research, until the late 1800s. Fragility is what makes us antifragile. Immune systems strengthen immunity by exposure to disease, the coffee maker on my desk owes its success to the hundreds of inventors who tried before and failed. We all stand on someone else's shoulders. Taleb's ideas, to me, seem very Hayekian although he hardly mentions Hayek (he does praise Schumpeter's idea of creative destruction, though not Schumpeter's later policies at naive interventionism). He critiques Hayek's talk of knowledge as Hayek ignores optionality as a substitute for knowledge.

Seneca is Taleb's hero. He was prominent stoic philosopher but said that education was for the lecture hall, and he was also a practitioner foremost-- the richest man in Rome.

Someone else's review summed it up thus:
We need entrepreneurs and risk-takers, else we end up as "Mediocristan." Mediocristan is where normal things happen, things that are expected, whose probabilities of occurring are easy to compute, and whose impact is not terribly huge. The bell curve and the normal distribution are emblems of Mediocristan. For those not very familiar with statistics, the bell curve represents the normal distribution, where small, low-impact changes have the highest probabilities of occurring, and huge, wide-impact changes have a very small probability of occurring. Exstremistan is a different beast. In Extremistan, nothing can be predicted accurately and events that seemed unlikely or impossible occur frequently and have a huge impact. Black Swan events occur in Exstremistan.

Yet, Taleb writes, the system should not be built such that others lose when one fails-- ie: creditors. Debt makes one less antifragile, here therefore opposes nations that run up debts and is opposed to personal debt. A Dave Ramsey fan can find commonality with Taleb here. Even though the odds of disability or death and therefore inability to pay off your mortgage may seem very slim, in the event that randomness strikes the consequences are enormous.

Politically, Taleb does not argue against all interventionism, but rather "naive interventionism." For example, when America attacks ISIL, it might drive it underground but that will only make it a worse problem later. (Taleb is a Lebanese Christian who grew up during the civil war there.) Taleb writes much about iatrogenics - an adverse condition in a patient resulting from treatment by a physician. Iatrogenics kills more people than cancer annually. To me, Taleb seems somewhat inconsistent on medicine. He is angry with doctors who prescribe age-old remedies with little evidence of their benefit while blasting prescriptions backed by studies which are done by modern researchers and pharmaceuticals. He makes a good point, however, that things like Mediterranean diet may have benefits due to more than eating. Greek Orthodox Christians who live on the Mediterranean fast for lent and other occasions, a stressor which is shown to have health benefits. Don't try the diet apart from the lifestyle, in other words.

Taleb writes that we should let kids fall, allow more microbes, etc. because this increases resiliency in the long-run. But my question is: what if one of those falls is the small-probability/large-consequence event? At what point do we aim for antifragility?

In the latter part of the book Taleb attacks economists and business schools directly. He writes that strategic thinking is just "superstitious babble," for instance. I do not agree with him, nor would many entrepreneurs that Taleb praises. It does no good to start your engine and not have an idea of your destination. A good strategic plan allows for randomness and can be made antifragile.

Taleb reserves special venom for Joseph Stiglitz, a Nobel laureate who failed to forecast the implosion of Fannie Mae and continues to acknowledge his error in either his books or his articles. Peter Orszag was a Stiglitz protege who headed Obama's Office of Management and Budget before taking a position at Citibank.
"The Romans had engineers sleep under the bridges they had built. The U.S. government should have made Orszag and Stiglitz sleep under Fannie Mae as they would have exited the gene pool and done us no more harm." Having "skin in the game" is the best way to make forecasting antifragile.

At least one investor critic has pointed out that applying Taleb's strategy to options is shown to historically lose money. Volatility has trended downward since 2008, should it go back up? Should we always be long volatility? This is a good critique here. "Taleb himself was in there angrily responding at length to these negative reviewers, and his cult-like fans piled on. From a guy who writes in Antifragile that criticism should be welcomed, his response to criticism is consistently hysterical"

Personally, I have thought more about framing things in terms of antifragility in my own life. Why do I want to pay off my debts faster

So, I recommend this book if you've read most of the other economists/philosophers/celebrities mentioned above. You need to have some background on ancient Greece and Rome, as well as Soviet history which Taleb often refers to. He flaunts his Latin and Arabic, so those languages are also a bonus in reading Taleb.

In all, I give this book 4 stars out of 5. It is thought-provoking. Great books lead the reader to read more books and Taleb's books are great in that fashion.

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