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This microbook is a summary/original review based on the book: Antifragile: Things That Gain from Disorder
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Here at 12min, we are big fans of Nassim Nicholas Taleb. The author of "The Black Swan" always comes on our list of favorite books and was one of the first micro books we created. If in "The Black Swan" Taleb has shown us that highly improbable and unpredictable events are widespread and shape our world, in his new book he brings us a concept as interesting as the Swan. The "Antifragile" covers things and ideas that not only benefit from chaos but also need it to survive.
In an antifragile world, uncertainty becomes necessary, for only that which is antifragile can grow and develop. Antifragile is the instruction manual for living in a world full of possibilities, and this microbook will introduce you to its key concepts.
Fragility is a simple concept. We know that a porcelain or a set of crystal bowls are fragile items that require special care. If they are not handled with care, they will inevitably break, and therefore we must know how to deal with this fragility, to be ready for unforeseen events. It is necessary to pack them well for transport, to ensure that in case of unexpected occurrence, they do not break.
But when we try to talk about the opposite of fragility, we have great difficulty. How should we call that which is not fragile? Many would say that the opposite of fragility is robustness. But robustness is not the opposite of weak. A sturdy item may not even break when an accident occurs, but it does not benefit from this situation. If the fragile needs a package that says "Handle with care," the item we are looking for is a piece that the less care it receives when handled, the stronger it becomes. Apparently, no word defines this situation, items that benefit from the unexpected. Taleb wed the coined that will guide our narrative: the Antifragile, which is the antithesis of the fragile.
His example to describe what antifragility is the Lernaean Hydra, a figure of Greek mythology. The Hydra was a multi-headed serpent that terrified the Greeks and was known to be indestructible. Each time someone cut one of the heads, two others grew in that place. The more the Hydra was attacked, the stronger it became. She was the definition of the antifragile.
An example of antifragility is the process of evolution of living things. Think of the evolutionary theory of Charles Darwin, about how creatures change and adapt. Evolution only happens in a fickle and hostile environment. Whenever a difficulty occurs, evolution forces life to adjust so that it fits well into the new environment. However, there is an interesting aspect to this concept: while the process itself is antifragile, the individuals who participate in it are fragile.
Evolution happens when genetic code is passed and generates changes known as mutations. As the changes persist, the individuals who have helped in this change suffer over time. The death of these members is necessary to make room for evolution.
One of the rules of antifragility is precisely this: for a system to be antifragile, most of its parts must be fragile. It's because parts of an antifragile system work with information that feeds you through your successes or failures, showing what works and what's not okay.
Failures, therefore, are a crucial part of the process, which works in a trial-and-error method. With every mistake made by the individuals involved, the system strengthens because it learns new things and becomes better.
The economy is also an antifragile system. The constituent parts, such as people and companies, are somehow fragile, but the economy itself is the opposite. For it to grow, some of these parts must fail, because we must learn from the mistakes made by its elements. When a company ends up failing, it teaches the other parts of the economic system some lessons about how not to die in this environment.
The antifragility is part of our day to day and is present at all times. When we do physical exercises, for example, we are experiencing antifragility because we are exposing our body to abnormal forces, so that it strengthens and grows our muscles.
In one exercise, muscles are confronted by stressful forces, such as weights. This power makes our antifragile system respond with overcompensation, improving our ability to deal with stresses that in theory would cause fragility.
Strength comes from overcompensation in times of adversity, and it leaves anti-fragile systems with elements of excess power built in response to stressors. In theory, we waste strength in exercising, and common sense tells us that success depends on the efficient use of our resources, not waste.
On the other hand, overcompensation and redundancy are vital to antifragility, as they prepare us for unknown and uncertain problems. The exercise that seemed like a waste of time actually can save us from an emergency where we need to run or jump. This redundancy, in fact, leaves us better able to cope and survive in adverse and unexpected situations.
Consistency and predictability end up creating fragile systems. While antifragility is found in natural and biological systems, fragile systems are often artificial. Therefore, most things created by man should not be antifragile, because they cannot improve through mistakes and the unexpected. A human-made system may even be robust, but it is rarely anti-fragile. Think, for example, of a car. The car can run thousands of miles and last for dozens of years but its use, over time, will make it weaker and worn, until the moment it succumbs.
However, although uncommon, there are artificial antifragile systems. The economy, for example, has an almost biological structure and is so complex that it has become antifragile. But complexity alone does not make a system antifragile. To be anti-fragile, it also needs inconsistency. Inconsistencies are shocks and stressors that define which units should die to strengthen the system. In a predictable and calm system, there are no stressors and also no pressure on the units of the system. With this, the antifragility of the scheme gradually disappears. Therefore, trying to control the antifragile tends only to weaken it.
In most cases where a government tries to tame the economy through interventions and regulations, for example, the weakens the economy. When a government tries to make its economy more predictable, it removes stressors, and this eventually weakens the system. Tranquility removes the information that is learned by inconsistency, through trial and error, which weakens the system as a whole.
Our society overestimates theoretical and academic knowledge and tends to underestimate practical knowledge. We tend to believe that theoretical knowledge will lead us to practical knowledge, but this is rare. Think of it this way: if you know how to design a rocket, you probably do not know how to be an astronaut.
Nassim Taleb has extensive experience in international capital markets. He realized these markets were extremely inconsistent and that the most successful investors had the least formal education. Although they did not understand much about economic theory or knew the countries in which they invested, they knew the right time to put invest their money.
It is therefore important to know that it is entirely possible to benefit from an anti-fraud system without understanding its theoretical principles. To do this, you need to have options and choices in this system, such as options to buy and sell stocks from stock exchanges. If the system brings you opportunities, but with no obligation on your side, you have the optionality. You may choose to buy or sell, but you can also simply do nothing.
It is possible to be an investor without knowing in theory how market fluctuations work, as long as you have the practical knowledge to know at what time you should exercise your options and thus take advantage of the opportunities.
The optionality exists in all systems. You use your options in all your day-to-day decisions, and they only fit you. You can go to a party by car, on foot or by subway. You may even just not go. These choices are yours, and no one can force you to choose an option.
Periods of inconsistency and uncertainty are inevitable. We go through periods of crisis in our personal, professional lives, face economic crises and come across unpredictable accidents. One must understand the variable and accept it to become an antifragile person.
To become antifragile, there is no need to avoid uncertainties. It is necessary to know what extreme situations can happen and prepare for it.
The first way to prepare yourself is by focusing on the 'negative element' that can occur. Knowing what the negative part is, you can reduce your risks. For example, if you want to protect yourself from the economy's inconsistencies, you should prepare and make sure that most of your assets are safe and will not suffer from market volatility. Taleb recommends that you put 90% of your assets into investments of very low risk and high predictability. By doing so, you may end up making less money on riskier investments, but on the other hand, you guarantee your financial stability.
Once you protect yourself against adverse contingencies, you should focus on the other side: the positive element. If you have saved 90% of your assets to avoid exposing yourself to potential fluctuations in the economy, you can now use the remaining 10% in the best possible way. With this 10 %, you can take risks, because even if things go wrong, you are putting at stake only those 10%, which will not affect you permanently. This approach protects your equity, but it also gives you the chance to capitalize on a scenario where a positive element occurs and brings you significant gains.
An example of a poor allocation of resources would be, for instance, if you put 100% of your assets into a medium-risk investment. You do not protect yourself and expose yourself to positive and negative elements at the same time. Doing so means putting the future of your money in a condition of extreme risk and uncertainty.
If you do not have options, you are surrounded. Imagine that you have to make a hotel reservation in a city on a date where the flow of tourists is very high. You look at all the hotels, and you can not find a room. When you find the last place of the city, the price is very high. Unfortunately, you can not do anything, just pay for that reservation. Bad, isn't it?
When you are surrounded, you have only one option and have to follow it regardless of the cost to you. And the cost of not having options will be determined by the size of the pressure: the higher the pressure, the harder it will be to deal with it.
In case of the hotel, for example, the costs may be high for the person who is reserving the room, but they would be worse if she had decided to take the whole family on this trip. The more complex the situation, the more expensive it becomes to get out of it.
With the world economy increasingly connected because of globalization, the world is increasingly exposed to pressures of colossal dimensions. In economics, for example, if a large company is left with no options to survive, a domino effect occurs. Your suppliers, employees, and customers are affected, and as they are affected, other businesses and people continue to be impacted.
Any major economic problem nowadays is global and universal, and its consequences reverberate at high speed.
The great financial crisis of 2008 left significant scars on the contemporary economy. Most interesting is that in the months leading up to the crisis, several experts in the field have assured that there was no reason to worry. These professionals were completely wrong, and the crisis cost the world economy billions of dollars.
Even after a wrong and disastrous prediction, many of these 'experts' continued in positions of prestige and power, without having to apologize for the mistake made in the 2008 crisis. That is because, in areas such as this, professionals know each other, coexist and depend on each other, so there are great fear and care in making any more incisive criticism to a fellow professional.
Although their analyses and predictions about the crisis have been completely wrong and have negatively impacted the lives of millions of people, the mistakes of these professionals are quickly forgotten. This type of situation exemplifies a serious problem in modern society: many people's antifragility exists because others are suffering damage. In the case of these specialists, these people gain prestige when they are right, but they do not suffer consequences when they are wrong. The analyst on Wall Street and the other financial markets has become an anti-fraud professional because he is not taking risks with his attitudes, but with those of other people.
It happens in a similar way to bankers. In the medieval era, bankers who talked and lost money from their clients were decapitated. That made all managers think of the common good and not just their gains. Today, however, modern bankers do not mind risking their customers' money, after all, if they risk right, they make a lot of money for themselves, and if they fail, they have nothing to lose. Other people's money is at stake and optionality is given to them.
The way we think about our society has a fundamental problem. We believe that we need to make our community as quiet and consistent as possible. As people become smarter, they also become more arrogant and want more control over the world. Because inconsistency is something we can not predict, we try to avoid it and reduce it, to have control over the world.
Politicians and economists tend to think that our economic cycle of ups and downs is inefficient and unpredictable, and they work trying to understand how to control it so that it improves and evolves. They develop complex economic theories that point out the times when there must be intervention in economic cycles so that we can be able to predict better.
However, this policy of acting "correctively" in a system is called naive interventionism. Unfortunately, we do not know as much as we think we are aware and this means that, instead of improving our systems, we end up making them more fragile, without realizing it. By trying to make these systems more predictable, we are stealing the volatility they need to survive and evolve.
Without the inconsistency, there is no antifragility, and the problems are no longer visible, hiding under a false tranquility. Then, unknowingly, these problems reach gigantic proportions that are much harder to deal with.
An interesting example would be to think of a forest. Every forest is in danger of being burned down. However, the risk of a massive fire is reduced every time a small fire occurs. Small fires periodically remove flammable materials from the forest without reaching a significant number of trees. The smaller fire is an example of volatility, a feature that helps prevent significant problems. As we avoid volatility, we are getting more prone to devastating fires.
Our society has the bad habit of making predictions based on a narrow and small view of the past. It makes those who follow the forecasts may be at risk of consequences when the expected events do not happen. Another shortcoming is to believe that the worst thing we have ever witnessed is the worst thing that can happen. The fact that there was a terrorist attack on September 11 that destroyed two towers in New York does not mean that something of much greater proportions cannot occur in the future.
Believing in our ability to predict the future leads us to have emergency plans for limited adverse situations and does not allow us to think about all the bad things that can happen. Emergencies can be unpredictable and unlikely, and we have to rely on the worst-case scenario to predict.
An interesting example comes from engineering. The Fukushima nuclear power plant, for instance, was built to withstand the largest earthquake ever seen in the world. However, its creators were not aware that a larger earthquake than the past could happen in the future. In 2011, even though the plant was built for past earthquakes, a major earthquake destroyed the plant's reactor.
We tend to believe that the Industrial Revolution was one caused by scientific progress. That's what they teach in schools, is not it? Most think that theoretical advances have guided the technological advances that transform the way society produces products and thus the economy.
But this is not true. When the Industrial Revolution occurred, it was not led by academics but by individuals without formal education. The submarine, for example, was invented by a pastor and not by a university or a naval institution.
Other important inventions also came as the results of people who worked independently. They came from people who were experimenting with new technologies and ideas to create useful tools. It was this dynamic of trial and error that guaranteed that the Industrial Revolution occurred, forming an anti-fragile system.
Today our society does not understand the importance of antifragility and the official narrative of Industrial Revolution is proof of this. We do not like to imagine that our progress may have come through a system of trial and error, and we prefer to believe in more deterministic reasons for having advanced as a society.
Our society wants our experts to know exactly what they are doing and not for them to try and find out what works.
It has significant effects on modern society. For example, several scientists end up getting resources for their research promising breakthrough discoveries from academia. These researchers receive money from governments and private initiative to create new theories and discoveries that will make our lives easier.
Unfortunately, what is not clear to all is that it is possible to achieve all the promised progress through just these theories: randomness and antifragility from chaos are necessary for the emergence of real changes and innovations.
It is best not to try to make the fickle environments quiet, as this weakens antifragile systems.
When we exercise, we are starting a practice of antifragility, leaving us with extra strength.
Do not try to understand theoretically the opportunities that appear to you: focus on finding the best time to take advantage of them.
Control your risks well to take advantage of unpredictable environments.
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12min tip: You've heard of 'The Black Swan' (not the movie!)? Taleb's previous book is a fantastic work about the impact of the unpredictable on our lives. We highly recommend you read this microbook. Already read? Re-read, it's worth it ;)
Nassim Nicholas Taleb is a Lebanese American author, former hedge fund manager, derivatives trader, and a scholar dealing with probability and uncertainty. He holds degrees in mathematical finance and worked as a researcher at... (Read more)
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