ANTIFRAGILE
     
In our present era of uncertainty and the unknown, we should figure out a way to deal and live in a disorderly world and with human failings, and to deal with the world that we do not understand. Who is able to do so, is better off and makes itself robust for the unpredictable. "Fail often, and fail fast" is the advice of Nassim Taleb.
4 October 2013, NEXUS Institute organized in Tuschinski a masterclass with Taleb
Nexus Institute invited Taleb to provide a masterclass about how to thrive on disorder (*). Taleb, according to the Sunday Times "the hottest thinker in the world", warns of apparent accuracy of statistics and calls for robust small scale, antifragile stan. He let's get acquainted with a mean to overcome crises and changes in intrinsic value. All big processes, biological evolutions, technological progress, cultural and economic growth, medicine, politics benefit by exposure to different forms of uncertainty.
It is about "well organized low dimensions, Euclidian vs. fractal information rich "mess"
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Success in all endeavors requires absence of specific qualities according to Taleb. To succeed in crime requires absence of empathy, to succeed in banking you need absense of shame at hiding risks, to succeed in school requires absence of common sense, to succeed in economics requires absence of understanding of probability, risk, or 2nd order effects and about anything, to succeed in journalism requires inability to think about matters that have an infinitesimal small chance of being relevant next January, but to succeed in life requires a total inability to do anything that makes you uncomfortable when you look at yourself in the mirror. As always, these are just heuristics ( Heuristics need to be convex, i.e. effect when wrong shoud be small, payoff from using it repeatedly should be broadly large). In a fascinating book “The Black Swan”, the author, Nassim Nicholas Taleb, writes about the differences between the “tyranny of the collective, the routine, the obvious, and the predicted” i.e. Mediocristan and “the tyranny of the singular, the accidental, the unseen and the unpredicted” i.e. Extremistan.

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.

Nature is full of things that follow a normal distribution. People’s heights follow a normal distribution. Imagine yourself walking down the street. If you see ten people, the odds are that most of them will be very close to average height, with only a small number being very short or very tall. This is a normal distribution. Mediocristan therefore constitutes the normal, the easy to predict, the expected, the small impact, the mundane.
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.

Mediocristan
Extremistan
Nonscalable
Scalable
Mild or type 1 randomness
Wild (even superwild) or type 2 randomness
The most typical member is mediocre
The most “typical” is either giant or dwarf, i.e., there is no typical member
Winners get a small segment of the total pie
Winner-take-almost-all effects
Example: audience of an opera singer before the gramophone
Today’s audience for an artist
More likely to be found in our ancestral environment
More likely to be found in our modern environment
Impervious to the Black Swan
Vulnerable to the Black Swan
Subject to gravity
There are no physical constraints on what a number can be
Corresponds (generally) to physical quantities, i.e., height
Corresponds to numbers, say, wealth
As close to utopian equality as reality can spontaneously deliver
Dominated by extreme winner-take-all inequality
Total is not determined by a single instance or observation
Total will be determined by a small number of extreme events
When you observe for a while you can get to know what’s going on
It takes a long time to know what’s going on
Tyranny of the collective
Tyranny of the accidental
Easy to predict from what you see and extend to what you do not see
Hard to predict from past information
History crawls
History makes jumps
Events are distributed* according to the “bell curve” (the GIFT) or its variations
The distribution is either Mandelbrotian “gray” Swans (tractable scientifically or totally intractable Black Swans
What I call “probability distribution” here is the model used to calculate the odds of different events, how they are distributed.   When I say that an event is distributed according to the “bell curve,” I mean that the Gaussian bell curve (after C.F. Gauss; more on him later) can help provide probabilities of various occurrences.

Think of income distributions. Most people make close to an average salary, some people make less, but a few people make a huge amount. If you tried to calculate an average salary, the highest incomes (the million dollar salaries) would have a disproportionate effect on the average. To illustrate further, imagine a room full of 30 random people. If you asked everyone their salary and calculated the average, the odds are the average would seem pretty reasonable. However, if you added Bill Gates to the room and then calculated the average salary, your average would jump up by a huge margin. One observation had a disproportionate effect on the average. This is Exstremistan
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Things like book sales, whether a movie becomes a hit, or a viral video on the internet all have similar characteristics, and therefore reside in Extremistan. Taleb uses the idea of Mediocristan vs Exstremistan to illustrate the importance of Black Swan events. The Black Swans are not predictable, but they have a huge impact.

Investment professionals know the value of a convex bond – it gains more from falling rates than it loses from rising ones. According to Nassim Nicholas Taleb, people and institutions can and should position themselves to be convex. Indeed, they should be antifragile – ready to gain from disorder or uncertainty.

That is the theme of the provocative, sometimes playful and often infuriating book, Antifragile: Things That Gain From Disorder, by Taleb, philosopher and businessman. Say that a shock to the environment causes you to have an equal probability of moving left or right along the x-axis in Figure 1 below. Your well-being is on the y-axis. You stand to gain more from a move to the right than you stand to lose from an equal move to the left, so you’re better off with the shock than without it.

You’re convex.

You’re not just “not fragile” — that would be a straight line in the diagram. You’re antifragile. Convexity refers to the shape of the curve in Figure 1. A convex curve bends away from the origin, the point where the x and y axes cross. A curve that bends the other way is concave. Things that are convex benefit from uncertainty, while things that are concave are hurt by it. The book argues that in a world in which predictions are mostly useless, we want to be convex.

Click for presentation. (figure 1: Why it’s good to be convex. Source: Taleb, Nassim. 2012. Antifragile: Things that Gain from Disorder. New York: Random House, p. 273)
Instead of using the term “convexity” throughout, Taleb renamed this principle antifragility. He didn’t think convexity would resonate with most readers, who are not investment professionals. Moreover, antifragility is not just robustness. Antifragility is as distant from robustness as robustness is from fragility. Unlike a robust person or system, an antifragile one is actually made better off by stress or disorder.

The rest of Taleb’s weighty book is an elaboration of this neat idea, filled in with characters familiar from the author’s previous works: Fat Tony, an unlettered but wise securities trader; Nero Tulip, a ringer for Taleb himself; and the very real Robert Merton. Taleb regards Merton, who developed an option pricing formula, as the worst of a large crowd of Nobel-decorated charlatans. Taleb calls these people “fragilistas” and argues that their theories and actions have weakened financial institutions. In Taleb’s view, Merton’s option pricing formula, developed with Fischer Black and Myron Scholes, was unoriginal and used “fictional mathematics”. Taleb also criticizes Merton for his role in the 1998 Long-Term Capital Management fiasco. The writing of Antifragile seems to have been motivated by Taleb’s anger at the fragilistas, He blames them for creating the conditions that led up to the crash of 2008, in which institutions and firms that were thought to be strong were stress-tested by events and found to be hollow.

Antifragile is the third book in Taleb’s “Incerto” (Italian for uncertain) trilogy. The first two books in the trilogy, Fooled by Randomness and The Black Swan, have made Taleb the “hottest thinker in the world,” according to the London Times. Fooled by Randomness is Taleb’s best book, followed by The Black Swan. The current volume is too long and disjointed to join his earlier ones on my top shelf. But if you can tolerate the pretension of a writer who gives Italian names to collections of his English-language books, Antifragile is a worthy read. It is a valuable extension of Taleb’s earlier work on the themes of randomness and unpredictability.

Antifragility in business and markets

For a man of the markets who made his fortune in options trading, Taleb devotes surprisingly little space in this book to business, finance and investments. Mostly, the book is a philosophy treatise. Taleb pays some attention to markets in his technical chapters, 18 and 19, but they are not all that technical. They’re within easy reach of the readers of this publication.

Who’s afraid of the big bad bank?

I happen to like big banks as a customer. Wherever I travel, there’s a branch. They are familiar with procedures such as wire transfers and foreign exchange. And there’s usually someone who speaks English in each location.

But as Taleb points out, big banks are fragile because their size magnifies mistakes in a nonlinear way. In 2008, a French rogue trader named Jerome Kerviel bought $70 billion in stocks for the account of the bank Societé Générale, stocks that the bank was not supposed to own and therefore had to sell immediately. The massive sell order caused a 7% dip in the French equity market and a larger decline in the stocks actually sold. The net result was a $6 billion loss for the bank. (The bank’s net income was $3.6 billion in 2011 and $1.6 billion in 2012.) If 10 banks had existed instead, with total assets equaling the actual asset size of Societé Générale, and 10 “Micro-Kerviels” (Taleb’s phrase) had performed the same dastardly act on different days, the market would have absorbed the pressure without a ripple. There would have been no losses.

Just a few weeks before Kerviel’s purchase, Taleb made a presentation to the Societé Générale board and was “heckled relentlessly by Kerviel’s boss and his colleague, the head of risk management. … Everyone ignored me, as if I were a Martian.” Taleb reflects that Kerviel’s mistake was attributed to bad controls or greed, but, “The problem is … the fragility that comes from size.”

Why Fannie Mae went under

Taleb presents a simple rule of thumb for assessing the health of a company facing volatile conditions. If sales increase 10%, will profits increase less than they would decrease if sales drop 10%? If so, that company is fragile and will not withstand much volatility. Its problems will compound downward in a death spiral, which is what happened to Fannie Mae. But Taleb had difficulty getting his measure used. “It looked simple, too simple, so the initial reaction from ‘experts’ was that it was ‘trivial.’” For fun, Taleb later joined with the mathematicians Raphael Douady and Bruno Dupire to express “this simple idea using the most opaque mathematical derivations, with incomprehensible theorems that would take half a day (for a professional) to understand.” Then, he says, experts took him seriously.

Antifragility in everyday life

As nearly all “big think” books do, Antifragile then applies his favored concept to virtually everything. An example, first set forth in The Black Swan but elaborated in Antifragile, is his recipe for success: “One foot in Extremistan, one foot in Mediocristan.” Taleb says people should position themselves in both of these fictional places. Mediocristan is where the uncertainties of life are smoothed out, and Extremistan is where someone can benefit from them.

In Mediocristan, Taleb argues, no one is much more successful than anyone else despite real differences in skill. In Extremistan, the winner takes almost all. A very successful dentist in Mediocristan probably earns no more than three or four times what a very unsuccessful dentist earns, despite being more than four times as skillful. The rewards for being spectacular just aren’t there. Meanwhile, LeBron James, lately of basketball’s Miami Heat, lives in Extremistan. He earns in a week what a very well paid high-school basketball coach earns in 10 years. Maybe he’s that good, but a better explanation is that most spectators are only interested in seeing the top stars, who can therefore command paychecks way out of proportion to their talent.

Taleb would argue that the dentist’s job is antifragile – people will always get toothaches – while James’ is fragile, with dozens of younger players eager to cut him down to size. Which road should an ambitious person pursue? Ideally both, since the antifragile activity provides a lifetime of paychecks (including to those who are only average) and the fragile one conveys the opportunity to really excel. My son, who as far as I know has not read Taleb’s books, is pursuing this strategy successfully: he’s a touring rock musician who also gives guitar lessons. While we can’t all have such a nicely balanced portfolio of jobs, it does make sense to try.

Eat like a caveman, lift like a caveman

Some of Taleb’s applications of his favored principle are pretty farfetched. Taleb notes that the human body seems well adapted to short periods of deprivation, so that people who eat irregularly thrive and avoid contracting diabetes. He also believes, as do many people, that what humans ate when we were evolving in primitive conditions is healthful, so he recommends a “paleo” diet, one that emphasizes the lean meats, fruits, vegetables and unprocessed foods that were available to our hunter-gatherer ancestors.

Taleb, Greek Orthodox by background, finds that the many fasts observed by that religion correspond well to the pace of food intake he favors. The lifestyle sounds terrible. The Greek Orthodox monks of Mount Athos, who follow the fasting schedule rigorously, are famously undernourished (see Michael Lewis’ book Boomerang). But Taleb himself is big and strong, as he is inordinately fond of boasting. Wanting to appear more physically intimidating, Taleb took up weightlifting, but (of course) not in the conventional way. He only lifts the heaviest weight he can handle, and avoids repetitions – roughly what a caveman would have done – believing this method to be both time-efficient and good for his muscles and bones. Maybe it is, but I hope his joints and ligaments are also antifragile, or he’ll have a tough time getting around in 20 years. One cannot apply a single clever idea to every possible situation.

the last war

Another shortcoming of Antifragile is that its prescriptions seem designed to win the last war, the war to keep the global financial system from collapsing. While this could happen again, the problems that now seem most acute to me are not generally ones of systemic or even corporate fragility. I am more concerned about slow growth, high unemployment, skill mismatches in the labor market, massive government spending and debt and a mushrooming number of retirees and disabled people per active worker. These difficulties are not infrastructural – as financial-system problems are – and the quest for antifragility has limited applicability to them.

The ongoing pension and Social Security crisis, however, is a fragility problem par excellence. The pay-as-you-go Social Security system depends on an ever-expanding pool of worker-taxpayers and collapses if the next generation is smaller than the current one. Thus it is intrinsically fragile. But as Paul Samuelson (who helped design the system) confesses, it was intended to be that way.3 Some fragile institutions were put into place to satisfy powerful political desires – in the case of Social Security, the desire to keep benefits high and taxes low – and it is very hard to undo these decisions or to avoid them in the first place.

The crash of 2008: Black swan or black turkey?

Taleb’s reputation soared when the crash of 2008 appeared to vindicate his concern about Black Swan events, but his ongoing characterization of that particular market decline as a Black Swan is classic Talebian overstatement.4 A black swan is an event that is so unlikely that it cannot be foreseen from past history and so influential that, in the words of the University of Chicago economist Thomas Coleman, it “completely changes the terms of discussion.”

As I pointed out in a 2010 Financial Analysts Journal article, “the crisis was a black turkey, an event that is everywhere in the data — it happens all the time — but to which one is willfully blind.”5 Without looking very hard (that is, leaving out oddball asset classes and emerging markets), I found 10 other financial-market crisis of comparable severity in the last 110 years. They affected stocks, bonds, gold and oil. The most recent was only 11 years ago. To call the crash of 2008 a black swan is more puffery than science.

The relationship between science and technology

An interesting line of thought pursued by Taleb is that technology precedes and motivates scientific discovery. Most people think of this process as occurring the other way around, with scientific advances enabling later technological improvements. An example of Taleb’s theory from finance is option trading, which began in the days of the Greek merchant and philosopher Thales. Option trading was a refined art for centuries before the French mathematician Louis Bachelier and others who came later made a mathematical science of it. The existence of the options and of a body of knowledge used to trade them inspired scientists to formalize the various option pricing equations that now decorate finance textbooks.

This story, which is accurately told, supports Taleb’s more general hypothesis that scientists do not typically create disembodied thoughts for which engineers and businessmen later find applications. Instead, the relationship between technology and science is two-way and organic. This thought is immensely appealing and, for many readers, sheds new light on the way that invention and innovation take place. But scientists should not shy away from basic research with no visible application. Sometimes, that approach really does turn up something valuable.

My library isn’t big enough

I’d like to think I could study any subject covered in a popular book without building a new wing on my house to store the further reading. Taleb makes me wonder. In one particularly packed six-page section (pp. 309-314), he drops the names of Simonides of Ceos, Raymond Aron, Ovid, “the French-Russian poetess Elsa Triolet,” Jules Verne, H. G. Wells, George Orwell, Hero the Alexandrian, Leonardo da Vinci, David Edgerton, Homer, Plato, “the very modern Shakespeare” (agreed), Phidias, Michelangelo and “the great Canova.” Is this my idea of fun? Sure. But it is also the signature of an insecure author who is trying too hard.

Taleb the mainstream academic

A notable irony is that, while Taleb lampoons conventional finance – and academic knowledge in general – in his popular writings, he is also a serious scholar and professor who is directly engaged in the academic world. His title at Polytechnic Institute of New York University, distinguished professor of risk engineering, suggests he might actually be a fragilista in his day job. I don’t think he is, but I don’t think his nemesis Robert Merton is either.

Read this book (but bring a grain of salt)

Any anti-intellectual intellectual book — any book that says there are earthier roads to wisdom than book learning — is going to have shortcomings. The main shortcoming of this genre is that the great thinkers deserve more respect than the writer is inclined to give them. Antifragile fits this description. But if readers have a big vocabulary or would like to acquire one and do not mind an author whose persona alternates between bullying know-it-all and charming raconteur, they will find much of Antifragile to be thought-provoking fun.

(*)

Never take the students with the best figures, forget 'Big Data' , do not listen to stock analysts and avoid the stock market as a company. During his masterclass in Amsterdam Nassim Nicholas Taleb, considered one of the most influential thinkers of our time, let very few reputations unbroken. For journalists, the former derivatives trader and hedge fund manager has certainly nothing good to say about it: even the markets function better. Taleb is not a modest scientist who cautiously proceed. Yet his message is precisely that science is too immodest. One of his hobbies : we think we can understand everything if we analyze enough data. But the traditional statistic fails for example in the financial world, says Taleb, which is just dominated by extremes. In his breakthrough book The Black Swan (2007 ) he describes the increased risks of huge scale of the financial world: ' If one falls , they all fall. " The fall of Lehman Brothers had then come.

Unexpected events with major consequences (black swans) can not be prevented, says Taleb. " But we can build a system that is less vulnerable to such events. Science should be about knowing what you do not know well. And decide is about survival, rather than being right. "We are made to make mistakes".

"In the financial world, the sky is the limit ," he stated in a packed Tuschinski theater . "I eat tonight ricetable. How many calories can I have ? 5000 ? That is still low compared with my year consumption. One meal can not help me to kill, but an event in the financial world does. When I started as a trader a colleague said to me, come here, ' kiddo'. This is Ed. Look at him. He earned $ 7 million in 7 years and lost the amount in 7 seconds. Are there any econometricians in the hall?" Taleb asks. At the very back of the hall is a wavering hand in the air . "You should do something else. The predictability of the economy is zero."

Big Data a big lie

His most recent irritation: the rise of Big Data, analysis of huge amounts of data. "In a hospital in Toronto are examined patient data over a period of 28 years. Guess what? The duration of the hospitalization showed a correlation with the constellation of the patient. Why? The more data you explore, the more patterns you think to discover that are of pure coincidence and also not repeat. People who love Big Data are either not scientists, or they can profit from it. The whole idea is bullshit. If you cross the street, then you look for large, moving things in stead of the eye color of other pedestrians. So you just delete data. "Less is more". But once you have a theory in your mind, you look for confirmation. Call Big Data not science,"please" ... in the name of science. Data can be toxic : at the 2008 crash we had millions of correlations and nobody knew what was going on."

Companies select students on their grades, according to the Lebanese American, but they are "just like athletes' only good at one thing - achieving high grades."Universities learn birds how to fly. But birds do not write books about how to fly. "They learn by trial and error, and that's exactly what Taleb sees as the basis of wealth. "Hobbyists have unleashed the industrial revolution in Britain. We think that many things come from theory, but often they come from practice. Let we allow people to learn how to take risks, instead of to fetch their exams.

"Small mistakes are not harmful," teaches Taleb, active as a professor. "We should no longer see it as a personal failure. It is a blessing for the collective." He also advocated a safety net for entrepreneurs. A society consisting of 'small units', he says, is much more robust than one that is predominant by big molochen. "What is the most successful organization in world history ? The Catholic Church. That's because the pope does nothing except be on TV. All decisions are made at lower levels. Does the Pope make a decision, then it goes immediately wrong. "But how does he explain the survival of multinationals? "Because they are so large that they hijack the state and are therefore protected. In addition, financial institutions make good earnings on mergers and acquisitions. In a natural situation, major companies are doomed to disappear, unless they consist of separate elements . Make way for others, that's the idea behind evolution. "

Which companies stand long 'in the free nature'? "Those who use their own money, and not the money of shareholders. Do not go to the stock exchange! "By such behaviour, you do not suffer from business analyst, says Taleb, who has not any faith in the profession. "They predict worse than coincidence. Why should we listen to them? Unless you consider it as entertainment."