Sunday, November 02, 2014

Book review: Antifragile: Things that gain from Disorder, by Nassim Nicholas Taleb

Nassim Nicholas Taleb is unique in stimulating thought while often annoying and exasperating the reader. He is likable yet solipsistic, intelligent yet pedantic, compassionate yet abrupt. Antifragile: Things that Gain from Disorder is the second of his books I’ve read (actually listened to the audio version), the first was The Black Swan back in 2007-08. Reviewed here, and in re-reading that review I’ll affirm my 5 star rating. Taleb’s influence was critical to my reassessment of the capital markets in 2008 and his admonitions supported some gainful personal decisions at that time.

Antifragility is defined as the quality of something to benefit from disorder. Unlike a poorly constructed UPS package of wine glasses that will shatter if disturbed, something that is antifragile will actually gain strength if disturbed. This is not to be confused with robust, which is merely something that is less likely to be damaged with disorder, ie, a well-constructed UPS package of wine glasses.  Antifragile takes it a step further to an entity that is actually improved with disorder.

Nassim Taleb says that great thinkers have only one great idea which is refined and adapted over time. Darwin had natural selection, Einstein had relativity, and presumably, Taleb includes himself with the idea he now calls antifragility.  I did mention he has an ego, right? Putting Taleb’s high self-opinion aside for a moment, I’ll grant that Antifragility as a followup to the Black Swan does deserve a place at least in the minor pantheon of cultural memes, albeit a few notches below Darwinism, but yeah.

As an example in nature, Taleb refers to the ability of any species to adapt to environmental stressors as antifragile. Antifragility is  everywhere in nature: the weak succumb while the strong survive and reproduce. Cultural examples are depicted by Adam Smith’s idea of the “invisible hand” that guides markets opaquely by rewarding beneficial actors and punishing the weak. For the record, Taleb later notes that the right-wing corporatist understanding of Adam Smith is incorrect and Smith never used the word “capitalist”, but that is another issue.

Platonic, or top-down, management is differentiated from bottom-up, or empiric, reality. Plato’s idea of a philosopher-king, like a soviet style central planner who has some special understanding, does not jibe with what we observe in the world.  Rather, the world is populated with adapting individuals and evolving ideas, some of which will die off and others that will survive. Taleb extends this notion from business and banking to other fields as wide-ranging as medical care and even religion.

Upon listening to a short interview of Taleb regarding this book, I was a bit unsure if I’d agree with his assessment of health care, but having finished the book, I’ll accept that he has it mostly correct. Medicine is best when it embraces the empiric, guided by what we see that actually works….what Taleb calls the heuristic: the rule of thumb.  Treating numbers, like mildly elevated cholesterol levels or arbitrary blood pressure “abnormals” with medication can lead to iatrogenic (ie, doctor-induced) harm and needless cost. The best examples of pharmaceutical development are rare-- eg, antibiotics and vaccines-- while things like cholesterol-lowering statin medication, developed for only the worst hereditary hypercholesterolemias, are now prescribed to lower mildly elevated levels without evidence of benefit. The human body, much like capital markets, is too complex to adhere to such top-down models since such things as long term sequelae and side effects are impossible to predict a priori. The best medical practice comes from time-tested heuristics, otherwise known as rules of thumb empirically shown to be effective. All else is waste and danger.

The asymmetry of information in medical care is what renders it complex, not only the asymmetry of knowledge between doctor and patient, but also--especially-- the asymmetry of resources between corporate actors and those of us in the trenches. If Big DrugCo floods the evening news shows with advertisements for their latest wonder drug, there isn’t a whole lot that will keep that drug from making it into medicine cabinets around the country. Eventually enough patients and practitioners will succumb to the influence of the moneyed interests. Restless Leg Syndrome has no less than six FDA-approved remedies.

Taleb was an options trader back in the 1980’s, buying mostly out-of-the-money puts and calls on various asset classes, which earned him enough money to retire at an early age to philosophize. He develops the concept of antifragility and how to achieve it, what he calls optionality, by placing a bet on a perturbation in the system. A small bet can become a big winner if that perturbation is large enough. For example, a put option (a bet on a crash) on the stock market would have lost small amounts every year from 2001 to 2007, but then would have resulted in a windfall if held through the debacle of 2008. Options are insurance for when the rare cataclysm, ie, Black Swan event, occurs.

Antifragility is not a how-to investment book, it is a philosophy book. Taleb rails against those individuals in business and government he calls “fragilisitas” who engage in activity and promote policies that increase fragility in the economic system. Alan Greenspan, Robert Rubin, Paul Krugman and Joseph Stiglitz are his favorite foils because they call for supporting weak actors who make bad decisions while ignoring the possibility of fat-tail events, those rare but devastating occurrences that can destroy entire systems.

Taleb, however, reserves special disdain for Alan Blinder, a former Vice-Chairman of the Federal Reserve Bank, who took the cynicism a step further. As a bank official, he enacted all manner of confusing regulations and then parlayed his “inside expertise” into a cottage industry upon leaving office, advising clients how to navigate these regulations. Furthermore, Blinder started a company that took advantage of FDIC deposit insurance for large corporations by splitting their colossal capital accounts into smaller accounts that would qualify for the FDIC protection. When asked if this were ethical, Blinder replied only that it was perfectly legal, while he collected prodigious fees from his clients. Taleb uses this as an example of the introduction of fragility into the economic system by cynical application of asymmetric knowledge and influence.

I enjoy Taleb’s passion and ranting, but it occurs to me that much of his self-admitted “anger” is misplaced. This fragility is inevitable. Relax and be entertained. For the vast majority of us the opportunity or inclination to act unethically is nonexistent, but a few sociopaths will always exist, so why bother fretting about the inevitable? Herb Stein, a Nixon White House economic advisor in the 1970’s, when dismissing the two-pronged dangers of the budget deficit and the trade deficit, coined Stein’s Law. To wit: "If something cannot go on forever, it will stop.” While Taleb never mentions this particular maxim, I think he would embrace it nonetheless. In fact, for all Taleb’s withering banter about fragilisitas and fat-tails and black swans, I sense that he is all too aware of the inexorable nature of humans to embrace harrowing fallacies that lead to destruction. It’s what we do. After all, Taleb successfully navigated the options markets to make a bundle of cash, so while luck likely played a role he does have some concept of risk management and the human propensity to ignore risk. Taleb’s first book was a technical tome on financial options called “Dynamic Hedging”, so he definitely gets it.

On a more personal note, I enjoy listening to the spoken word versions of Taleb’s books, and I search my podcast app for any interviews of Nassim Taleb. One interview on some economic webcast actually took my breath away because of the eerie similarity of Taleb’s personality to that of my father, Vince. The passion, the erudition and even the speech cadence is uncannily similar (the audio books, unfortunately, are read by a polished professional actor.)  Not many people can expound on Seneca one moment and the next give a fairly accurate description of how skeletal muscle fibers function. This is like my father, who could explain how Jungian symbols of the collective unconscious correspond to the three levels of consciousness of the Huna religion one day and the next would give a textbook explanation of quantum mechanics and radioactive decay (he was a radiologist, later turned psychiatrist, by profession).  As they say, all that plus $8 will get you a six-pack of Anchor Steam.

Individuals who have such profound and wide-ranging interests are rare and usually misunderstood.  Their humility is masked by their intellectualism. Taleb’s humility is manifest in his admission that specific predictions about almost anything are impossible, hence the concept of Black Swan events and the importance of protecting yourself against any and all major cataclysms. He notes that financial commentators are forever trying to predict the “next Black Swan”, completely bolloxing the concept that such things are inherently unpredictable. You cannot know, so be humble.  Optionality in a broad sense is the only mitigation available.

My father also had a firm grasp of this idea that increasing fragility, or entropy, is natural and he gave excellent advice about becoming antifragile, although he had different terminology.  Amidst all the discussions about the Caeser’s Gallic Wars or conjecture about whether he could harness the noosphere to control a roll of the dice, pearls of wisdom would occasionally wiggle out. Unlike Taleb, Vince didn’t have an editor so it usually took effort by the listener to keep the conversation focused. Eventually, I gleaned that economic disasters occur once every generation or so, for Vince it was the Great Depression and World War II, and at the time of our discussions it was the crushing inflation of the 1970’s that followed Vietnam.  Shit WILL happen. The Great Recession of 2008 was inevitable in some form, and the next crisis is already in development somewhere.  The best protection, the optionality, is to learn a useful skill that even the Russians or Red Chinese will need. Fix furnaces or cars, or deliver babies; that will never go out of style and you will have insurance against fat-tail events.  Be thrifty, be skeptical, pay off your mortgage. Relax, the rest is entertainment.

Nassim Taleb’s Antifragility synthesizes several fields of interests into an overarching theme. He discusses the problems of agency, actors who lack skin in the game, the failure of even the best economic and biologic models, the human tendency toward bias, etc. My short review cannot do it justice. As a sequel to his previous works, Fooled by Randomness and The Black Swan, this book successfully depicts the nature of the human condition, culturally and biologically. Read it, you’ll be richer for it.