Antifragile: Things That Gain from Disorder (51 page)
Read Antifragile: Things That Gain from Disorder Online
Authors: Nassim Nicholas Taleb
Let us discuss the idea of the insufficiency of True/False in decision making in the real world, particularly when probabilities are involved. True or False are interpretations corresponding to high or low probabilities. Scientists have something called “confidence level”; a result obtained with a 95 percent confidence level means that there is no more than a 5 percent probability of the result being wrong. The idea of course is inapplicable as it ignores the size of the effects, which of course, makes things worse with extreme events. If I tell you that some result is true with 95 percent confidence level, you would be quite satisfied. But what if I told you that the plane was safe with 95 percent confidence level? Even 99 percent confidence level would not do, as a 1 percent probability of a crash would be quite a bit alarming (today commercial planes operate with less than one in several hundred thousand probabilities of crashing, and the ratio is improving, as we saw that every error leads to the improvement of overall safety). So, to repeat, the probability (hence True/False) does not work in the real world; it is the payoff that matters.
You have taken probably a billion decisions in your life. How many times have you computed probabilities? Of course, you may do so in casinos, but not elsewhere.
This brings us again to the green lumber fallacy. A Black Swan event and how it affects you—its impact on your finances, emotions, the destruction
it will cause—are
not the same “ting.”
And the problem is deeply ingrained in standard reactions; the predictors’ reply when we point out their failures has typically been “we need better computation” in order to predict the event better and figure out the probabilities, instead of the vastly more effective “modify your exposure” and learn to get out of trouble, something religions and traditional heuristics have been better at enforcing than naive and cosmetic science.
In addition to the medical empirics, this section has attempted to vindicate the unreasonable mavericks, engineers, freelance entrepreneurs, innovative artists, and anti-academic thinkers who have been reviled by history. Some of them had great courage—not just the courage to put forth their ideas, but the courage to accept to live in a world they knew they did not understand. And they enjoyed it.
To conclude this section, note that doing is wiser than you are prone to believe—and more rational. What I did here is just debunk the
Lecturing-Birds-How-to-Fly
epiphenomenon and the “linear model,” using among other things the simple mathematical properties of optionality, which does not require knowledge or intelligence, merely rationality in choice.
Remember that there is no empirical evidence to support the statement that organized research in the sense it is currently marketed leads to the great things promised by universities. And the promoters of the Soviet-Harvard idea do not use optionality, or second-order effects—this absence of optionality in their accounts invalidates their views about the role of teleological science. They need to rewrite the history of technology.
When I last met Alison Wolf we discussed this dire problem with education and illusions of academic contribution, with Ivy League universities becoming in the eyes of the new Asian and U.S. upper class a status luxury good. Harvard is like a Vuitton bag or a Cartier watch. It is a huge drag on the middle-class parents who have been plowing an increased share of their savings into these institutions, transferring their
money to administrators, real estate developers, professors, and other agents. In the United States, we have a buildup of student loans that automatically transfer to these rent extractors. In a way it is no different from racketeering: one needs a decent university “name” to get ahead in life; but we know that collectively society doesn’t appear to advance with organized education.
She requested that I write to her my thoughts about the future of education—as I told her that I was optimistic on the subject. My answer: b**t is fragile. Which scam in history has lasted forever? I have an enormous faith in Time and History as eventual debunkers of fragility. Education is an institution that has been growing without external stressors; eventually the thing will collapse.
The next two books, V and VI, will deal with the notion that fragile things break—predictably.
Book V
will show how to detect fragility (in a more technical manner) and will present the mechanics behind the philosopher’s stone.
Book VI
is based on the idea that Time is an eraser rather than a builder, and a good one at breaking the fragile—whether buildings or ideas.
4
1
The other biographer of Socrates, Xenophon, presents a different picture. The Socrates of the
Memorabilia
is no-nonsense and down to earth; he despises sterile knowledge, and the experts who study matters without practical consequence when so many useful and important things are neglected (instead of looking at stars to understand causes, figure out how you can use them to navigate; use geometry to measure land, but no more).
2
Adam Smith was first and last a moral philosopher. Marx was a philosopher. Kahneman and Simon are psychologist and cognitive scientist, respectively. The exception is, of course, Hayek.
3
The philosopher Rupert Read convinced me that Hayek harbored in fact a strain of naive rationalism, as did Popper, and presents convincing arguments that the two should not be included in the category of antifragile thinkers.
4
The reader might wonder about the connection between education and disorder. Education is teleological and hates disorder. It tends to cater to fragilistas.
1
T
ime for another autobiographical vignette. As Charles Darwin wrote in a historical section of his
On the Origin of Species,
presenting a sketch of the progress of opinion: “I hope I may be excused for entering on these personal details, as I give them to show that I have not been hasty in coming to a decision.” For it is not quite true that there is no exact word, concept, and application for antifragility. My colleagues and I had one without knowing it. And I had it for a long, very long time. So I have been thinking about the exact same problem most of my life, partly consciously, partly without being aware of it.
Book V
explores the journey and the idea that came with it.
In the mid-1990s, I quietly deposited my necktie in the trash can at the corner of Forty-fifth Street and Park Avenue in New York. I decided to take a few years off and locked myself in the attic, trying to express what was coming out of my guts, trying to frame what I called “hidden nonlinearities” and their effects.
What I had wasn’t quite an idea, rather, just a method, for the deeper central idea eluded me. But using this method, I produced close to a
six-hundred-page-long discussion of managing nonlinear effects, with graphs and tables. Recall from the prologue that “nonlinearity” means that the response is not a straight line. But I was going further and looking at the link with volatility, something that should be clear soon. And I went deep into the volatility of volatility, and such higher-order effects.
The book that came out of this solitary investigation in the attic, finally called
Dynamic Hedging,
was about the “techniques to manage and handle complicated nonlinear derivative exposures.” It was a technical document that was completely
ab ovo
(from the egg), and as I was going, I knew in my guts that the point had vastly more import than the limited cases I was using in my profession; I knew that my profession was the perfect platform to start thinking about these issues, but I was too lazy and too conventional to venture beyond. That book remained by far my favorite work (before this one), and I fondly remember the two harsh New York winters in the near-complete silence of the attic, with the luminous effect of the sun shining on the snow warming up both the room and the project. I thought of nothing else for years.
I also learned something quite amusing from the episode. My book was mistakenly submitted to four referees, all four of them academic financial economists instead of “quants” (quantitative analysts who work in finance using mathematical models). The person who made the submissions wasn’t quite aware of the difference. The four academics rejected my book, interestingly, for four sets of completely different reasons, with absolutely no intersection in their arguments. We practitioners and quants aren’t too fazed by remarks on the part of academics—it would be like prostitutes listening to technical commentary by nuns. What struck me was that if I had been wrong, all of them would have provided the exact same reason for rejection. That’s antifragility. Then, of course, as the publisher saw the mistake, the book was submitted to quantitative reviewers, and it saw the light of day.
2
The Procrustean bed in life consists precisely in simplifying the nonlinear and making it linear—the simplification that distorts.
Then my interest in the nonlinearity of exposures went away as I began to deal with other matters related to uncertainty, which seemed more intellectual and philosophical to me, like the nature of
randomness—rather than how things react to random events. This may also have been due to the fact that I moved and no longer had that attic.
But some events brought me back to a second phase of intense seclusion.
After the crisis of the late 2000s, I went through an episode of hell owing to contact with the press. I was suddenly deintellectualized, corrupted, extracted from my habitat, propelled into being a public commodity. I had not realized that it is hard for members of the media and the public to accept that the job of a scholar is to ignore insignificant current affairs, to write books, not emails, and not to give lectures dancing on a stage; that he has other things to do, like read in bed in the morning, write at a desk in front of a window, take long walks (slowly), drink espressos (mornings), chamomile tea (afternoons), Lebanese wine (evenings), and Muscat wines (after dinner), take more long walks (slowly), argue with friends and family members (but never in the morning), and read (again) in bed before sleeping, not keep rewriting one’s book and ideas for the benefit of strangers and members of the local chapter of Networking International who haven’t read it.
Then I opted out of public life. When I managed to retake control of my schedule and my brain, recovered from the injuries deep into my soul, learned to use email filters and autodelete functions, and restarted my life, Lady Fortuna brought two ideas to me, making me feel stupid—for I realized I had had them inside me all along.
Clearly, the tools of analysis of nonlinear effects are quite universal. The sad part is that until that day in my new-new life of solitary walker cum chamomile drinker, when I looked at a porcelain cup I had not realized that everything nonlinear around me could be subjected to the same techniques of detection as the ones that hit me in my previous episode of seclusion.
What I found is described in the next two chapters.
1
The nontechnical reader can skip
Book V
without any loss: the definition of antifragility from Seneca’s asymmetry is amply sufficient for a literary read of the rest of the book. This is a more technical rephrasing of it.
2
A similar test: when a collection of people write “There is nothing new here” and each one cites a different originator of the idea, one can safely say there is something effectively new.
