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Protecting Yourself Against the Unpredictable

Antifragile by by Nassim Taleb

Antifragile by by Nassim Taleb

The latest book from Nassim Nicholas Taleb, the New York professor famous for dubbing large-scale, unpredictable and irregular events of massive consequences such as the astonishing success of Google, or 9/11, as Black Swans, is an advisory on how your behaviour, lifestyle and assets can be shaped to minimize such risks, even benefit from them*.

“Antifragility,” as he calls it, is the characteristic of anything that has more upside than downside from random events, so the more of that thing you possess, the better.

Here’s his example of an antifragile investment strategy: “If you put 90 per cent of your funds in boring cash (assuming you are protected from inflation)… and 10 per cent in very risky, maximally risky, securities, you cannot possibly lose more than 10 per cent, while you are exposed to massive upside. Someone with 100 per cent in so-called ‘medium’ risk securities has a risk of total ruin from the miscomputation of risks.”

He calls this his “barbell technique” – any dual strategy composed of opposing extremes without the “corruption” of the middle.

Somehow, “they all result in favourable asymmetries,” while fixing the problem of exposure to rare events whose likelihood and magnitude cannot be predicted.

By contrast, there is much greater risk in many things that appear to be only moderately risky, because they are “fragile” – vulnerable to the volatility of changes that affect them.

Consequent damage turns out to be much greater than expected because of “convexity.” That’s the characteristic of any successive changes in a primary factor to produce accelerating second-order effects. Example: beyond a certain point, additional cars on a highway not only cause an increase in congestion — each addition produces a disproportionately greater increase in congestion.

In managing your life, Taleb warns, be wary of those who are “antifragile” at the expense of others because they don’t have “skin in the game.” The ultimate interest of your stockbroker, for example, is his own profit rather than your financial health.

So… “Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have – or don’t have – in their portfolio.”

Forest fires, turkeys and grandma

Here are a few other interesting snippets from Taleb’s book…

  • Some things benefit from shocks. They thrive when exposed to volatility and disorder, so it can be a mistake to shield things (or people) against stress. “Small forest fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place ‘to be safe’ makes the big one much worse.”
  • “Average is of no significance when one is fragile to variations.” Example: if you’re told your grandmother will spend the next two hours in an average temperature of about 21 degrees, that sounds very desirable. But if it turns out that the average was derived from one hour at minus 18 degrees and the second hour at around 60, “you will most certainly end up with no grandmother, a funeral… and possibly an inheritance.”
  • “The mother of all harmful mistakes – mistaking absence of evidence of harm for evidence of absence.” Example: a turkey is fed for a thousand days by a butcher. “Every day confirms to its staff of analysts that butchers love turkeys ‘with increasing statistical evidence.’ Then comes the day when it is really not a very good idea to be a turkey…”
  • The more complicated the regulation, the more prone it is for arbitrage by insiders… “a gold mine for former regulators.” In African countries, government officials get explicit bribes. In the US “we have the implicit, never-mentioned promise to go work for a bank at a later date [for]… say $5 million a year if they are seen favourably by the industry.”
  •  Switzerland is “perhaps the most successful country in history” because its government is so decentralized – “a collection of small municipalities left to their own devices” – and an educational system based on apprenticeship and vocational training. It’s traditionally had “a very low level of university education compared to the rest of the rich nations.”
  • Harvard’s former president Larry Summers got into trouble with the feminist lobby for clumsily trying to explain that although males and females have equal intelligence, there is greater dispersion in the male population – more highly intelligent men and more highly unintelligent ones. This explains why men are over-represented in the scientific and intellectual community – and also over-represented in jails.
  • One of the most consequential technologies ever developed “seems to be the one people talk about the least: the condom.”

*Antifragile: Things That Gain from Disorder” by Nassim Nicholas Taleb, professor of risk engineering, pub. by Random House.

CopyRight – OnTarget 2013 by Martin Spring

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