In his book The Black Swan, Nassim Taleb told us that the world is a much weirder place than we can bear to believe. It is full of occult forces and strange events. If we think we can control or predict these forces and events, we’re sorely mistaken. One minute, we think we’ve mastered the business of lending money and hedging our bets; the next, the economy crashes. One minute, we invent a way to send a message on a computer; the next, porn is everywhere and the music business is finished. One minute, we’re a bit plump; the next, we’re obese, and heading for a diabetic meltdown. We always think we know what will happen next. Get real, said Taleb; the world is non-linear. It’s a stranger place than we want it to be.
The Black Swan was a brilliant book, and Taleb, who ran a hedge fund, made a lot of money by understanding that markets are more volatile than people think they are. In this new book, which is also brilliant, he takes his idea a stage further. When we try to predict things, he says, we are fragile, because the world around us is volatile. But we’re only fragile if the thing we need is certainty. If we found ways to live with uncertainty, we’d be more robust. Better still, why not try to make a virtue out of uncertainty? Why not try, as it were, to harvest randomness? If we could do that, we’d be fine. We wouldn’t just be robust — we would be antifragile.
Well, fine. So far, this has a touch of Dr Faustus to it. The idea of harvesting uncertainty — the idea of gaining from our lack of knowledge — sounds like the Devil’s work, or at the very least alchemy. But that’s because we’re so in love with linearity and certainty. And, says Taleb, our love of, and need for, this certainty is what’s always getting us into trouble. We plan too much. We’re too in love with controlling our environment. But just look at what happens when you try to control things. They go horribly wrong. Look at what happens when we try to get rid of germs. We get weaker, and they get stronger. It’s the same when we try to control traffic with endless signs and instructions. When we take them away, there are fewer crashes. And when we try to manipulate risk out of the economy, we end up making it riskier.
So how can we become antifragile? By learning to love risk. By exposing ourselves to small losses, in exchange for bigger gains. If we learn to live with germs, we might get sick a few times, but we’ll develop immunity. On the other hand, if we take antibiotics, or spray every surface with bleach, we increase our fragility to germs. Likewise, if we try too hard to control traffic, we stop drivers from thinking for themselves. Result: more accidents. If we bail banks out, they never learn how to manage risk properly. Result: mountains of debt. We are, says Taleb, too much in love with safety nets. And safety nets, as he keeps on demonstrating, are dangerous: ‘You get pseudo-order when you seek order; you only get a measure of order and control when you embrace randomness,’ he writes.
Conversely, lots of things benefit from being exposed to all the things we typically think of as bad — stress, volatility, uncertainty, randomness. One of these things is us. If we stress our muscles, they get stronger. If we expose ourselves to harm, up to a point, we learn how the world works. Taleb points us towards evolution itself as an example of a system that is antifragile:
In fact, the most interesting aspect of evolution is that it only works because of its antifragility; it is in love with stressors, randomness, uncertainty, and disorder — while individual organisms are relatively fragile, the gene pool takes advantage of shocks to enhance its fitness.
Clearly, it’s only by exposing itself to harm that a species evolves. Or, to put it another way, if prehistoric reptiles had developed a health and safety system, we’d all still be lizards.
So, what are the practical applications of these insights? One is what Taleb calls ‘skin in the game’ — having something to lose. Our economic system stops working when banks realise they’re too big to fail — in other words, when they behave as if they have nothing to lose. Another is: stop trying to get rid of boom and bust — the business cycle itself only learns if it’s allowed to fail. Trying to smooth out ups and downs in the economy is like getting rid of the seasons. Yet another insight: don’t let government get too big — large institutions hide risk. And hidden risk gets you in the end.
How else can we gain by exposing ourselves to randomness? In our diets, says Taleb. One reason we’re fat is that we eat too much. Another might be that we eat too regularly — unlike our ancestors, who evolved to eat at unpredictable times, feasting on a bison one day, fasting the next. And there is evidence, it seems, that our metabolism works better if we learn how to go without food every so often.
Taleb tells us about his own risk management. ‘I am personally completely paranoid about certain risks, then very aggressive with others,’ he says. For instance, he avoids smoking, sugar and motorcycles. A good investment strategy, he says, is to put 95 per cent of your money into safe stocks, and speculate with the other 5 per cent, mimicking the mating strategy of certain female birds, who pair-bond with a steady provider, and occasionally cheat with a risk-taking interloper.
This is a lovely book to read; there’s an idea on pretty much every page. In brief: we can’t control the world. And we’ll never learn anything by pretending we can.