ANTIFRAGILE – How to live in a world we do not understand

Nassim Taleb

The concepts in this book are as simple as they are radical. They are extremely important yet poorly understood. The book is essential reading for anyone trying to manage change in the modern world. Taleb takes the us further into his mastery of strategies needed to protect oneself or one's company against unforeseen disasters (Black Swans).

The central idea in the book concerns the way in which differently organised systems are affected by dramatic change. Large rigid systems crash (fragile) unless they are strongly fortified (expensively) to become robust but other systems actually thrive on change and uncertainty (antifragile). The natural world is full of antifragile systems – nature thrives on variety and change. That's the basis of evolution and natural selection. The modern world (its large inter-connected corporations, banks and governments) is becoming increasingly fragile and highly vulnerable to unpredictable events. Systems with large numbers of small independent units are antifragile; in these systems random events benefit some while weeding out those less able. Taleb points out that this applies especially to units of management (governments and corporations) – reflecting the famous quote that “small is beautiful”.

Taleb emphasizes that the significant events that shape history have never been predicted. He cites references to show how those who most claim to be experts at forecasting are the most likely to be completely wrong. (There are over 600 references at the end of the book.)

Taleb suggests the following tests.

Your situation is fragile when you stand to lose more than you gain if random events take place

Your situation is antifragile if you stand to gain more than you lose from random events.

The best logical strategy to make your position antifragile is what Taleb calls the “barbell” strategy.

In this strategy the bulk of your resources or activities should be put into a relatively safe place where they should be little affected by random events but where the potential return is correspondingly small. The remainder should be put into high risk activities or investments where the returns could be very large (and open ended) but the risks very high.

Taleb assesses every position in terms of its symmetry in respect of risk. A good asymmetry is one where the potential downside is much smaller than the potential upside. In a bad asymmetry the potential downside is much bigger than the potential upside. For managers in large companies (and Governments) their “agency” position means they put their own situation ahead of that of their parent company. This is why bankers can still get huge bonuses even when their bank makes a massive loss.

Taleb introduces the concepts of being a “tourist” (trapped by a plan therefore risky and dangerous) or a “rational flaneur” (always thinking of the best thing to do as events unfold). Once again he restates his view that “experts” are usually the very worst people to give forecasting advice. Such people often “miss the shape of the wood by spending too much time studying the trees”! They also tend to think they know more than they actually do; this makes them “fragile” - very prone to large error.

Taleb gives 4 rules for successful business strategy:

  1. Use a strategy that is “optimal” - this is one where you can continually adjust your actions to make the best of what actually happens i.e. not sticking to a rigid plan – don't be a “tourist”

  2. Choose actions that have “open ended” pay-offs so the rewards may be very large

  3. Try to invest in people not plans – choose people who are prepared to change

  4. Make sure your strategy is “barbelled” in some way – so you have a fail safe position

Taleb has a radical view of the future where nation states lose their significance, large corporations fail and currency creating banks lose their predominance. Small city states and small corporations will thrive and become the norm.

Those who are too comfortable are most likely to be fragilized!

Taleb says that humans should not be given explosive toys like atom bombs, financial derivatives and tools to make life. These are perfect examples of asymmetry – small potential gains with massive and unmeasurable potential losses. What Mother Nature does is rigorous until proved otherwise, what humans do is flawed until proved otherwise. In Nature things break on a small scale all the time so that large scale general catastrophes are avoided.

Taleb writes in cocky and flamboyant style. It's entertaining if you can put up with the exotic references and spicy anecdotes.