Nassim Taleb is one of the most influential financial authors of this century. His books include well-known works like “Fooled by Randomness” and “The Black Swan.”
But it’s a lesser-known book that really captures the essence of Taleb’s ideas and presents ways of dealing with the unexpected, serving as a guide for business, politics and life. It’s a system that endures and grows from shocks. The book is “Antifragile: Things That Gain From Disorder."
The book takes the central concepts of previous works, handling risk and uncertainty, and presents systems, attitudes and processes that incorporate disorder, learn from it, adapt and grow. Taleb notes in the book:
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better”.
Taleb provides examples from different fields, including physics, biology, engineering, management and computer science, to demonstrate the power of antifragility. These concepts include:
- Hammurabi Risk Management: The Hammurabi Code was one of the earliest and most complete written legal codes, proclaimed by the Babylonian King Hammurabi, who reigned from 1792 to 1750 B.C. The code very clearly aligned the interests of the builders and sellers with the users and buyers. For example, the code stated that if a builder builds a house and the house collapses and causes the death of the owner of the house, then the builder shall be put to death. Of course, this is an extreme example. But the logic is that if both parties are forced to put skin in the game in a commercial transaction, odds are much better that the results of the transaction will be good for both. It’s about the importance of finding the right incentives for a structure to work.
- Via Negativa: Michelangelo was asked by the pope about the secret of his genius, particularly how he carved the statue of David, largely considered the masterpiece of masterpieces. His answer: “Its simple. I just remove everything that is not David.” Knowing what doesn’t matter, what not to do and avoiding what is wrong is more important over the long term that trying to do everything you think its right. This “subtractive knowledge,” as Taleb calls it, increases focus, removes uncertainty and reduces severe downside from the implications of black swan events.
- Trial and error is a way to figure things out by learning from mistakes. In addition, you can gain exposure to large potential upsides. For instance, any great inventions were toys first. The steam engine was invented by the Greeks for amusement, and it took a long time to be understood that it had practical applications.
These concepts relate closely to value investing ideas and the way value investors manage portfolios. In future installments to this series, I will analyze these concepts and their applications to investing.
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