In today’s Financial Post, MLI’s Philip Cross talks about the value of risk taking and how uncertainty can lead to innovation and success.
Philip Cross, Financial Post, April 4th, 2013
Nassim Taleb was described as “Wall Street’s principal dissident” when he was trading options based on the theory elaborated in his well-known book, The Black Swan. Â In his view, unpredictable events like the September 11 terrorist attacks or the 2008 financial crisis occur more often and with more effect than conventional models of uncertainty acknowledge.
Taleb’s latest book, Antifragile, elaborates on this theory. Â Since many events can’t be anticipated, but occur frequently, it’s counter-productive to organize our lives around avoiding shocks or minimizing their impact.Instead, we should structure our existence to thrive on shocks when they occur. Â Hence the notion of antifragile, which refers to things or people that gain from volatility and uncertainty.
It is the opposite of fragility, which shatters when the unexpected occurs.Like the book, the concept is difficult to grasp, but worth the effort.
Well-meaning people, like planners and parents,who strive “to squeeze every drop of variability and randomness out of life” are doomed to fail. Worse, their attempts to minimize risk actually make the world more dangerous by denying the experience gained from dealing with events that stress systems or individuals. Volatility in life is beneficial because it forces us down the uncharted road of improvisation, experimentation and self-discovery.
This helps to answer the question, “How do you innovate?” Talebresponds: “First, try to get in trouble.” Apple’s greatest achievements occurred after its late 1990s near-death experience, a hopeful example for our auto industry and Blackberry. On a personal level, the people that made you grow and develop the most are those who tried to harm you, not those who tried to help, if the harm was not irreparable.Since life is subject to so much uncertainty, humans need to be rooted in conventions that have stood the test of time.
The commitment to this Edmund Burke strand of conservatism is so deep that he questions drinking orange juice or brushing teeth because they are comparatively new-fangled in human history. But this conservatism should not be confused with resistance to change; his measure of how alive you are is “checking if you like variations.” Clearly, this is someone who would rather work in the resource sector than in government.
The antifragile viewpoint prefers age-tested heuristics to technology based on the scientific method. More specifically, it is deeply skeptical about school-based education compared with uncodifiable, intuitive, or experience-based knowledge. Â As the noted philosopher Yogi Berra said, “In theory, there is no difference between theory and practice; in practice, there is.
“This is why economic models failed during the 2008 meltdown. As an example of how necessity is the best teacher, Taleb argues the fastest way to learn a foreign language is spending a month in jail with people who speak that tongue.
The obsession of economists with the very top and bottom of the income distribution is ironic, as Taleb’s fundamental point is that they don’t properly weigh the ‘tail risks’ at the extreme ends of the probability distribution for highly-disruptive events. Growing income inequality in the U.S. is heralded as a positive sign of an increasing number “of risk-takers crazy enough to have ideas of their own,”striving to create wealth and produce innovations that ultimately benefit all.Taleb proposes a National Entrepreneur Day to celebrate risk-takers, especially the large number who fail and thereby point the way for others to succeed. Ruined entrepreneurs should be treated by society with almost the same reverence shown for dead soldiers. This shows how the antifragility of a system like the economy requires fragility in its parts-the same idea of learning from mistakes is why airplane safety improves with every crash.
In the pecking order of Antifragile, entrepreneurs are at the top while “talkers” like academics and politicians are at the bottom, since they escape the brunt of the fall-out of their errors. Taleb is scathing in his assessment of Joseph Stiglitz, hailed by redistributionists as a leading economist, who first wrote a report saying Fannie Mae would never go bust, and then in 2010 claimed he had predicted the crisis.Taleb contemptuously dubs this hypocrisy Stiglitz Syndrome. It is a variant of what I call Krugman Syndrome. Â That’s where someone leverages a Nobel Prize awarded in one field of economics (trade for Krugman, information forStiglitz) as a platform to pontificate on matters in which they are not experts (macroeconomics for Krugman, inequality for Stiglitz).
Above all else, Taleb despises people who prescribe lifestyles they don’t live, like champagne socialists or womanizing popes. People who proselytize a way of life must “eat their own cooking”; don’t say money can’t buy happiness unless you give away all your income above $50,000. He favours extending the principle underlying the old Roman system of forcing engineers to sleep under bridges they had built, giving real meaning to “having skin in the game.
“The book is not without its imperfections. There is more about Taleb’s personal life than needed. Readers of The Black Swan will find parts of Antifragile repetitious. Still, overall it is an outrageous tome in the best sense, questioning many ideas we take for granted, a rigorous and authentic antidote to the inundation of sound-bites of conventional modern wisdom in our lives.
Philip Cross is the Research Co-ordinator for the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada.
