Nassim Nicholas Taleb
Allen Lane/Penguin Press, PP472
27 Nov 2012
With his first book for a popular audience, Fooled by Randomness (2001), the statistician Nassim Nicholas Taleb quickly became the new century’s favorite skeptic: We live in a complex world, and it’s not getting any easier. We are bombarded with information and bedazzled by the range of available choices. In response, we put our faith in computer models, using statistics to make sense of everything from population growth to stock markets and bank rates . . . even next year’s fashionable colors or the summer’s pop hits. Taleb’s book raised a warning flag. He argues that we are hopeless at predictions no matter how much data we crunch. The most highly-priced consultant is no better than the average Joe in the street when it comes to reading the future. Professional and amateur, alike, tend to overvalue the latest piece of information, ‘see’ patterns when there is only randomness, and flip out entirely when confronted by the unexpected.
Taleb’s follow-up, Black Swan (2007), looked more closely at unexpected events. Once upon a time, Taleb tells us, Europeans believed that all swans were white. When the first black swan appeared, it seemed miraculous and the entire definition of a swan had to be rewritten. The lesson Taleb draws is that the way we frame the world is too rigid. When anything unpredictable happens, it comes as a far bigger shock than it ought. We need a more flexible approach, he argues. With his third book, Antifragile, he gives us his blueprint for a flexible, unshockable worldview.
Antifragile often resembles a self-help book, though it is difficult to imagine any other self-help book as bossy and argumentative. The most bewildering sections are those voiced by two imaginary characters, Fat Tony and Nero Tulip, who appear to represent the two sides of Taleb’s Lebanese homeland. Fat Tony is the wise guy, a street hustler who is unimpressed by fancy rhetoric and always wants to know what’s in it for him. Nero Tulip, in contrast, is more ‘frou-frou’ and refined, yet just as stubborn as Fat Tony in his way. Nero is determined to lead a special life, not dulled and flattened by average expectations. The self-help sections of Antifragile are poised between these two poles, Fat Tony’s tough common sense and Nero’s love of beauty and oddity.
Taleb argues that we are built to be fooled by theories. He says, “Theories come and go, experience stays.” Fat Tony trusts experience and, in one anecdote, becomes rich in 1991 when he bets against the experts who believe the price of oil will rise with the first Gulf War. The theory is that a war causes hoarding and bottlenecks yet, as Tony notes, the date of the war was known so far in advance that too much oil had been hoarded. Tony is beholden to no theories. He simply looked at the figures, saw there were more barrels of oil than the world needed, and bet on the price falling, which is exactly what happened.
Taleb began his professional life as an options trader and his little fable about the birth of Fat Tony’s fortune is drawn from life. Taleb has seen financial analysts fail too often. Models are necessarily based upon historical data, and when a Black Swan event comes along to upset their theories, the experts are helpless. But as Taleb points out, the fall in oil prices in 1991 was not a real Black Swan event. It was unexpected only because the experts were thinking in terms of historical models concerning wars. If they had simply looked at the numbers and thought about demand, they would not have made that mistake. Their theories produced a fragile situation, while Tony’s back-of-an-envelope calculations proved more workable.
Taleb’s distrust of financial professionals has become more topical since the economic crash. Banks live by trying to offset risk using more and more fancy financial products known as derivatives. These products are tested by running tests based on historical data that, to Taleb’s eyes, seemed explicitly designed to ignore uncomfortable facts. Now the world has come crashing down around the bankers’ ears, they have been bailed out by government who, in turn, take their advice from academic economists. At every turn, Taleb argues, the people building models or recommending solutions are divorced from real-life. They get their pay packets and end-of-year bonuses, or their Nobel prizes and publishing deals, but no part of their income is derived from real life. Using the language of his option trading days, Taleb claims they take the upside and make damn sure the downside never touches them. In a Fat Tony-like phrase, he attacks them because they have ‘no skin in the game.’ Taleb thinks the rewards and punishment should flow directly from the real events. When he reflects on the bankers responsible for the state of our world, he recommends beheading on the pavement outside the ATM machine.
If big theories, tested by number crunching historical data, don’t work‚what does? Speaking as Fat Tony, Taleb urges us to grasp reality using rough-and-ready rules of thumb, in a spirit of trial and error. Yet just as Taleb speaks in two voices, so there are two sides to his view of history. He urges respect for the things that have survived the longest. At times, his advice seems bizarre, as when he recommends Eastern Mediterranean men only eat food with ancient Semitic or Greek names because anything else might be too new for their sensitive stomachs (even oranges!). Taleb loves the mountainous villages of Lebanon, which have survived despite four thousand years of the shocks of war. He draws street smarts from wise guys, but his real wisdom comes from the writings of ancient Greek and Arabic philosophers. Here, Taleb turns into Nero Tulip, the more gentle side of his two-fold psyche. Beneath the braggadocio, Taleb loves the quiet life. Because top-down solutions tend to exaggerate shocks, he argues, we need to develop small-scale strategies, diversify our portfolios and—especially—listen to the traditions of his Lebanese home.