Navigation & Hurricanes

Rita, Katrina, Andrew, the list goes on. Every year, the weather forecasters go to work plotting the courses of hurricanes. Every so often, a hurricane doesn’t listen to the prognostications of forecasters, and things get messy. In risk management, these “every so often” events are also known as “tail events”: they are events with a statistically low probability of occurring, but when they do, big problems can occur.

Nassim Taleb’s book, Antifragile, explores these tail events. He hopes to describe how to survive, and maybe even prosper, in a world where they happen. The conventional solution to surviving tail events is better and more frequent forecasting. Taleb criticizes this solution because more and better forecasting doesn’t improve the odds of navigating through a hurricane when it changes its course. The problem ought to be “building a better boat”. In other words, the way to survive and prosper in a world with hurricanes is to build lifestyles that successfully coexist with them, rather than building a fragile lifestyle that relies on the accurate forecast in order to evacuate and get out of the way.

Detractors might claim that building systems robust enough to survive tail events is expensive, and they are correct. However, it is also expensive to insure the millions of lives that live in the paths of these events, and supporting the forecasting systems that inaccurately predict tail events. If we spend money designing systems that can survive despite tail events, we will have front-load our expenses, paying less in the future once the initial design work is finished. The current system of insuring a fragile system against tail events has a high recurring cost that we cannot escape unless we focus on designing systems that survive in the face of tail events.

Taleb describes a spectrum from “fragile” to “robust” to “anti-fragile” in order to make sense of different responses one might take towards tail events. Fragile systems rely on forecasting to prevent them from toppling over: think of a house of cards — any small disturbance would upset the house of cards. Robust systems can survive tail events, but repeated exposure to tail events might cause them to fail; think of over-engineering a bridge, such that it can survive powerful earthquakes and heavy trucks; eventually such a bridge would fall down, but it would be robust enough to avoid this catastrophe for a very long time. Anti-fragile systems actually thrive on tail events: to use one of Taleb’s examples, the airline industry improves after each plane crash by gathering information about the details surrounding the incident, and then improving guidelines for airline operation and design. Taleb uses the mythical tropes of The Sword of Damocles, The Phoenix, and The Hydra to illustrate fragile, robust, and anti-fragile systems respectively: The Sword will fall if the thread holding it snaps, The Phoenix rebuilds itself after each destruction, and The Hydra grows two new heads in the place of each one that is destroyed.

It is important to note that antifragility is relative to the system it is describing. For example, individuals in a Darwinian population are fragile because they die, but the population is (hopefully) antifragile because natural selection removes the weaker individuals from the gene pool, thereby improving the genetic material available for reproducing the population. Populations may be fragile in an ecosystem, as various populations compete for common resources, but the ecosystem is (hopefully) antifragile because of the redundant, or overlapping, roles played by various populations competing for resources. It is important to note how the concept of antifragility applies to the individual or population that it is describing, since the concept depends on the behavior of the object in the system in order to determine whether it is antifragile.

* * *

We can apply this idea of antifragility to the goal of living a good life. We should seek to live our lives in such a way that tail events don’t harm us, and in the best case, help us. Financially, this means diversifying streams of income to avoid relying on one source too heavily, because if a single stream of income fails, or several streams of income that depend on a single source fail, we would be up the creek without a paddle. It also means reducing debt, to be less dependent on all sources of income, increasing our the redundancy of our financial resources: with fewer payments to make, we can save more of our income and have it available to support us. If you’re an investor, it means diversifying your investments across asset classes and individual assets. (There are problems with the current economic system, according to Taleb, since it is inherently fragile, but it is possible to build a more robust investment portfolio versus a more fragile one, despite this systemic fragility.) Personally, it means developing a network of friends and neighbors who can help you; this is probably different from your LinkedIn and Facebook contacts. We are talking about people you meet for movies and meals, who may be your friend on Facebook, but who would also help shovel your car out of a snowbank in a blizzard. It means having hobbies that fit your income: collecting Gibson guitars, or Versace dresses, on a quickie mart salary probably lies closer to the Sword of Damocles than it does to the Hydra.

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