Nissim Nicholas Taleb’s upcoming book talks about how robust investment strategies gain from unforeseen events, chaos & shocks
25-Jun-2012 •Dhirendra Kumar
Nissim Nicholas Taleb, who was once a trader and is now best described as a thinker and a writer, has released the prologue of his new book. A new Taleb book is an exciting event for any thoughtful investor as his writings have given a unique insight into markets over the last half a decade. The new book is called ‘Antifragile: Things That Gain from Disorder’. It’s a promising title and although you wouldn’t have come across the word ‘antifragile’ before this (I think Taleb coined the word for this book), anyone who has read his earlier ‘Fooled By Randomness’ and ‘The Black Swan’ will recognise the essential Talebness of the word.
Disorder, and all its consequences are the central theme of all of Taleb’s work. The main idea in the two earlier books was that unpredictable events of severe consequences have a larger role in human history than people expect. These ‘Black Swan’ events are truly random and unforeseeable but their impact is so large that they are the ones that really drive history. In the context of markets and investments, this implies that all attempts at quantifying and predicting risk and returns are useless. Your expectations of how the future will turn out may work for a long time but that will be an illusion. One day, seemingly out of the blue, a large an unpredicted event will strike and its impact will be far larger than the illusory routine that came before it.
On a larger scale, the most recent example of this is financial meltdown of 2008. However, investors know that on a smaller scale black swan events routinely strike individual stocks and sectors. Currently, Taleb is Scientific Adviser to a hedge fund that is based on the idea of exploiting black swan events. The fund is designed to just protect about capital in normal circumstances but delivered outsized returns when a crisis strikes.
In terms of ideas, that’s as far as the Fooled by Randomness and The Black Swan takes the reader. These books describe why the conventional approach is fragile. The latest book goes a step beyond that introduces the idea of antifragile. Conventionally, the opposite of fragile is robust. A fragile investment strategy is one that is easily affected by events while a robust one is supposed to be resilient to it. Antifragile is the name Taleb gives to those that actually benefit from the chaos and shocks.
While we’ll have to wait for the release of the book to read about Antifragility in detail, Taleb’s prologue says something very interesting about the prevalence of fragility in the world today. Here’s what he writes: While in the past people of rank or status were those and only those who took risks, had the downside for their actions and heroes were those who did so for the sake of others, today the exact reverse is taking place. We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending fakes, and academics with too much power, and no real downside and accountability. They game the system while citizens pay the price. At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.
This lament may appear to be at a tangent from the main theme but it’s actually characteristic of Taleb. For him, the role of individuals and their moral and intellectual choices has always been an integral part of how black swan events actually affect the world. Taleb is deeply contemptuous of the cult of the arms-length detached professional. It’s self-evident that that people with no downside, no skin-in-the-game take bad decisions. Look around you and you’ll see that India suffers specially from this, both in our public life and in business. Whether it’s politicians or bureaucrats or businessmen, there’s no respite from those whose job it is to act in the larger interest but whose personal interests lie elsewhere.