Wednesday, 15 January 2014

BOOK REVIEW: Antifragile?

Guest post by David Howden

BOOK REVIEW: Antifragile: Things that Gain from Disorder,
Nassim Nicholas Taleb (New York: Random House, 2012).

In the world of economists and policy wonks, no two buzzwords define the ongoing financial crisis more than “contagion” and “robustness.” The current interrelated nature of the financial system has bred a fragile situation where the success or failure of the greater economy supposedly hinges critically on its individual components, such as banks that are too big to fail.

To combat this fragility, economists have increasingly sought to build “robust” institutions. Such institutions will remain strong in the face of adverse effects if an individual component of the economy fails — be it subprime mortgages, sovereign debt, deposit-taking institutions or investment banks. This approach to the crisis stresses that if we cannot battle contagion, we had at least better construct strong institutions to weather future storms.

Nassim Taleb takes great issue with this approach in his new book Antifragile. His view is that constructing such so-called robust institutions is not sufficient, as they simply fight yesterday’s battles. Instead the focus should be in building “antifragile” insti­tutions able to fight the unforeseen battles of tomorrow.

Although often confused with robustness or resilience, an antifragile institution is not only unharmed by adverse events, but is actually strengthened by them. Building antifragile institutions will not only strengthen the global economic arena, he argues, but also have wide-ranging social applications.

Taleb’s latest work builds on two of his previous books, Fooled by Randomness (2001) and The Black Swan (2007). The common theme underlying all three is that there are events which are fundamentally unknowable — true uncertainties — in distinction to merely risky outcomes. Since we cannot know in advance what these events are, or what their effects will be, we should not exert too much effort in constructing contingency plans.

It is at this point that my first quibble with the book arises, and one I had with its predecessor The Black Swan. Taleb bifurcates between two definitions of uncertain events, regardless of our knowledge of their cause(s). On the one hand he invokes random or fundamentally unknowable events. Readers of this blog will be sympathetic to this definition of uncertainty, bearing close resemblance to Ludwig Von Mises’s use of “case probabilities” or Shackle’s (1949) use of “non-seriable, non-divisible” events.1

On the other hand, it is also clear that Taleb also thinks of uncertain events as merely rare events, whatever their cause. These are events located on the “fat” or “long tails” on a probability distribution. Even though he thinks that these represent true uncertainty, there is no doubt that he is referring to funda­mentally probabilistic events. (This quibble aside, one can still apply much of Taleb’s remaining work bearing mind that his terminology differs from that of the Austrian economists, and also that the domain of his theory is slightly different than he thinks.)

Something is “antifragile” then if it gets stronger from a negative event. What are some examples? Taleb applies the preface of his book liberally to outline what choices we should be pursuing. Indeed, the body of the book gives a long list of antifragile actions that, at least on one level, boil down to doing the exact opposite of what you think you should be doing.

Some examples:

  • Authors should be shocked to learn that there is almost no news that can harm a writer’s credibility, and that any publicity is good publicity (pp. 51–52).
  • Corporations and governments that try to “reinstill confidence” should not be trusted because they would do so only if they were ultimately doomed (p. 53).
  • Children shouldn’t be on antidepressants as this removes a source of learning from the life experience and thus make individuals less capable of dealing with unwanted events later in life (p. 61).
  • The sinking of the Titanic was a positive disaster as it put shipbuilders on their toes, and possibly avoided an even larger accident later (p. 72).

The general theme, paradoxically then, is that those who make errors are stronger than those who don’t — that reliability, or antifragility, only comes when something is regularly tested by an unwanted event.

The theory has merit. Consider this lesson applied to central bank policies. In the wake of earlier busts like the dot-com bust, concerted efforts by the world’s central banks flooded the global financial system with liquidity, and the much-needed liquidation of malinvested assets was never allowed to happen.  As a result, lenders and borrowers didn’t learn their lesson on prudential money management. The seeds were sown for the larger crisis starting in 2007–2008 because a simple lesson was not learned when the financial system’s problems were still in relative infancy.

Antifragile: Things That Gain from DisorderSo there is much to learn from this book, but also much about which to be wary. At the end of the day, Taleb reckons the best test of an anti-fragile institution is Mother Nature mixed with a healthy dose of time—which really offers little guidance. In chapter 21 he criticises the prevailing orthodoxy of “neomania,” the mistaken belief that newer is better. Those institutions that have existed the longest are, in all likelihood, those that will continue to exist into the future. As an example, imagine that the year is 1988 and answer the following: which structure will last the longest, the Berlin Wall or the Great Pyramid of Giza.

In this test, as in much of the book, Taleb asks too much and too little. He asks too much because those institutions with the most longevity were once upon a time also the ones with the least. There must be a better test than longevity, as it only pushes the problem back in time to identify the source of antifragility. It cannot be turtles all the way down.

An applied example relevant to the present financial crisis would involve looking for those institutions that have been strengthened by current affairs. The crisis has taken its toll on many aspects of the financial services industry, but some general types of products have proven surprising resilient, or antifragile: Governments with prudent fiscal policies — e.g., Germany, Switzerland and Singapore — have fared well and indeed been strengthened as finances deteriorate in more profligate countries. Investment funds capitalizing on what were once unorthodox strategies, such as gold and other precious metal holdings, have out-performed more traditional investments as the financial crisis worsens. Readers of this blog might also have noticed that the stock in Austrian economics has increased in value over the past decade. Question begging and failed policies developed through more mainstream theories have led many former outsiders to the ranks of Austrian economists. An unwanted event caused an offsetting positive outcome in all these scenarios. That is what being antifragile is about.

Taleb asks too little however by not exploring the true sources of antifragility. He comes close, alluding in many places that market-based institutions better combat the false security that planned institutions create. Explaining and elaborating on this link would do much to take the fundamental merits of antifragility to the next level. It would be fertile fodder for another book

Photo of David    HowdenDavid Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute's Douglas E. French Prize.
This post previously appeared in the in the Fall 2013 edition of The Quarterly Journal of Austrian Economics and the 
Mises Daily. It has been lightly edited for clarity and blogworthiness.

1. Shackle, G. L. S. 1949. Expectations in Economics. Westport, Conn.: Gibson

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