{"id":1882,"date":"2014-01-27T05:35:53","date_gmt":"2014-01-27T05:35:53","guid":{"rendered":"http:\/\/www.rationalargumentator.com\/index\/?p=1882"},"modified":"2014-02-08T22:27:39","modified_gmt":"2014-02-08T22:27:39","slug":"time-and-uncertainty-antifragile","status":"publish","type":"post","link":"https:\/\/www.rationalargumentator.com\/index\/blog\/2014\/01\/time-and-uncertainty-antifragile\/","title":{"rendered":"How Time and Uncertainty Can Make Us \u201cAntifragile\u201d – Article by David Howden"},"content":{"rendered":"
\n
\"The<\/div>\n<\/div>\n
David Howden
\n<\/big><\/big><\/strong><\/span><\/div>\n
January 26, 2014<\/span>
\n<\/big><\/div>\n
Recommend this page<\/a>.<\/strong><\/div>\n
******************************<\/div>\n
\n

Antifragile: Things that Gain from Disorder, <\/em>Nassim Nicholas Taleb (New York: Random House, 2012).<\/p>\n

No two buzzwords define the present crisis more than \u201ccontagion\u201d and \u201crobustness\u201d in the world of economists and policy wonks. The current interrelated nature of the financial system has bred a fragile situation where the success of the greater economy supposedly hinges 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 \u2014 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 better construct strong institutions to weather future storms.<\/p>\n

Nassim Taleb takes great issue with this approach in his new book Antifragile<\/em>. His view is that constructing such so-called robust institutions is not sufficient as they continually fight yesterday\u2019s battles. Instead the focus should be in building \u201cantifragile\u201d insti\u00adtutions. 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, but also have wide-ranging social applications.<\/p>\n

Taleb\u2019s latest work builds on two of his previous books, Fooled by Randomness <\/em>(2001) and The Black Swan <\/em>(2007). The common theme underlying all three is that there are events which are fundamentally unknowable \u2014 true uncertainties \u2014 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.<\/p>\n

It is at this point that my first quibble with the book arises, and one I had with its predecessor The Black Swan<\/em>. Taleb bifurcates between two definitions of uncertain events. On the one hand he invokes random or fundamentally unknowable events. Readers of this journal will be sympathetic to this definition of uncertainty, bearing close resemblance to Mises\u2019s own use of \u201ccase probabilities\u201d[1]<\/a> (1949, pp. 110\u2013113), or Shackle\u2019s (1949) use of \u201cnon-seriable, non-divisible\u201d events.[2]<\/a> On the other hand, it is also clear that Taleb also thinks of uncertain events as merely rare events. 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 funda\u00admentally probabilistic events.<\/p>\n

This quibble aside, one can apply much of the remaining work cognizant that Taleb\u2019s terminology differs from that of the Austrian economists, and also that the domain of his theory is slightly different than he thinks.<\/p>\n

Something is \u201cantifragile\u201d if it gets stronger from a negative event. What are some examples? Taleb applies the prefix 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.<\/p>\n

Authors should be shocked to learn that there is almost no news that can harm a writer\u2019s credibility, and that any publicity is good publicity (pp. 51\u201352). Corporations and governments that try to \u201creinstill confidence\u201d should not be trusted because they would do so only if they were ultimately doomed (p. 53). Children shouldn\u2019t 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<\/i> was a positive disaster as it put shipbuilders on their toes, and possibly avoided an even larger accident later (p. 72). The general theme is that those who make errors are stronger than those who don\u2019t \u2014 reliability, or antifragility \u2014 only comes when something is regularly tested by an unwanted event.<\/p>\n

The theory has merit. Consider this lesson applied to central bank policies. In the wake of the dot-com bust a concerted effort by the world\u2019s central banks flooded the global financial system with liquidity. The liquidation of assets that should have happened never did, and as a result lenders and borrowers didn\u2019t learn their lesson on prudential money management. The seeds were sown for the larger crisis starting in 2007\u20132008 because a simple lesson was not learned when the financial system\u2019s problems were still in relative infancy.<\/p>\n

There is much to learn from this book and much to be wary of. 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. In chapter 21 he criticizes the prevailing orthodoxy of \u201cneomania,\u201d 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.<\/p>\n

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.<\/p>\n

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 \u2014 e.g., Germany, Switzerland and Singapore \u2014 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 journal will also notice that their 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.<\/p>\n

Taleb asks too little 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, however, fodder for another book.<\/p>\n

References<\/strong><\/h5>\n
\n

[1] <\/a>Mises, Ludwig von. 1949. Human Action: A Treatise on Economics<\/em>. Auburn, Ala.: Mises Institute, 1998.<\/p>\n

[2] <\/a>Shackle, G. L. S. 1949. Expectations in Economics<\/em>. Westport, Conn.: Gibson.<\/p>\n

David 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<\/a>, and winner of the Mises Institute’s Douglas E. French Prize<\/a>. Send him mail<\/a>. See David Howden’s article archives<\/a>.<\/strong><\/p>\n

This article first appeared in the Fall 2013 edition of <\/strong>The Quarterly Journal of Austrian Economics<\/a>.<\/strong> <\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

David Howden January 26, 2014 Recommend this page. ****************************** Antifragile: Things that Gain from Disorder, Nassim Nicholas Taleb (New York: Random House, 2012). No two buzzwords define the present crisis more than \u201ccontagion\u201d and \u201crobustness\u201d in the world of economists and policy wonks. The current interrelated nature of the financial system has bred a fragile situation where the success of the greater economy supposedly hinges on its individual components, such as banks that are too big to fail. To combat…<\/p>\n

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