Book Reviews

In a book review called Finally: A Business Memoir That Owes More To Nassim Taleb Than To Jack Welch, David Shaywitz describes similarities he sees between Nassim’s thinking and the thinking of Pixar President Ed Catmull, as revealed in his memoir Creativity Inc. Shaywitz writes:

… in a fashion that seems equally indebted to Montaigne’s On Experience and Taleb’s The Black Swan, Catmull contemplates the challenges of managing in a world where, inevitably, there will be so much that’s hidden, and that you can never see.

This is precisely the question that vexed Taleb as well; as I phrased it in my review, “How do you function in a world where accurate prediction is rarely possible, where history isn’t a reliable guide to the future and where the most important events cannot be anticipated?”

Much like Taleb, Catmull isn’t looking for certitude, and would profoundly (and appropriately) distrust it if he saw it.  But the alternative is finding a way to function and achieve balance – a very dynamic and ever-changing balance – in a world that’s constantly shifting.

For Catmull, encouraging employees to surface and solve problems, and to candidly share critique is both a daily challenge and an existential need, without which creative businesses are destined to fail.

Read the entire book review at Forbes.

Drawing of Nassim TalebPhilosopher-author of The Black Swan asks us to embrace uncertainty as a survival tactic

I had just finished Taleb’s latest book when Uttarakhand happened. And the phrase ‘unprecedented tragedy’ kept recurring like a bleak refrain. Nobody had been able to predict that the rainfall could be this heavy, the flooding this bad. Taro in Japan built a 34 ft sea wall the city called the Great Wall. It was swept away contemptuously by the 2011 tsunami.

This capriciousness — whether of nature, humans, or man-made systems — lies at the core of Taleb’s book, as he passionately and provocatively argues for modern man to learn and use non-predictive decision making, which can be the only safeguard in a world where, and let me grasp at a cliché here, the only thing that’s certain is uncertainty.

With the writer having made somewhat of a career in needling establishment gurus, the bankers, academics, economists and other suits, one might be tempted to dismiss the book as grandstanding from a favourite soapbox. But it’s an eminently readable argument for a theory that can be intimidatingly rooted in complex math but is also at its basics just a product of old-fashioned nous. Take, for instance, Taleb’s peeve with modern mollycoddling, which he says is producing a very fragile human being. Extreme hygiene, by destroying the body’s natural hormetic reactions, becomes vulnerable. We counter it by ingesting probiotics, the good ‘dirt’ that we denied the body in the first place.

This is but one simple story. Taleb transposes it to politics, disaster management, urban planning, research, financial management and much more to propound his theory of antifragility. What he is saying is simple — we don’t need more and more complex graphs and grids that attempt to ‘predict’ what will come and thus build systems to face that supposed eventuality. The truth is we can never predict with any degree of accuracy a Black Swan event. It will always be sudden, random, huge, wildly destructive, and yes, totally unpredictable.

Managing risks

Risk management pros look to the past, using the worst known war, recession or tsunami to build the next higher sea wall. They don’t realise that the worst event always exceeded the worst one before it. What we really need are systems that can regenerate by using such unpredictable shocks to their advantage. Not systems that can survive the shock to some extent but those that can actively use the shock to become stronger. In other words, ‘antifragile’ systems. Much like what nature does — breeding the next gen mosquito to fight repellents. Nature works because evolution is antifragile. The gene pool uses periodic shocks to become more fit. In the tsunami example, thus, it makes more sense to put money into training people in survival and rebuilding tactics than to build higher and higher walls.

Taleb calls it learning to live in a world we must admit we don’t understand. He asks that we modify man-made systems so that they allow natural events to take their course, instead of smoothing out every little bump — Prozac for the smallest attack of the blues, warnings on coffee cups that tell you it might be hot enough to scald, hormone therapy for menopause. While the smoothening is done with the best of intent, it’s the classic soccer mom syndrome — the quest for a perfect, crisis-free world. Guess what, it doesn’t exist. Some discomfort makes us tough; removing every discomfort makes the species fragile.

That’s where the heading of this piece comes from — in trading jargon, when someone holds a ‘long gamma’ position, any movement in price is good news. In other words, long gamma means that which benefits from volatility or the non-linear. Excessive planning and smoothening are attempts to force something that’s predominantly non-linear into an easy linear graph, a simplification that distorts dangerously.

Taleb thus argues that depriving political and economic systems of natural volatility (non-linearity) — that is, making things artificially smooth — harms them more by leaving them unprepared when the biggie strikes. Take the turkey example. A turkey fattened for 1000 days imagines that life and the butcher love it. The turkey, its friends and family have absolutely no reason for 1000 days to doubt this. On the 1001 day, the Black Swan strikes. The most dangerous mistake the turkey made was to believe that the absence of evidence of harm meant the absence of harm.

The writer argues that the 2007 financial crisis was caused to a large extent because Alan Greenspan and his ilk wanted to iron out the boom-bust cycle and allowed small risks to hide (and accumulate) under the carpet — till finally they blew the economy up. Allowing small risks to swallow up companies periodically lets the economy weed out vulnerable players early on. It isolates the financially undisciplined companies from the rest of the economy, rather than finally transferring the burden of indiscipline from corporation to state.

What’s the solution? Taleb advocates the ‘barbell’ strategy — reduce extreme downsides from black swans. The upsides or positive black swans will take care of themselves. His tail risk hedging strategy is just this — telling investors how to be insured against extreme market movements. To simplify, a perfect barbell strategy for a flight would not be a crew that is uniformly cautiously optimistic. You actively want your pilots to be pessimistic like hell, while the flight attendants can be as cheery as they want.

Taleb’s barbell for the economy would be to nationalise banks but let hedge funds go unregulated. When Fannie Mae’s secret risk reports landed on Taleb’s desk, it showed that the corporation’s risk exposure consisted of some moves that brought small profits but opposite moves that brought massive losses. It was clearly a powder keg. And it blew up.

Formidably well read, Taleb segues from Seneca and Plato to Galbraith and Aquinas to Jewish and Islamic texts to make his point. Large corporations, big government, bankers, and politicians, they are all dismissed ruthlessly. As are copy editors, my own tribe. Taleb’s warnings about the imminent collapse of the banking system in The Black Swan invited much derision. Unfortunately, he was proven right. With that kind of hindsight, one is tempted to be in his corner on this one. And even if you disagree with some of his extreme positions, it’s such a darned good read you can’t put it down.

How to Live in a World We Don’t Understand: Nassim Nicholas Taleb; Penguin Books India Pvt. Ltd., 11, Community Centre, Panchsheel Park, New Delhi-110017. Rs. 899.

http://www.thehindu.com/books/books-reviews/life-is-long-gamma/article5016231.ece

dr khandee ahnaimuganBlog post today in the Huffington Post from Dr Khandee Ahnaimugan titled The Antifragile Diet:

I’ve recently read the book Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb. It’s obviously not a diet book, but the principles in it are highly relevant to weight loss.

But first, a bit of background. We are all familiar with things that are fragile. If you drop a Ming vase from a height, it shatters. Something that is resilient on the other hand, when dropped from a height withstands stress. An example might be an iron bar.

But until now, we didn’t really have a word for something that gets stronger when it’s placed under stress. That’s why Mr Taleb coined the term “antifragile”.

A good example of antifragility is the system of airline safety. Notwithstanding a few recent tragic examples, air travel gets safer and safer every year. The reason being that every time there is a crash, the incident is scrutinised, causes are elucidated and then measures are taken to try and avoid it happening again. Every air crash makes the next one less likely.

In other words, the system is set up to respond positively to negative things. Every bad incident makes the overall system stronger.

Nassim Nicholas Taleb wrote a book called ‘The Black Swan’ which was about randomness and the inevitability of improbable, unpredictable but hugely disruptive events like the banking crash of 2008. Taleb, a derivatives trader, made a great deal of money out of that and other crashes by prudently investing on the assumption that something would go wrong even though nobody knew what that was. He talks about his follow-up book called ‘Anti-fragile: How to live in a world we don’t understand’

(Taleb)
“Once you define fragility as one who does not like volatility and variability, and for statistical reasons you can, then the exact opposite is something that loves volatility, gains from disorder, variability, stresses and similar phenomena. This category of object doesn’t have a name, it is not resilient, it is not robust, it is something beyond. A lot of things require disorder and variability to function [Beautiful]. And of course we are harming by depriving them of disorder and variability”.

[Systems that appear to be robust, like the banking system, are in fact fragile?]

“Exactly. There are systems where the errors are small and systems where the errors are large. In a transport system, an accident lowers the probability of another accident. We never let an error go to waste. On the other hand the banking system, the failure of a bank makes the next bank failure more likely. It is not a healthy system”.

[In a world of big top-down organisations it is very difficult to organize?]

“It is actually simple. You can come up with single rules. The big thing for me is to transfer fragility from the individual to the system. Skin in the game. You get harmed by your mistake. A bureaucrat in Whitehall is not harmed, but if you live in a village you feel you’ve made a mistake. You have this kind of shame checking you. Decentralisation is a must. Mathematically I show how size compounds mistakes.” [Amazing]

 Here is what I wrote in my endorsement: Emanuel Derman has written my kind of a book, an elegant combination of memoir, confession, and essay on ethics, philosophy of science and professional practice. He convincingly establishes the difference between model and theory and shows why attempts to model financial markets can never be genuinely scientific. It vindicates those of us who hold that financial modeling is neither practical nor scientific. Exceedingly readable.

From the remarks here, people seem to be blaming Derman for not having written the type of books they usually read… They are blaming him for being original! This is very philistinic. This book is a personal essay; if you don’t like it, don’t read it, there is no need to blame the author for not delivering your regular science reporting. Why don’t you go blame Montaigne for discussing his personal habits in the middle of a meditation on war inspired by Plutarch?

Customer Review: Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Paperback)