» Property Soul, Notes from a Singapore property investor writes Six reasons why property is not an antifragile investment after meeting Nassim at his recent talk there.

» Zero Hedge talks Antifragility on Prepared? When Ebola hits your town you will want to be antifragile.

» Nouriel Roubini on CNBC reveals his black swan scenarios.

» Business Insider names Nassim one of The 25 Most Successful Wharton Business School Graduates.

» Antifragility explored when applied to raising children on Why Parents Inadvertently Hinder The Success Of Their Children on Forbes.

» Lorin Hochstein discusses the fragile side of cloud software concluding the “future of cloud software is systems that fail much less often, but much harder” on Cloud software, fragility and Air France 447.

Got any other links? Let us know in the comments!

From Nassim Taleb’s Facebook Page:

Life is Randomness! Life is Antifragility!

More evidence that you are alive if & only if you like volatility. More evidence of Jensen’s inequality (convex response). This article passed my filter, my bi-monthly linking allowance. (via Steven Stogatz)

Stochastic properties of neurotransmitter release expand the dynamic range of synapses.

Yang H, Xu-Friedman MA.
Department of Biological Sciences, University at Buffalo, State University of New York, Buffalo, New York 14260.

Release of neurotransmitter is an inherently random process, which could degrade the reliability of postsynaptic spiking, even at relatively large synapses. This is particularly important at auditory synapses, where the rate and precise timing of spikes carry information about sounds. However, the functional consequences of the stochastic properties of release are unknown. We addressed this issue at the mouse endbulb of Held synapse, which is formed by auditory nerve fibers onto bushy cells (BCs) in the anteroventral cochlear nucleus. We used voltage clamp to characterize synaptic variability. Dynamic clamp was used to compare BC spiking with stochastic or deterministic synaptic input. The stochastic component increased the responsiveness of the BC to conductances that were on average subthreshold, thereby increasing the dynamic range of the synapse. This had the benefit that BCs relayed auditory nerve activity even when synapses showed significant depression during rapid activity. However, the precision of spike timing decreased with stochastic conductances, suggesting a trade-off between encoding information in spike timing versus probability. These effects were confirmed in fiber stimulation experiments, indicating that they are physiologically relevant, and that synaptic randomness, dynamic range, and jitter are causally related.

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.

☞ Joe Weisenthal at Business Insider writes about Musician Brian Eno’s recent letter to Nassim in A Glam Rocker’s Letter To Nassim Taleb On The Lessons Of Fukushima Is The Smartest Thing You Will Read All Day. The Long Now Foundation Blogs about it also.

☞ Matthew Boesler on Nassim’s recent Twitter exchanges with Karl Whelan. Also see Karl Whelan at Forbes weighs in.

☞ posts about a recent exchange with Nassim in the Q&A at his talk at Concordia University:

“In his book Antifragile, he writes about how one of his characters, Nero Tulip (who is based on Taleb), never donates to charities that have someone drawing a salary, and that he never donates when asked. Knowing a number of dedicated & thoughtful workers in the social sector, this did not sit well. After his talk ended, I decided to ask a question about this: “If I work for a charity, and we genuinely do good work, and I draw a modest salary, is it not my duty to tell the world about my work and to ask for donations?”

A Via Negativa Approach to Humanitarian Work: aka how Nassim Taleb has Influenced my Thinking on Genocide Prevention.

☞ Nassim Taleb’s Barbell Theory applied to Photography? In essence make photo shoots short and intensive; Try keep photography as a hobby or play; Optionality in shooting lots of photos but only keeping/displaying the best; The tails is where the action and insight is so pay attention to your best and worst photos.

☞ A new blog Antifragile Life; Or, how I learned to stop worrying and love volatility.

☞ Steve Miller criticises “authoritative” public-policy macroeconomists in his blog post The Data and Bias of Macroeconomics.

John Sullivan writes about Nassim’s new book Antifragile and the importance of looking at market’s fragility rather than risk, and how markets require stressors to thrive.