Nassim Taleb couldn’t personally come to the recent TOCICO congress in South Africa, so he sent a short video lecture outlining his concept of antifragility.
Fragile and antifragile explained with a coffee mug
From his experience as an options trader, Nassim knows that volatility and shocks can have more advantages than disadvantages. He calls systems and people benefitting from unpredicted situations antifragile.
To illustrate antifragility, Mr Taleb starts defining fragility: “One day I looked at my coffee cup… Like the coffee cup, fragility doesn’t ‘like’ coincidences, swings and shocks.”
So Taleb’s mug ‘wants’ peace and quietness. Antifragility is the exact opposite: While on parcels the warning ‘fragile – handle with care – is usually written, an antifragile parcel’s packaging would read ‘please mishandle!’
This idea isn’t new. In ancient times, the concept of systems ‘liking’ disorder was known and used in poetry. In Greek mythology, Taleb discovered three scenarios that are relevant to today’s world.
1. Damocles and the sword hanging over his head: The best case scenario is that nothing happens, but it’s certain that nothing good can come out of this situation.
2. Phoenix, the mythical bird: You can be sure it will rise again, but the situation won’t improve.
3. Hydra – You cut off one head, two more grow: Not only is it a bad idea to attack this type of problem, but attacking it will actually make it much stronger than before – up to a certain point. According to the legend, hydra was tamed by using a trick. This means, antifragility is always relative. While a coffee cup is more fragile than a plastic cup, the former is less sensitive to high temperatures.
In his former job as a derivatives trader, Taleb realised that fragile portfolios behave in a nonlinear manner. “A 20% drop in the market hurts you worse than two times 10%”, he explains. There is a nonlinearity, and an acceleration of harm at work. An antifragile portfolio, on the other hand, benefits from a 10% move in the market a lot more than it would from ten 1% moves.
A system is fragile if it is more likely to have more disadvantages than advantages from random shocks. By contrast, antifragile systems or individuals benefit from volatility and are subsequently more likely to gain from random shocks.
From systems’ nonlinear reactions we can recognise fragility. Antifragility, as Taleb defines it, is different from just being robust. While robust systems are simply neutral to shocks, antifragile systems thrive when disruptions occur. So robustness should never be confused with antifragility. Taleb reckons that whenever robust systems are mentioned, roughly half of the time it would be better to speak of antifragile systems instead.
Nassim Nicholas Taleb is a Lebanese-American author, finance mathematician and researcher whose work focuses on risk and randomness. He lives in New York. His insights are influenced by his 20 year career in derivatives trade. Read more about antifragility in his latest book: “Antifragile: Things that Gain from Disorder”