What do Vikings, the multiplying smartphone and YouTubers have in common? They're all antifragile. This is a top 5 takeaway summary of the fourth book in the Incerto series - Antifragile- Things That Gain From Disorder, written by Nassim Taleb. I will post a playlist consisting of all the books in the series in the description. We will now examine what antifragility is; how we as humans sometimes intervene too much with randomness, turning us fragile in the process; how one can detect what is antifragile; why antifragility is the solution to the Black Swan problem; and lastly, what we can learn from an isometric strategy named after a barbell. Takeaway number 1: Introducing the triad - Fragile, Robust, Antifragile. To understand what antifragility is, we will now look at the triad. All good things come in three, right? Antifragility exists on a spectrum together with that which is robust and that which is fragile. The difference between the three of them lies in how they react to randomness, uncertainty, stressors, errors and most importantly, time. The fragile breaks when faced with uncertainty. The robust doesn't care too much, and the antifragiel - and here comes the central point of the book - becomes stronger. Let's take an example. In Norse mythology, the god Baldur was protected from almost all harm, when his father Odin tried to have every creature and living thing swear an oath not to harm his son. The issue was that he forgot about the mistletoe. And so the evil god Loki made an arrow of the plant and later killed Baldur with it. Baldur, in this example, represents that which is fragile to physical harm. Another famous creature from the Nordic folklore is the boar Sæhrímnir. In Valhalla, it said that the Vikings killed the boar every evening and feasted on its meat. But every next morning, the boar was resurrected. Clearly it was robust - no matter how much physical damage the boar took from bacon-loving Vikings, it lived to see another day. As an example of antifragility, take the Vikings themselves. They thought that dying in battle would give them the entrance to Valhalla. So being wounded wasn't something they were afraid of. This made it so they had an advantage in fighting the fragile Englishman and Frenchman. Another example ... Have you ever dropped a smartphone on a surface other than perhaps your bed door a really soft carpet? This is different than from back in the days when cellphones could take basically any physical damage. Although it hasn't been invented yet, we can imagine what the antifragile smartphone would be like. Picture yourself throwing your phone in the ground, only to see it multiplied into two brand new phones, upgraded with all the latest software and gadgets. Wouldn't that be awesome? Okay, final example! Take the stressor of bad reputation and the effect it has on your career depending on which profession you've chosen. If you've chosen to climb the corporate ladder, you are fragile in this aspect. Any mistake you make will go into your permanent record at the personnel department, and could possibly harm your prospects at the workplace. Now, take the self-employed cab driver in a large city. It doesn't matter to him if he makes a mistake with one client, he can just go and pick up one of the other, million potential customers who doesn't know a thing about how he performed during his last drive. And finally take the YouTuber. The YouTuber is antifragile to bad reputation. The more people hate, the more we earn. Not only do negative comments and thumbs down boost the YouTube algorithm, but think about word to mouth as well. I don't know how many times I've been recommended to watch something on the basis of how horrible, cringy, crazy or just plain bad it supposedly was. So the antifragile is something that likes randomness, uncertainty, stressors, errors, and time, because it gains from it. Antifragility is domain-specific though. The Vikings didn't gain much from bad reputation, and the YouTuber doesn't really enjoy physical harm. Also, antifragility often only works up to a certain point. A Youtuber who gets such bad reputation that he goes to jail can't be said to have gained from it, I guess. Next we shall see how intervention can turn something antifragile into something fragile. Takeaway number 2: Naive interventionism (or bear favors, as we say in Sweden) What do soccer moms, your colleague who uses hand antiseptics all day, and the politicians who are bailing out banks, have in common? That's right, they are turning the antifragile into something fragile. Kids don't need protection from every potential harm in life, and neither do they need help overcoming every obstacle. The personal development of an individual is antifragile to harm and obstacles (up to a certain point) or in other words, it gains from it! Removing these stressors from one's childhood, on the other hand, is likely to create a very weak and fragile adult. Similarly, using hand antiseptics and staying away from public places because you imagine that you might catch a disease otherwise, will deprive your immune system, which is antifragile, from stressors, causing it to be weaker in the long run. The removal of such stressors is likely the reason why allergies and autoimmune diseases plague our society today, and the antiseptics, together with the overuse of antibiotics, is strengthening the antifragile bacteria, creating antibiotic resistance. Finally, we have the economists and the politicians who are intervening in the economy by deeming something "too big to fail" and therefore refusing to let nature take its course. Weeding out vulnerable firms early allows for minimal harm to the system, as they would otherwise grow to cause systemic problems. Nassim Taleb refers to this as "naive interventionism". In sweden, we call it "doing someone a bear favor" In plain English it's called "trying to help but causing more harm than good", or "fixing things that rather should be left alone". There's this central illusion in life that randomness is a bad thing, and that we can remove randomness by removing randomness. The truth is that we can't, we will just build up something that is fragile and pay greater consequences in the future. Takeaway number 3: Concavity and convexity - detecting what is fragile and antifragile This is going to be a bit technical, but there's a way of detecting that which is fragile and that which is antifragile. Let's start with the fragile. Imagine yourself driving a car. You find parking quite difficult, so occasionally, you bump into stuff when parking the car, like neighboring cars, walls, road signs, slow pedestrians ... You've lost count on how many times this has happened, but when you add up the scratches in the car paints a quick estimation says ... maybe 20 times? You didn't go faster than perhaps 5 km/h (about 3 miles per hour) in any of the accidents. Now imagine yourself driving that car into a wall in 5 * 20, 100 kilometres per hour (or about 60 miles per hour) a single time. Will it have the same effect on your car? Clearly not. Your car is fragile. The harm is not linear to the stressor, ie the velocity of the impact. Hitting a wall at 5 km/h 20 times will cause a lot of scratches. Hitting it in 100 km/h gives the vehicle a straight way ticket to the car cemetery. Mathematically, this can be shown by a non linear relationship on a graph and a so called "concave" function. The antifragile is also detectable by its nonlinear response to a given stressor. But in this case, the function is "convex" instead. In other words, it responds positively to the stressor, and more so if you increase the intensity of it (up to a certain point). Muscle growth is antifragile to physical exhaustion. Lifting 100 kilos in deadlift for a single repetition is more beneficial than lifting 10 kilos 10 times. Average shmaverage, an interesting property follows from these concave and convex functions. It's much more important to understand the variance in the underlying variable X, in many situations, than to understand the average of it. An illustration from personal experience: My mother has always been keen on arriving early to airports, so that one has a marginal safety and can make it in time for the flight, even if something unforeseen should happen. Me, on the other hand, have always thought of this as wasteful. Waiting an extra hour at the airport?? Forget about it! Then, last summer, when I was scheduled to fly to Prague in the Czech Republic I ... missed my flight. There were no other flights to Prague that day, and I really wanted to go. So instead .. well, I took the bus. Sure. It's a bit annoying having to wait for an hour at the airport every time you travel somewhere, but the annoyance of missing your flight and having to sit on an uncomfortable bus for 20 hours, exceeds that by a non-comparable magnitude. Another example, of the opposite situation. You are being told that investing in early biotech companies is a bad idea. One of your friends argues so, and tells you that: "80% of biotech startups fail already within the first year, you know. 15% fail within 5 years, and yeah, I think only 5% managed to survive more than 5!" What your friend forgets about in this case is the non-linear relationship that exists between the survival of the company and the return for you as a stock owner. This is a convex function. Hitting a single one of these companies that belong to the top 5%, may have you settled for life, as returns can be in the tens of thousands of percentages. If you want to hear more about this, head over to my summary of "Angel - How to Invest in Technology Startups". There's another way to detect what is likely to be fragile, and what is likely to be antifragile, and it's determined by the so called Lindy effect. (But more on that in the 2nd video) Take away number 4: The answer to the Black Swan problem First, a quick recap of what a Black Swan event is. It's unpredictable, and has a large impact. The impact is so big that Nassim Taleb argues that society to a large extent is decided by the outcome of these events. Negative Black Swans cause a lot of trouble, so it would be optimal if it was possible to foresee them. But well, that's the issue with the unpredictable. It's ... not possible to predict. What's far easier though, is to see if a system is exposed to Black Swans. We do realize that, if an airplane crashes, all of the people on board will die. We can't foresee exactly WHEN and HOW that will happen, but we do understand that it CAN happen. So what can we do about it? We can try to change the system from being a fragile one, into being a robust or an antifragile one. By focusing on exposure to failure, we make the predictions about the failure largely irrelevant. Back to the example of airplanes. We check people for weapons before they board a plane. Not because we think they carry weapons, but because the harm we expose ourselves to if we don't do so is too big. Remember, the concave property of the fragile systems from the last takeaway? The checking of people increases the effort for the airplane personnel, but it's not comparable to the price that the passengers have to pay, should the accident be there. In a fragile system, we introduce redundancy to reduce the fragility. Nature understands this well. For instance - humans have two kidneys, two breasts, two testicles (if male) fat reserves, etc, etc. Also, we are antifragile in that our body overcompensates to stressors. If you do one rep on 100 kilos in deadlift your body will prepare you for lifting 110 kilos the next time. Humans don't understand this as well as nature does unfortunately. We tend to remove redundancy for the sake of "efficiency". We also tend to expect that the worst that we've seen is the worst possible outcome of the future as well. This is one of the reasons why so many blew up in the stock market in October 1987, when it crashed by 22% in a single day. The worst return from a single day up until that point was in October 1929, with the comparative minor crash of 12%. Warren Buffett is famous for having redundancy in his investments. He suggests that one should: "Invest only in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." The difference between good and bad systems, is this the good systems are set up to have small errors, independent from each other. In fact, the mistakes are even negatively correlated to one another, as we tend to learn from them. For the investor, it's therefore a good idea to have uncorrelated bets. A portfolio consisting of only stocks from the energy sector, for instance, is fragile to the Black Swan event that a new competitor enters the market with an innovation that beats the living h*** out of the current technologies available. Like ... energy made from a small portable fusion reactor or something like that. Furthermore, an antifragile or robust system often have options. Consider evolution, perhaps the best example there is of an antifragile system. Individuals die and even whole species go extinct from time to another. The surviving genes are "better" than the ones that go extinct - survival of the fittest. How can nature do this? It's because of optionality. If the dinosaurs can't handle the current situation, maybe the mammals can? Optionality can be introduced into ones investment strategy. Benjamin Graham famously invested in companies where the business was valued lower than the value of its assets. Such an investment gives optionality. There's a chance that the company will do well, and in that case, it's awesome. If the business doesn't do well though, the company can still be liquidated, and the shareholders would keep a large part of their initial invested capital anyways. Takeaway number 5: The barbell strategy The barbell strategy consists of securing oneself of huge losses, while, at the same time, have an exposure to a large potential upside. It's the strategy of replicating the convex function from takeaway number 3. Let's see how females in some species use this approach, and how you can use it (whether female or not) in your choice of occupation and when investing. In some monogamous species, including humans, females use this approach in choosing whom to mate with. They marry the stable and secure beta male, ie. securing the survival of their offspring, while they sometimes cheat with the alpha male, giving them a potential of securing the strongest genes to their offspring, at the same time. Minimizing downside, maximizing potential upside. When making your career decision, consider going for something conservative and something hyper aggressive at the same time. For instance. You can combine a 9-5 or an education with entrepreneurial endeavors in your spare time. Or you can rely on safe investments to produce some income every month, just to put food on the table, while aggressively pursuing the entrepreneurial path with all your time and effort beyond that. In the field of finance, a lot of professionals misunderstand how to make profits over the long run. They believe that the focus should always be on coming up with bets that make them a lot of money. But what's most important is something different ... The difference appears minor, but it's not. What's most important is NOT to lose. Warren Buffett famously said: "The first rule of investing is: never lose money. The second rule of investing is: never forget rule number one ." And if you don't take Buffett's word for it, consider that Ray Dalio, another one of the top 100 richest in the world, who also made his fortune from investing, says this: "Make sure that the probability of the unacceptable, ie. going bust, is nil" The barbell can be achieved by putting a large chunk of your portfolio in hyper conservative investments and a smaller chunk in hyper aggressive ones. I've discussed this previously in my summary of the Black Swan, which also is written by Nassim Taleb. Please check out that video if you're interested in hearing more about it. There is a convex relationship between how many times you hear something and how long you can remember it for. Therefore - it's summary time! The antifragile becomes stronger from things such as randomness, uncertainty stressors and time. Positive antifragile systems are often better left alone. Fragility and antifragility can be detected by their nonlinear response to stressors. An interesting property of the nonlinear is that variance becomes much more important than averages. Predicting future events isn't possible, and largely irrelevant, as long as you can control your exposure to them. Use the barbel strategy to have the cake and eat it too. And holy fu** ***** smokes, this book is awesome. Therefore, this will be one of the exceptions. This masterpiece by Nassim Taleb will consist of two videos, with ten takeaways in total. So if you've read the book before and you're like: "Swedish investor, are you crazy? Why isn't the Lindy effect included among your top five takeaways?" Patience. You'll have to wait until next week for part two. In the meantime, thanks for staying until the end of this video, and have a good one.
