Nassim Taleb: Escape Your Fragility (Or Suffer)

so I'm introducing myself here I was my origin is Trader because a lot of people think I'm a professor or a lot of people think I'm a writer so I give a little bit of so that's my national origin I was a Trader doing these kind of weird things and then I got downgraded downgraded myself to becoming a pit Trader those people who you know stand in a bit sweat a lot you know the smell is not conveyed by the picture but you can understand and you spent six hours on your feet I did that from qualitative Trader you know for the experience and I fell in love with Marcus how prices um how prices develop price formation is very difficult saying still don't understand it then it was so difficult trading in a pit that I went to do this for retirement largely because I can't do tennis so this was easier so we have a professor at NYU and focusing on things so it's pretty much backwards so I went from practice sorry this doesn't go backwards no this doesn't work yeah it does so I went from practice to Theory to rather than go from Theory to practice which means that you make enemies in theory and you make enemies in practice because you know you don't have the same culture in both and now this is the technical insertile I'm embarking on and one of the first volume is out is on something we'll discuss in in the during the fire uh the fire chat parsaturated but the the first volume is about so uh fat tails how most of History comes from random events that are very consequential and one in environment that I call scalable and I've discovered yesterday visiting my friends that this becomes scalable whatever it was was uh limited to artisanal production become scalable I mean surgery is not scalable yet surgeons and the best surgeon in the world cannot see a million people and a day but an author you write a book once and that's it luckily you can get I'm very lazy so it's great to write a book every time someone buys it you don't have to rewrite it you see unlike surgery or other professions but uh thanks to this a lot of professors are become scalable you know even Dentistry I mean you can make a million teeth all right you don't have to be there except for the first one anyway so this is that was the first block of research fat tails What I Call fat tails extreme events onwards later now let's talk about fragility so before we talk about robustness resilience stuff like that we need to Define fragility and so again I mean I went into research because I was incompetent in anything else you know outside training so I couldn't play tennis so the first thing I realized looking at a coffee cup is that we had a definition of fragility I was an option Trader trading volatility and I realized there were packages that like volatility and packages that hate volatility the same thing was right there staring at me look I mean the coffee cup I looked I was looking at I'm lying was not as attractive as this one it was an ugly coffee cup not Starbucks but an ugly coffee cup anyway so I realized that it did not like volatility so here we have the definition of fragility and from there we can figure out anti-fragility if you're fragile to some classes of events you can have the reverse reaction to you know uh to them you can you can gain from from from from shocks so so my definition of fragility came with this I don't know is this this is fragile so with the following very simple thing everything fragile on this planet must have acceleration of harm and this I figured it out from Trading like if the market goes down one percent so I'm removing this so people don't read the slide so the if the market is down one percent say you lose a million down two percent you lose another five million so there is acceleration and that acceleration is quite Universal and that applies to us if we jump 10 meters we die 10 meters is a lot worse than 10 times one meter and why is this necessary because if you're linear to harm then you have to harm him okay I'm just walking from here to the whatever would kill you because a lot of shocks so we're sort of insensitive to small sharks and we get disproportionately more hard more sensitive to others because everything that's linear to harm is already gone so everything fragile is going to be non-linear to harm and we're going to see everything anti-fragile would be non-linear to harm and everything I'm going to be talking about for the rest of my life is based on that very simple point so this is the coffee cup it is non-linear to harm because I tap on a coffee cup it doesn't break doesn't break doesn't break then a little more it breaks and we're going to see why averages don't matter anymore and and many things that come with the idea so second order effects is effectively what we got to concentrate on and you can see that really with the pandemic okay the supply chain second order effect is when I put some equations here just to wake people up and let me remove them put pictures so second order effect you can see it easily don't cross the rivers on average four feet deep and translate it into French it's a convex function of an average or whatever so you're gonna you can also translate into Russian or it's even more theoretical so that's what I call convexity effect but you can see it was a supply chain story if you consume zero for one year and 200 units the second year is going to be a lot worse than if you consume 100 the first year and 102nd year so we have export we can figure it out if the the the the market causes fragility or not in some domains okay unevenness you want steadiness we are fragile to temperature for example I'd rather have 70 degrees today and 70 degrees tomorrow rather than zero degrees today we're not close to it but it feels like it right sort of like today in Boston or anywhere zero degrees today and 140 tomorrow you see the idea so whatever is fragile depends heavily on second order effects and that's quite Universal so I'm taking this of course you know in 40 minutes I'm not going to be able to cover a lot but I'm going to think of this as an interesting territory is that size causes fragilities and it was a very simple example a large Stone if someone threw this at my head I I'm you know you'd have someone else to replace you need someone else to replace me for the continuation of the session because I won't be here but if you took the big thing the big uh Rock and broke it into pebbles and threw them progressively at my head nothing would happen so you see there is a is a side effect and pretty much everything in finance everything that breaks bankruptcies all of these come from acceleration of harm because if you're very sensitive to harm in the beginning it would show so it has to be hidden harm has to be hidden and then accelerate just like if you smash a car against the wall a thousand times at a tenth of a kilometer per hour nothing's going to happen but once at a thousand kilometers per hour you know what's going to happen all right so so this is that acceleration and you can see very easily this can explain why an elephant is very fragile if if you push an elephant I mean it's we're not I'm not inviting you it's a thought experiment to push an elephant but if you push an elephant off this stage would break a leg now again I'm not inviting you to push elements off the stage it's a solid experiment but and when elephants break a leg they're gone this is why we don't have a lot of elephants they're vastly more efficient than a mouse metabolically heart rate 50 versus 200. but guess what a mouse you can you can throw a muscle it won't even notice it'll laugh at you all right so if you throw a mouse off the stage or something many times it's high its height so there is an effect this economy is a scale that comes with fragility because of that nonlinearity and that's also Universal we have I don't know about Boston but in New York we have at least 8 million mice nobody counted them so you can imagine because they don't vote it's not precise but the but you can imagine and you don't have a lot of elephants all right so that explains why small companies tend to survive sharks a lot better than large companies particularly when they are squeezes so all of this now hopefully I'll confuse you a little bit the next two three slides is linked to options because options have non-linear payoff and whatever have this optionality likes volatility and likes uncertainty for some weird reason and then we look at fragility as an inverse of that the other side of the coin is the the the fragile and basically I'm going to confuse you one more time and then it becomes easy all right if you like one of these like them all so if you like and let me explain how if you like uncertainty you will like time why time brings uncertainty you see it was time if the coffee cup there's no coffee cup here but if we have a coffee cup on the table you know that over time is gonna break because we're gonna have an earthquake or something okay so so time uncertainty shocks stressors entropy all of these going the same direction if you like one you like them all this is why I call them the solar Brothers like moving uh like the brothers that move uh you know Furniture in New York city so the solar brothers so the um the and and and I spent it took me 10 years to really formalize this uh this idea that if you like one you like them all

Channel: Finance Strong

Views: 67,113

Keywords: talks at google, ted talks, inspirational talks, educational talks, Skin in the Game, Nassim Nicholas Taleb, problems of randomness, probability, fairness, commercial efficiency, Finance Strong, Personal Finance, Insurance, Investing, Wealth

Id: 6bzB7ga32zs

Length: 11min 36sec (696 seconds)

Published: Tue Dec 06 2022