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ANT

Antifragile IFRaGILE

T H I N G S T H At G A I N F R O M D I S O R d E R

NASSIM NICHOLAS TALEB

Supplemental Graphics

Copyright 2012 by Nassim Nicholas Taleb

Contents
Graphic 1

1-5 6 7-8 9 9 9 10

Graphic 2 Graphic 3

Graphic 4 Graphic 5

Graphic 6 Graphic 7

PROLOGUE

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TABLE 1 1. THE CENTRAL TRIAD: THREE TYPES OF EXPOSURE GRAPHIC

FRAGILE Mythology Greek Mythology New York and Brooklyn Black Swan

ROBUST

ANTIFRAGILE

Sword of Damocles Rock of Tantalus Dr. John

Phoenix Nero Tulip

Hydra Fat Tony, Yevgenia Krasnova* Exposed to positive Black Swans Silicon Valley: Fail fast, Be foolish.

Exposed to negative Black Swans New York: Banking system Efciency, optimized Hates mistakes Redundancy

Businesses

Biological & Economic Systems Errors

Degeneracy (functional redundancy) Loves mistakes (since they are small) Produces reversible, small errors

Mistakes are just information

Errors

Irreversible, large (but rare) errors, blowups Directed Research Opportunistic research Studying exposure to events, statistical properties of exposures Phenomenology Mithridatization Recovery

Science/ Technology

Stochastic Tinkering (antifragile tinkering or bricolage) Modifying exposure to events

Dichotomy eventexposure

Studying events, measuring their risks, statistical properties of events Theory Mollication, atrophy, aging, sarcopenia

Science

Heuristics, practical tricks Hormesis, Hypertrophy

Human Body

* Dr John, Nero Tulip, Fat Tony, and Yevgenia Krasnova are characters in The Black Swan. Nero Tulip is also a character in Fooled by Randomness.

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P R O LO G UE

FRAGILE Ways of Thinking Human relationships Ancient Culture (Nietzsche) Ethics Ethics

ROBUST

ANTIFRAGILE

Modernity Friendship Apollonian

Medieval Europe Kinship Dionysian

Ancient Mediterranean Attraction Balanced mixture of Apollonian and Dionysian The strong System with soul in the game Virtue Distributed sources of randomness

The weak System without skin in the game Rules Concentrated sources of randomness NonlinearConcave, or Concave-convex Left-Skewed (or negative skewed) Short Volatility, gamma, vega Explicit True-False Tourist Personal and intellectual Corporate employment, Tantalized class

The magnicent System with skin in the game Principles

Regulation Systems

Mathematics (functional)

Linear, or Convex-Concave Low volatility Flat Volatility Tacit

Nonlinear-Convex

Mathematics (probability) Option Trading

Right-Skewed (or positive skewed) Long volatility, gamma, vega Tacit with convexity Sucker-Nonsucker Flneur with a large private library

Knowledge Epistemology Life and Thinking

Financial dependence

Dentist, dermatologist, niche worker, minimum wage earner Real life, pathemata mathemata

taxi driver, artisan, prostitute, F*** you money

Learning

Classroom

Real life and library Collection of City-States; Decentralized

Political Systems

Nation-State; Centralized

PROLOGUE

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FRAGILE Social System

ROBUST

ANTIFRAGILE

Ideology Postagricultural Modern Settlements

Mythology Nomadic and hunter-gatherer tribes Expertise Phenomenology Erudition Evidence-based phenomenology Post traumatic growth Heuristic-based decision making Early Stoics, Menodotus of Nicomedia, Popper, Burke, Wittgenstein, John Gray Anthropologists Convex heuristics Roman Stoics, Nietzsche, Nietzsche perhaps Hegel (sublation), Jaspers

Knowledge Science

Academia Theory Post traumatic syndrome Model-based probabilistic decision making Plato, Aristotle, Averroes

Psychological Well- Being Decision Making

Thinkers

Economic Life

Econophasters Cults Bureaucrats

Religion Entrepreneurs

Economic Life (effect on economic life) Reputation (profession)

Academic, corporate executive, Pope, Bishop, Politician Middle Class Via positiva Additive treatment (give medication)

Postal employee, truck driver, train conductor Minimum wage persons

Artist, Writer

Reputation (class) Medicine

Bohemian, aristocracy, old money Via negativa Subtractive treatment (remove items from consumption, say cigarettes, carbs, etc.)

Philosophy/ Science

Rationalism Separable

Empiricism

Skeptical, subtractive empiricism Holistic

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P R O LO G UE

FRAGILE Economic Life Finance Knowledge Stress

ROBUST

ANTIFRAGILE

Owner operated Short Option Positive Science Chronic stressors Acts of commission E-Reader Industry Food Companies Debt Public Debt Large Monomodal Markowitz Statutory law, Legal Code Code of regulations Banks, Hedge funds managed by econophasters. Agency Problem Signal only Hedge funds (some) Kelly criterion Equity Private debt with no bailout Small but specialized Book Small Business Negative Science Long Option Art Acute stressors, with recovery Acts of omission (missed opportunity) Oral Tradition Artisan Restaurants Venture capital Convertible Small but not specialized Barbell Kelly criterion using nite bets Common Law, equity Heuristic regulations Hedge funds (some) Principal operated Stochastic resonance, simulated annealing Convex to errors Street life Barbell: parental library, street ghts

Decision Making Literature Business Food Finance Finance

General

General Risk taking

Legal System

Regulation Finance

Business Noise- Signal

Model Error Education

Concave to errors Soccer mom

PROLOGUE

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FRAGILE Physical Training Urbanism

ROBUST

ANTIFRAGILE

Organized sports. gym machines Robert Moses, Le Corbusier

Street ghts

Jane Jacobs

you may consume eight hundred thousand in a year). So the exception, the rare event, plays an inconsequential role in the aggregate and the long-term. You cannot double your weight in a single day, not even a month, not possibly in a yearbut you can double your net worth or lose half of it in a single moment. By comparison, if you take the sale of novels, more than half of sales (and perhaps 90 percent of prots) tends to come from the top 0.1 percent, so the exception, the one-in-a-thousand event, is dominant there. So nancial mattersand other economic matterstend to be from Extremistan, just like history, which moves by discontinuities and jumps from one state to another.*
Process Process

Time Time

Time Time

noise, distributed variations in the souks (rst) compared to that of centralized or human-managed systems (second)or, equivalently, the income of a taxi driver (rst) and that of an employee (second). The second graph shows moves taking place from cascade to cascade, or Black Swan to Black Swan. Human overintervention to smooth or control processes causes a switch from one kind of system, Mediocristan, into another, Extremistan. This effect applies to all manner of systems with constrained volatilityhealth, politics, economics, even someones mood with and without Prozac. Or the difference between the entrepreneur-driven Silicon Valley (rst) and the banking system (second).

GRAPHIC 2. FI GU RE 3 . Municipal

* When randomness gets distributed across a large number of small units, along with small recurrent political disorder, we get the rst type, the benign Mediocristan. When randomness concentrates, we get the second type, the sneaky Extremistan.

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NAIVE INTERVENTION

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GRAPHIC TABLE 3 3. FRAGILIZING INTERVENTIONISM AND ITS EFFECTS ACROSS DISCIPLINES


FIELD Medicine, Health EXAMPLE OF INTERVENTIONISM IATROGENICS/ COSTS

Overtreatment Steady feedings, thermal stability, etc.denying the human body randomness Pharmaceutical addition, not subtraction

Fragility Medical error Sicker (but longer-living) humans, richer pharma, antibiotic-resistant bacteria Worsening total risks larger big ones Informational opacity Chaos after a revolution

Ecology

Micromanaging forest res Central planning U.S. supporting rotten regimes for the sake of stability

Politics

Economics

No More Boom and Bust (Greenspan (US), Labor (UK)), Great Moderation (Bernanke) State interventionism Optimization Illusion of pricing rare events, value-at-risk methodologies, illusion of economies of scale, ignorance of second-order effects

Fragility Deeper crises when they happen Support for established, state-friendly corporations; stiing of entrepreneurs Vulnerability, pseudo-efciency Big-time blowups Richer charlatans, bankrupt businesses Urban blight, inner cities, depressions, crime Hidden risks (People take more risks when supplied with a forecast) Blander, more New York Timesstyle commoditized writing

Business

Positive advice (charlatans), focus on return not risk (what to avoid) City planning Forecasting in Black Swan Domain (Fourth Quadrant) in spite of the horrible track record Copy editors trying to change your text

Urbanism

Forecasting

Literature

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M O D E R N I T Y A ND THE DE N I A L OF A N TI FRAGI L I TY

FIELD Parenting

EXAMPLE OF INTERVENTIONISM

IATROGENICS/ COSTS

Soccer mom (or pop): removing every random element from childrens lives The entire concept is grounded in interventionism Neomania High-frequency sterile information

Touristication of childrens minds Ludicationtransformation of childrens brain Fragility, alienation, nerdication Disruption of the noise/ signal ltering mechanism Interventionism

Education

Technology

Media

Can a Whale Fly Like an Eagle?

Social scientists and economists have no built-in consciousness of iatrogenics, and of course no name for itwhen I decided to teach a class on model error in economics and nance, nobody took me or the idea seriously, and the few who did tried to block me, asking for a theory (as in Semmelweiss story) and not realizing that it was precisely the errors of theory that I was addressing and cataloguing, as well as very idea of using a theory without considering the impact of the possible errors from theory. For a theory is a very dangerous thing to have. And of course one can rigorously do science without it. What scientists call phenomenology is the observation of an empirical regularity without a visible theory for it. In the Triad, I put theories in the fragile category, phenomenology in the robust one. Theories are superfragile; they come and go, then come and go, then come and go again; phenomenologies stay, and I cant believe people dont realize that phenomenology is robust and usable, and theories, while overhyped, are unreliable for decision makingoutside physics. Physics is privileged; it is the exception, which makes its imitation by other disciplines similar to attempts to make a whale y like an eagle. Errors in physics get smaller from theory to theoryso saying Newton was wrong is attention grabbing, good for lurid science journalism, but ultimately mendacious; it would be far more honest to say Newtons

cal axis the corresponding prots in thekels. Figure 5 shows the asymmetry: in this situation, the payoff is larger one way (if you are right, you earn big time) than the other (if you are wrong, you lose small).
Prots in Stater (Thekel)
30 unlimited gains 20 O N T H E Dlimited I F F E RE N CE B E TWE E N A L A RGE S TON E AND A THOUSAND PEBBLES loss 10
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Gains/Losses Gains Losses f X f(X)

10

20

30

Gains/Losses Gains Losses f Xf(X) 40


Gain Gain

Rent for Oil Press 50


Variable Variable X

FIGU RE 5 . GRAPHIC 4.

X Thales antifragility. He pays little to get a huge potential. We can see the asymmetry between upside and downside.

Youare are here You here

Gain Gain

The vertical axis in Figure 5 represents a function of the rent for oil Gains/Losses Gains/Losses Gains Losses Gains Losses f X f(X) f Xf(X) presses (the payoff from the option). All the reader needs to note from F IGU RE 1 2 . Pain More than Gain, or Gain More than Pain. Assume you start from the You Are the picture (that is,x the asymmetry, with more Gain Here spot. In is thethe rstnonlinearity case, should the variable increase, i.e., move to the right on upside the horiGain Variable Variable Youare are here You here X Gain than asymmetry is a form of the nonlinearity). Gain zontal downside; axis, the gains (vertical axis) are larger than losses encountered by moving left,Xi.e., an equivalent decrease in the variable x. The graph illustrates how positive asymmetry (rst Variable graph) turns into convex (inward) curving and negative asymmetry (second graph) Pain turns into Variable Pain X You are here X You are here Things That Like Dispersion concave (outward) curving. To repeat, for a set deviation in a variable, in equivalent amounts in Pain Pain both directions, the convex gains more than it loses, and the reverse for the concave. One property of the option: it does not care about the average outcome, GRAPHIC 5. F I GU RE 1 2 . Pain More than Gain, or Gain More than Pain. Assume you start from the You Are only the favorable ones (since the downside doesnt count beyond a cerHere spot. In the rst case, should the variable x increase, i.e., move to the right on the horiWhy is the Concave Hurtartists, by Black Swan Events? tain point). Authors, and even philosophers are much better off zontal axis, the gains (vertical axis) are larger than the losses encountered by moving left, i.e., having a very small number of fanatics behind them than a large number an equivalent decrease theinhabited variable x. The graph illustrates how positive asymmetry (rst Now the idea that in has me all my lifeI never realized it could of people appreciate their work. The asymmetry number of persons who graph) turns who into convex (inward) curving and negative (second graph) turnsdisinto show so clearly when put in graphical form. Figure 13 illustrates the efconcave (outward) curving. To repeat, for a set deviation a variable, in equivalent amounts in like the work dont count there is no such in thing as the opposite of buyfect of harm and the unexpected. The more concave an exposure, the both directions, the convex gains more than it loses, and the reverse for the concave. ing your book, or the equivalent of losing points as in a soccer game, and more harm from the unexpected, and disproportionately so. So very this absence of negative domain for book sales provides the author with large deviations have a disproportionately larger and larger effect. a measure of optionality. Why is the Concave Hurt by Black Swan Events? Harm Harm Bene t Benefit both are enthusiastic and inuenPositive Black f f(X) X Further, it helps when supporters Event Size Event Size fX X Swan Now the idea that has inhabitedX me all f(X) my lifeI never realized it could Positive Black Event Swan Event show so clearly when put in graphical form. Figure 13 illustrates the effect of harm and the unexpected. The more concave an exposure, the more harm from the unexpected, and disproportionately so. So very large deviations have a disproportionately larger and larger effect.
Harm

O N T H E D I F F E RE N CE B E TWE E N A L A RGE S TON E AND A THOUSAND PEBBLES 273 Variable Variable Pain Pain X You are here X You are here Pain Pain

Black Tale_9781400067824_2p_all_r1.indd 178Swan Event fX

Event Size X F IGU RE 6. 1 3 . Two exposures, one linear, one nonlinear, with negative convexitythat is, GRAPHIC

Harm f(X)

Black Swan Event

Event Size X

Bene Benefit t f f(X) X

Positive Black Swan Positive Black Event Swan Event

Event Size Event Size X X

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concavityin the rst graph, positive convexity in the second. An unexpected event affects the nonlinear disproportionately more. The larger the event, the larger the difference.

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Next, let us apply this very simple technique to the detection of fraEvent Size Event Size Black Swan Event X Black Swan in Event gility and position the Triad.

S KI N I N TH E GA M E : A N TI FRAGILITY AND OPTIONALITY

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TABLE 7 7. ETHICS AND THE FOUNDATIONAL ASYMMETRY GRAPHIC


NO SKIN IN THE GAME SKIN IN THE GAME SKIN IN THE GAME FOR THE SAKE OF OTHERS, OR SOUL IN THE GAME

(Keeps upside, transfers downside to others, owns a hidden option at someone elses expense) Bureaucrats Cheap talk (tawk in Fat Tonys lingo) Consultants, sophists Businesses Corporate Executives (with suit) Theoreticians, data miners, observational studies Centralized government Editors Journalists who analyze and predict Politicians Bankers Fragilista Prof. Dr. Joseph Stiglitz Risk Vendors

(Keeps his own downside, takes his own risk) Citizens Actions, no tawk Merchants, Businessmen Artisans Entrepreneurs Laboratory and eld experimenters Government of city states Writers Speculators

(Takes the downside on behalf of others, or universal values) Saints, Knights, Warriors, Soldiers Expensive talk Prophets, Philosophers (in the pre-modern sense) Artists, Some artisans Entrepreneurs/Innovators Maverick scientists

Municipal government Great writers Journalists who take risks and expose frauds (powerful regimes, corporations) Rebels, Dissidents, Revolutionaries (They would not engage in vulgar commerce) Nero Tulip Taxpayers (not quite voluntarily soul in the game, but they are victims)

Activists Traders Fat Tony

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