Re-posted from the Atlastory blog.
In Nassim Taleb’s new book “Antifragile,” there’s an interesting segment about how an entire system can be antifragile (benefiting from variability / disorder / stressors) precisely because its individual parts remain fragile (harmed by variability). A few examples:
The engineer and historian of engineering Henry Petroski presents a very elegant point. Had the Titanic not had that famous accident, as fatal as it was, we would have kept building larger and larger ocean liners and the next disaster would have been even more tragic. So the people who perished were sacrificed for the greater good; they unarguable save more lives than were lost. . . . Every plane crash brings us closer to safety, improves the system, and makes the next flight safer.
Thankfully the errors we encounter while developing Atlastory don’t involve anyone dying. But the same principle applies — every bug, problem, server crash, chokepoint, or design flaw we encounter leads to a better system. We want to run into problems, because that means we know about them and can now fix them — eventually making the user experience better as a result.
“Some businesses love their own mistakes,” Taleb continues. “Reinsurance companies, who focus on insuring catastrophic risks . . . manage to do well after a calamity . . . All they need is to keep their mistakes small enough so they can survive them.”
The more you benefit from low-downside mistakes, the more “antifragile” your business is. I see this as a function of both the industry you’re in and the internal culture of the company.
If everyday work and life is viewed as a science experiment (the circle of observe > guess > test > interpret), then any screw-ups or failures are a good thing in the end. You know something’s wrong, and you can work on fixing it. Taleb again: “…every attempt becomes more valuable, more like an expense than an error. And of course you make discoveries along the way.”
Continual improvement is everyday life in software development, but it is only just catching on for personal development.
If you want to build a ship, don’t drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea… — Antoine de Saint Exupery
The little dissatisfaction which every artist feels at the completion of a work forms the germ of a new work. — Berthold Auerbach
Whatever few awards are presented for risk control, they’re never given out in good times. The reason is that risk is covert, invisible. Risk–the possibility of loss–is not observable. — Howard Marks
Actually, all education is self-education. A teacher is only a guide, to point out the way, and no school, no matter how excellent, can give you education. What you receive is like the outlines in a child’s coloring book. You must fill in the colors yourself. — Louis L’Amour
I like nonsense, it wakes up the brain cells. Fantasy is a necessary ingredient in living, It’s a way of looking at life through the wrong end of a telescope. Which is what I do, And that enables you to laugh at life’s realities. — Dr. Seuss
There is no terror in the bang, only in the anticipation of it. — Alfred Hitchcock
It is much harder to become independent if you are wealthy than to become wealthy if you are independent. — Nassim Taleb
Nothing is original. Steal from anywhere that resonates with inspiration or fuels your imagination … Authenticity is invaluable; originality is non-existent. And don’t bother concealing your thievery — celebrate it if you feel like it. — Jim Jarmusch (via Kirby Ferguson @ TED)
The cover story of the May edition of the Bloomberg Markets magazine discusses Nassim Nicholas Taleb’s affect on Wall Street:
On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley’s Manhattan offices on 47th Street and Broadway to address a group of the firm’s risk managers. His message: Your models don’t work.
Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests–Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said.
See the Full Article here
It’s always interesting to see what other investors or thinkers have on their bookshelf. In the introduction to the article, there’s a picture of Nassim Taleb in his library. Using the hard copy, I picked out a few books that Taleb has read (or hasn’t read, by Umberto Eco standards). These should be useful for expanding one’s network of mental models:
- Darwin’s Dangerous Idea, by Daniel Dennett
- Collapse, by Jared Diamond
- Guns, Germs and Steel, by Jared Diamond
- The Selfish Gene, by Richard Dawkins
- Rational Herds, by Christophe Chamley
- The Perception of Risk, by Paul Slovic
- Knowledge and Decisions, by Thomas Sowell
- Serendipity, by Royston Roberts
- The Construction of Preference, by Sarah Lichtenstein and Paul Slovic
- Evolutionary Dynamics, by Martin Nowak
- The Quark and the Jaguar, by Murray Gell-Mann
- Why Beauty is Truth, by Ian Stewart
- The Eastern Origins of Western Civilization, by John Hobson
- For and Against Method, by Imre Lakatos and Paul Feyerabend
- Probability via Expectation, by Peter Whittle
- Probability Theory, by E. T. Jaynes
- Plight of the Fortune Tellers, by Riccardo Rebonato
- Imperfect Knowledge Economics, by Roman Frydman and Michael Goldberg
- The Business of Options, by Martin O’Connell
- The Logic of Scientific Discovery, by Karl Popper
- Unmaking the West, by Philip Tetlock
On another note, I have joined the team of authors at Reflections on Value Investing. If you haven’t already, head over and subscribe to the RSS feed. It’s a must for any value investor. Although this was posted at both sites, for the most part, my occasional posts at Reflections will have different content than FutureBlind.
Studying Students’ Reaction to Chance
An interesting article on a contest held at University of Virginia’s Darden School of Business. The contest split 269 students into two groups:
1. The first chooses one of two unmarked briefcases. One has a check for $18,750, and the other has nothing. Before opening the case, they are offered a chance to receive a fixed amount of cash in its place. It’s their choice.
2. The second group is given the cash upfront, and then offered the chance to buy one of the briefcases. For the student mentioned in the article, he was given $3,000. He could have walked away with the $3k, or bought the right to choose one of the cases.
The research showed that “buyers” (the second group) were more likely to keep the cash. Of course that isn’t rational, because the expected value of the case selection is $9,375 (a 50% chance of getting the $18,750 check).
The students admitted the decision is easier on paper, and more difficult when you have a handful of cash.
Overall, I’m glad Darden is doing research like this and teaching the students about decision making in the face of uncertainty. More schools should be doing the same.
For anyone who has read the book Fooled by Randomness by Nassim Nicholas Taleb, the name Victor Niederhoffer may sound familiar (if you haven’t read the book, check out this article by Malcolm Gladwell). “The Blow-Up Artist”, a great article in The New Yorker, discusses Niederhoffer’s most recent financial troubles. Although Niederhoffer and Nassim Taleb are friends, after the events of the last two months I believe that Taleb has the last laugh.
Victor Niederhoffer is a well-known hedge fund manager who got his start managing a trading firm in the 1980s. From 1982-1990, he partnered with George Soros and ran the Fixed Income and Forex divisions of Soros’ firm. Niederhoffer has published two books: The Education of a Speculator (1996) and Practical Speculation (2003). Since 2001 he has run Manchester Trading LLC, which manages three small funds with total assets under management of about $350 million at the end of June. Manchester’s main fund had returned 50% annualized through the end of 2006, earning it a prize for best performance by a Commodity Trading Adviser.
Despite the level of respect for him in the trading world, Niederhoffer is most well known for the blow-up of his hedge fund in 1997. After the Asian financial crisis and a 7% one-day drop in the Dow, Niederhoffer Investments lost a majority of its capital and was forced to close down. These losses wiped out virtually all of the gains the fund achieved racking up 35% annualized returns since inception. Continue reading “The Blow-Up Artist”