Saturday, November 2, 2013

My 3 take-aways from Nassim Taleb’s Antifragile

“What do you do if you cannot predict?” is the title of chapter 13 in Nassim Taleb’s bestseller The Black Swan (TBS). Antifragile expands the 10 page chapter into a 500 page book. I find the question important and its exploration useful in my work on improving innovation effectiveness. And hence I turned to Antifragile.  But I am allergic to fat books, notwithstanding the kindle versions. Fortunately, the essence of the approach to the “What do you do?” question is presented in four of the twenty five chapters (chapter 9 to 12). Rest of the book is about the definition and the importance of antifragile and equally about ranting against Harvard Profs, bankers with black tie, Alan Greenspan and loads of philosophy. It wasn’t difficult to skim and skip through most of it. In this article we look at my 3 take-aways from Antifragile on the “What do you do?” question. But before that let’s look at the definition of antifragile.

What is Antifragile? Wind extinguishes candle and energises fire. Thus fire is benefited from the wind and candle is harmed by the wind.  Anything that has more upside than downside from random events (or certain shocks) is antifragilie. The reverse is fragile. In economic systems, fiscal deficit is a source of fragility and innovation is the source of antifragility. In personal life, corporate employment is fragile (to downturn) while tenured-prof-cum-fiction-writing is antifragile. A bestseller and your life may change.

1. Fragility is measurable, risk is not: Can you predict the chance of you getting fired from your job? No. But can you imagine the consequences of you getting fired? Yes, you can. Fragility is about the potential impact of rare events and not about predicting the occurrence of the events. As we saw in an earlier article, Ken Cox, Technical Manager of the control systems program of Apollo 13, didn’t have the foggiest idea of the probability of command module failure. However, it wasn’t difficult to imagine the consequences of such a failure.
One way to measure fragility is to calculate acceleration of harm due to unit change in something. For example, you may check additional harm from Fukushima reactor when tsunami goes beyond certain level. Similarly, you can check the additional delay in traffic when the number of cars on the road increases by certain percentage. If we detect acceleration of harm, it means the system is fragile.

2. First step is to reduce fragility: Taleb says – the first step towards antifragility consists in decreasing downside rather than increasing upside. To make profits and buy a BMW, it would be a good idea to, first survive. In the movie, Million dollar baby, the boxing coach Frankie (Clint Eastwood) tells Maggie (Hilary Swank) following during a coaching session:
Frankie: You forgot the rule. Now, what is the rule?
Maggie: Keep my left up?
Frankie: Is to protect yourself at all times. Now, what is the rule?
Maggie: Protect myself at all times.
Frankie: Good. Good.
Unfortunately, one can never know all such harmful events or create a full-proof protection. However, one can reduce one’s exposure. For example, adding redundancy helps. Commercial aircrafts have redundancy built into almost all aspects of their design – engines, autopilots, instruments, pumps, generators, air and hydraulic systems, controls etc. Another way to reduce fragility is to keep a system as simple and small as possible.

3. Optionality is the key lever to antifragility: Thales, a Greek philosopher from Miletus in pre-Socratic era (perhaps a contemporary of Buddha), is one of the heroes of Antifragile. According to a story, Thales reserved olive presses ahead of time at a discount. The harvest turned out to be good and Thales rented the presses out at a high price when the demand peaked. What Thales bought was an option – right but not an obligation to use the olive presses. Options which allow you more upside than downside are vectors of antifragility.

In an earlier article we saw how Paul Buchheit spent 6-7 hours building a Gmail prototype involving content-targeted ads. In fact, he himself didn’t believe that the experiment would work. But he didn’t lose much in doing the activity and it led to the most successful business model for his employer – Google. Taleb says that low-cost trial-and-error activity like that of Paul can be seen as the expression of an option. The tricky part is to recognize the favourable outcome.

It was a pleasant surprise to meet Seneca, a Roman philosopher, in Antifragile. Seneca’s method to counter fragility was to go through mental exercises to write-off possessions. So when losses occurred you don’t feel anything. Anything you gain is a bonus! For example, Seneca started his journeys with almost the same belongings he would have if he were shipwrecked – a blanket plus a few things. Taleb calls this antifragility in its purest form. Isn’t that similar to Krishna’s advice of non-attachment to Arjuna?

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