I have been a fan of Nassim Taleb for around 5 years, having started out with Black Swan in 2008. Taleb’s traditional work has been focused around robustness, making systems less vulnerable (fragile) to Black Swan events (seeing as they can’t be predicted). Antifragility extends this thinking further, identifying ways to make systems benefit from shocks and stressors. Our own bodies benefit from minor stressors, a biological response known as Hormesis. To use weightlifting as an example, when you deadlift 100kg, your body sustains some damage, and then responds by not just repairing the muscle, but repairing it in a way that it is now capable of deadlifting 105kg.
One of the challenges in reviewing Taleb’s work is that he carefully writes his books so they can not be easily summarised, he writes his books for the reader, not for the reviewer. I know several people who have given up partway through one of his books because of his idiosyncratic writing style, but his ideas are worth taking the time to understand. So rather than try to summarise the book I’m going to outline the key concepts I drew from the book and finish by explaining how I’ve applied the concepts of antifragility on my own portfolio (and life) strategy. I include the concept of robustness in my thinking already so I’m not going to talk much about that here.
Antifragility as optionality:
Options (in the financial sense) have an asymmetric payoff. If you are writing put/call options, you are accepting a small, certain payoff from the person taking the option. So you do not want large volatility. A person who buys an option wants volatility, so that their option increases in value. It doesn’t cost a lot to buy a deep out-of-the money option (eg AUD/YEN calls that exercise at 104 Yen = $1AUD. At time of writing the Yen is at 95.27). So the option is cheap because such a large move in the next 6 months is unlikely. But if a disaster happens and the Yen devalues to 120 to the AUD, suddenly you have a massive payoff.
Optionality can also be characterised outside finance. It’s the analogy of planting seeds, it doesn’t matter how unlikely the payoff is, all that matters is that you have a lot of them, and some of them will pay off. You are assuming that the expected value of the aggregate payoffs is higher than the cost of planting these seeds, something I’m generally confident in if the option is cheap because of 2 reasons:
- The more unlikely an event is, the less accurate an estimate of its probability will be
- People in general underestimate the value of extremely cheap options (like being polite)
It’s human nature to take a guaranteed small payoff, while ignoring the hidden risks, analogous to picking up coins in front of a steamroller. You steadily profit for years, and then suddenly, your cumulative returns are wiped out in a matter of minutes. Almost every single transaction has some asymmetry to the payoff, and the golden rule is that if you aren’t sure who the sucker is in a transaction, it’s you.
Taleb has spoken on the Barbell strategy in his previous books, albeit more through the traditional lens of what he refers to as “vulgar finance”. A barbell portfolio consists of 90% cash with 10% spread across a large amount of cheap options, so your downside is limited to a 10% loss against the possibility of unlimited upside. During times of low volatility you are likely to break even or lose a little, so you are chasing large volatility so that your options pay off hugely. This is an antifragile portfolio.
The idea is extended in antifragility talking about career choices. If you want to become a novelist, better to choose a boring, stable job such as civil servant during the day, and then write at night, rather than become a journalist and write as a career. Albert Einstein came up with his theory of relativity while working as a patent clerk.
The barbell can also be applied to health. It is better to drink liberally 5 days a week and then totally abstain from alcohol for 2 days, than to drink a smaller total amount of alcohol spread evenly across 7 days a week. It is better to lift 100kg once, than to lift 10kg 10 times. Avoid clinical evenness and instead regularly surprise any system you rely on, so that it becomes hardened against stressors and stronger as a result.
The idea of Via Negativa is that it is better to remove something harmful from a system than to try to add something positive. I haven’t watched the news in over year, because 99% of it is complete crap, and a waste of brain cycles. If something important happens, I’ll surely hear about it from somebody else. By removing news from my life, it has improved my life and my ability to process information because I’m not distracted by the noise.
When I’m analysing a stock to invest in, my first step is to try and qualify out (find a reason not to invest) because then I can safely move on without wasting time and effort trying to justify how some perceived positive outweighs a dealbreaker negative. More information doesn’t necessarily lead to better decisions, and your time is better off identifying the 2 or 3 key factors that will influence an outcome, rather than worry about 20 others that are of not real importance, and just serve as red herrings.
It is human nature to intervene where doing nothing is probably better, because it feels more productive to interfere than allow things to run their course. A frequent application of this concept applies to healthcare, where Taleb cites as an example, an empirical study on hypertension treatment. The study confirms that treatment of hypertension only improves the patient’s condition when their systolic blood pressure is above 170, while treatment for those below 170 receive little benefit but are still exposed to the side effects.
This is just an example but Taleb cites many others in his book, which can be boiled down to the general rule of thumb, to “avoid intervention unless the condition is serious, and if it isn’t rely on Mother Nature who has a better track record than new treatments”. Another example is with smoking, where not smoking has saved more lives than every medical breakthrough since penicillin. So if you want to live longer, health foods and antioxidants are going to have a minimal impact, just avoid smoking (and occasionally starve yourself).
How I have applied the antifragility concept to my own life
Diet & Health
Rather than eat moderately healthy all 7 days per week, I fast on Fridays until dinner, and then pig out on Friday night and Saturday during the day. I have 2 alcohol-free days per week. I was never big on vitamins but have just focused on eating reasonably healthy with the odd fast and odd lapse. I don’t smoke, and exercise moderately. There’s not much point focusing on optimising my health much further because I’m already 90% of the way there. In fact, smoking outweighs all other health habits so heavily that any smoker who gives health advice can rightly be called an idiot, to their face.
Given the upcoming volatility I’m about to flip my portfolio into mostly cash, including my super, and just sit on it until some good investment opportunities arise. I’ve found a few already (mostly mining focused) where I’m making small investments $1000-$2000 to capture big upside. I’m not looking to make 20%, these are 10 baggers. Some will go to zero so it’s not a core component of my portfolio.
I’m also dipping my toe in the water with derivatives. Right now it’s purely vanilla calls/puts, on currency pairs. I can take an option on an EUR/USD contract for around $40 which is 10,000 units for 180 days. Sure they are deep out of the money but they don’t have to move much for me to cash in big, and that’s the idea. So I am long volatility. It’s a pretty pedestrian derivative portfolio but I’m happy to take things slowly here.
Because I have low living expenses, low debt, and a strong professional network I’m already pretty robust, so capturing some antifragility is something I’d only consider after getting these things in place. Antifragility is minor in comparison to robustness, because not being robust opens you to getting screwed, while not being antifragile only means you miss out on capturing the upside.