Monday, November 10, 2014

Anti Fragility, Robustness and Risk.

A great video of a conversation between Nassim Taleb & Daniel Kahneman discussing the concept of Anti-fragility. Interesting to see how two deep thinkers discuss the philosophical challenge of anti-fragility.

Taleb argues that Greenspan, in trying to smooth out the economy to create no more boom or busts, actually caused a big bust.

Likewise it seems obvious that the Fed in smoothing out the GFC downside with QE, have created the current stock market boom cycle and likely future inflationary boom.

Controlling stressors (smoothing), leads only to the increased Magnitude of events later, and blowouts in volatility.  This creates Fragility in the system, not robustness or anti-fragility.  In other words the system does not learn - the risks have not changed (only the direction).

Anti-Fragility he demonstrates in the Airline analogy, is that everytime there was a crash (certainly a volatile event), the airline industry and aircraft makers, made changes to their products to decrease the chance of another same-cause highly volatile event.  Airlines became safer through these changes and volatile events occurred less, and then usually for different reasons.  "You never let the mistake go to waste."

The finance industry eliminated small risks at the expense of large risks, the airline industry mostly eliminated large risks, though small risks do remain.  We can handle the small risks, and therefore survive the big risks - most likely.  More so, taking the small risks, benefits and advances our lives - travel, opportunity, wealth and the like, whilst less exposure to the big risks negates the downside.

I think that is Anti-Fragility.  (I need to read this book when I can get through the ten others I have bought).

There is a lot more in this video to get my head around.

No comments:

Post a Comment