Nassim Nicholas Taleb, author and professor of risk engineering at New York University's Polytechnic Institute, gave us black swans: large events that are both unexpected and highly consequential.
"In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term. Still, through some mental bias, people think in hindsight that they 'sort of' considered the possibility of such events; this gives them confidence in continuing to formulate predictions,” Taleb writes for The Wall Street Journal.
“But our tools for forecasting and risk measurement cannot begin to capture black swans. Indeed, our faith in these tools make it more likely that we will continue to take dangerous, uninformed risks… If we could not measure the risks of potential blowups, what were we to do? The answer is simple: We should try to create institutions that won't fall apart when we encounter black swans—or that might even gain from these unexpected events.”
Taleb describes this resilience as antifragility, the opposite of fragility which is the quality of things that are vulnerable to volatility. “To deal with black swans, we instead need things that gain from volatility, variability, stress and disorder. My (admittedly inelegant) term for this crucial quality is ‘antifragile’."
Taleb offers five rules that can help us to establish antifragility as a principle of our socioeconomic life.
-- Think of the economy as being more like a cat than a washing machine (i.e. the world does not run like a sophisticated home appliance).
-- Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.
-- Small is beautiful, but it is also efficient.
-- Trial and error beats academic knowledge.
-- Decision makers must have skin in the game.
"In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term. Still, through some mental bias, people think in hindsight that they 'sort of' considered the possibility of such events; this gives them confidence in continuing to formulate predictions,” Taleb writes for The Wall Street Journal.
“But our tools for forecasting and risk measurement cannot begin to capture black swans. Indeed, our faith in these tools make it more likely that we will continue to take dangerous, uninformed risks… If we could not measure the risks of potential blowups, what were we to do? The answer is simple: We should try to create institutions that won't fall apart when we encounter black swans—or that might even gain from these unexpected events.”
Taleb describes this resilience as antifragility, the opposite of fragility which is the quality of things that are vulnerable to volatility. “To deal with black swans, we instead need things that gain from volatility, variability, stress and disorder. My (admittedly inelegant) term for this crucial quality is ‘antifragile’."
Taleb offers five rules that can help us to establish antifragility as a principle of our socioeconomic life.
-- Think of the economy as being more like a cat than a washing machine (i.e. the world does not run like a sophisticated home appliance).
-- Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.
-- Small is beautiful, but it is also efficient.
-- Trial and error beats academic knowledge.
-- Decision makers must have skin in the game.
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