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Gaining from Randomness

Posted on:October 15, 2021 at 06:39 AM (6 min read)

Tweet by Swapnil Agarwal

Change is the only constant.

When things go wrong, and they eventually will, there are different ways we deal with them. If something gets easily destroyed when stressed, it’s called fragile. If you can bounce back into shape when stressed, you’re resilient. Imagine the ability to become better with shocks and stress - that’s antifragile for you!

The term “antifragile” was coined by Nassim Taleb, one of the leading philosophers of modern time. Here’s a simple test of asymmetry: anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile.

The classic example of something antifragile is Hydra, the Greek mythological creature that has numerous heads. When one is cut off, two grow back in its place.

I find Taleb’s writing a bit hard to read but the content is pure gold. Here are some of his core ideas that I really resonated with:

  1. The need for Redundancy
    I loved this point as I always like to be someone who takes backups. As well as backups of backups. That’s how I keep my mind calm. You need to stock up for emergencies to avoid being wiped out completely. Here’s a relevant excerpt:

Nature likes to overinsure itself - we have two kidneys, and extra capacity in many, many things (say, lungs, neural system, arterial apparatus), while human design tends to be spare and inversely redundant, so to speak — we have a historical track record of engaging in debt, which is the opposite of redundancy (fifty thousand in extra cash in the bank or, better, under the mattress, is redundancy; owing the bank an equivalent amount, that is, debt, is the opposite of redundancy). Redundancy is ambiguous because it seems like a waste if nothing unusual happens. Except that something unusual happens — usually.”

  1. Skin in the Game
    Incentives run the world. Never ask the doctor what you should do. Ask him what he would do if he were in your place. You would be surprised at the difference.
    This is the reason why I love watching Shark Tank so much. Giving advice is easy. But if you put your money where your mouth is, I’m listening. Here’s a relevant excerpt:

“Opinions are dime a dozen. Anyone producing a forecast or making an economic analysis needs to have something to lose from it, given that others rely on them (what’s their portfolio?). People voting for war need to have at least one descendant (child or grandchild) exposed to combat. Engineers need to spend some time under the bridge they built.”

  1. Barbell Strategy
    This was my greatest takeaway. Stay rational in larger decisions. You have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. You have to survive to succeed. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk. Same with money. The odds of many lucrative things are in your favor. Real estate prices go up most years, and during most years you’ll get a paycheck every other week. But if something has 95% odds of being right, the 5% odds of being wrong means you will almost certainly experience the downside at some point in your life. And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks.
    Housing prices fell 30% last decade. A few companies defaulted on their debt. That’s capitalism. It happens. But those with high leverage had a double wipeout: Not only were they left broke, but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe. Here’s another relevant excerpt to drive the concept home:

“About all solutions to uncertainty are in the form of barbells.
Let us use an example from vulgar finance, where it is easiest to explain, but misunderstood the most. If you put 90 percent of your funds in boring cash (assuming you are protected from inflation) and 10 percent in very risky securities, you cannot possibly lose more than 10 percent, while you are exposed to massive upside. Someone with 100 percent in so-called “medium” risk securities has a risk of total ruin from the miscomputation of risks. This barbell technique remedies the problem that risks of rare events are incomputable and fragile to estimation error; here the financial barbell has a maximum known loss.”

  1. Keep your Options open
    I now also optimize for optionality and only engage in activities that have massive upside and minimal downside. I’m also trying to remove luck from my life. I take a lot of small risks, avoiding the ones with significant downside, to play the long game. Here’s are some relevant excerpts:

“Take literature, that most uncompromising, most speculative, most demanding, and riskiest of all careers. There is a tradition with French and other European literary writers to look for a sinecure, say, the anxiety-free profession of civil servant, with few intellectual demands and high job security, the kind of low-risk job that ceases to exist when you leave the office, then spend their spare time writing, free to write whatever they want, under their own standards.
Professions can be serial: something very safe, then something speculative. A friend of mine built himself a very secure profession as a book editor, in which he was known to be very good. Then, after a decade or so, he left completely for something speculative and highly risky. This is a true barbell in every sense of the word: he can fall back on his previous profession should the speculation fail, or fail to bring the expected satisfaction.”

Think about this: If you have to leave your current job for any reason, can you get it again whenever you want? Tell me in the comments below. If not, you are in a swamp my friend. Now is a good time to build a safety net. If you’re knocked off, think of how you can get back to a better place. If you felt like you could have skipped this post, you’re already at a powerful place with high leverage. Kudos!