N ASSIM N ICHOLAS T ALEB : T O P REVAIL IN AN U NCERTAIN

W ORLD , G ET C ONVEX
Laurence B. Siegel
July 2013

Investment professionals know the value of a convex bond — it gains more from
falling rates than it loses from rising ones. According to Nassim Nicholas Taleb,
people and institutions can and should position themselves to be convex. Indeed,
they should be antifragile — ready to gain from disorder or uncertainty.

That is the theme of the provocative, sometimes playful, and often infuriating book,
Antifragile: Things That Gain From Disorder, by Taleb, a philosopher and
businessman.

Say that a shock to the environment causes you to have an equal probability of
moving left or right along the x-axis in Figure 1 below. Your well-being is on the
y-axis. You stand to gain more from a move to the right than you stand to lose from
an equal move to the left, so you’re better off with the shock than without it.

You’re convex.

You’re not just “not fragile” — that would be a straight line in the diagram. You’re
antifragile.

Figure 1: Why it’s good to be convex

Source: Taleb, Nassim. 2012. Antifragile: Things that Gain from Disorder. New York:
Random House, p. 273.
Convexity refers to the shape of the curve in Figure 1. A convex curve bends away
from the origin, the point where the x and y axes cross. A curve that bends the other
way is concave. Things that are convex benefit from uncertainty, while things that are
concave are hurt by it. The book argues that in a world in which predictions are
mostly useless, we want to be convex.

Instead of using the term “convexity” throughout, Taleb renamed this principle
antifragility. He didn’t think convexity would resonate with most readers, who are not
investment professionals. Moreover, antifragility is not just robustness. Antifragility is
as distant from robustness as robustness is from fragility. Unlike a robust person or
system, an antifragile one is actually made better off by stress or disorder.

The rest of Taleb’s weighty book is an elaboration of this neat idea, filled in with
characters familiar from the author’s previous works: Fat Tony, an unlettered but wise
securities trader; Nero Tulip, a ringer for Taleb himself; and the very real Robert
Merton. Taleb regards Merton, who developed an option pricing formula, as the
worst of a large crowd of Nobel-decorated charlatans. Taleb calls these people
“fragilistas” and argues that their theories and actions have weakened financial
institutions. In Taleb’s view, Merton’s option pricing formula, developed with Fischer
Black and Myron Scholes, was unoriginal and used “fictional mathematics.” Taleb also
criticizes Merton for his role in the 1998 Long-Term Capital Management fiasco.1 The
writing of Antifragile seems to have been motivated by Taleb’s anger at the fragilistas.
He blames them for creating the conditions that led up to the crash of 2008, in which
institutions and firms that were thought to be strong were stress-tested by events and
found to be hollow.

Antifragile is the third book in Taleb’s “Incerto” (Italian for uncertain) trilogy. The first
two books in the trilogy, Fooled by Randomness and The Black Swan, have made
Taleb the “hottest thinker in the world,” according to the London Times. Fooled by
Randomness is Taleb’s best book, followed by The Black Swan. The current volume is
too long and disjointed to join his earlier ones on my top shelf. But if you can tolerate
the pretension of a writer who gives Italian names to collections of his English-
language books, Antifragile is a worthy read. It is a valuable extension of Taleb’s
earlier work on the themes of randomness and unpredictability.

A NTIFRAGILITY IN B USINESS AND M ARKETS

For a man of the markets who made his fortune in options trading, Taleb devotes
surprisingly little space in this book to business, finance, and investments. Mostly, the
book is a philosophy treatise. Taleb pays some attention to markets in his technical
chapters, 18 and 19, but they are not all that technical. They’re within easy reach of
the readers of this publication.

W HO ’ S A FRAID OF THE B IG B AD B ANK ?

I happen to like big banks as a customer. Wherever I travel, there’s a branch. They are
familiar with procedures such as wire transfers and foreign exchange. And there’s
usually someone who speaks English in each location.

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But as Taleb points out, big banks are fragile because their size magnifies mistakes in
a nonlinear way. In 2008, a French rogue trader named Jerome Kerviel bought $70
billion in stocks for the account of the bank Societé Générale, stocks that the bank
was not supposed to own and therefore had to sell immediately. The massive sell
order caused a 7% dip in the French equity market and a larger decline in the stocks
actually sold. The net result was a $6 billion loss for the bank. (The bank’s net income
was $3.6 billion in 2011 and $1.6 billion in 2012.)

If 10 banks had existed instead, with total assets equaling the actual asset size of
Societé Générale, and 10 “Micro-Kerviels” (Taleb’s phrase) had performed the same
dastardly act on different days, the market would have absorbed the pressure without
a ripple. There would have been no losses.

Just a few weeks before Kerviel’s purchase, Taleb made a presentation to the Societé
Générale board and was “heckled relentlessly by Kerviel’s boss and his colleague, the
head of risk management. … Everyone ignored me, as if I were a Martian.” Taleb
reflects that Kerviel’s mistake was attributed to bad controls or to greed, but, “The
problem is … the fragility that comes from size.”

W HY F ANNIE M AE W ENT U NDER

Taleb presents a simple rule of thumb for assessing the health of a company facing
volatile conditions. If sales increase 10%, will profits increase less than they would
decrease if sales drop 10%? If so, that company is fragile and will not withstand much
volatility. Its problems will compound downward in a death spiral, which is what
happened to Fannie Mae.

But Taleb had difficulty getting his measure used. “It looked simple, too simple, so
the initial reaction from ’experts’ was that it was ‘trivial.’” For fun, Taleb later joined
with the mathematicians Raphael Douady and Bruno Dupire to express “this simple
idea using the most opaque mathematical derivations, with incomprehensible
theorems that would take half a day (for a professional) to understand.” Then, he says,
experts took him seriously.

A NTIFRAGILITY IN E VERYDAY L IFE

As nearly all “big think” books do, Antifragile then applies his favored concept to
virtually everything. An example, first set forth in The Black Swan but elaborated in
Antifragile, is his recipe for success: “One foot in Extremistan, one foot in
Mediocristan.” Taleb says people should position themselves in both of these fictional
places. Mediocristan is where the uncertainties of life are smoothed out, and
Extremistan is where someone can benefit from them.

In Mediocristan, Taleb argues, no one is much more successful than anyone else
despite real differences in skill. In Extremistan, the winner takes almost all. A very
successful dentist in Mediocristan probably earns no more than three or four times
what a very unsuccessful dentist earns, despite being more than four times as skillful.
The rewards for being spectacular just aren’t there.

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Meanwhile, LeBron James, lately of basketball’s Miami Heat, lives in Extremistan. He
earns in a week what a very well paid high-school basketball coach earns in 10 years.
Maybe he’s that good, but a better explanation is that most spectators are only
interested in seeing the top stars, who can therefore command paychecks way out of
proportion to their talent.

Taleb would argue that the dentist’s job is antifragile — people will always get
toothaches – while James’ is fragile, with dozens of younger players eager to cut him
down to size. Which road should an ambitious person pursue? Ideally both, since the
antifragile activity provides a lifetime of paychecks (including to those who are only
average) and the fragile one conveys the opportunity to really excel. My son, who as
far as I know has not read Taleb’s books, is pursuing this strategy successfully: he’s a
touring rock musician who also gives guitar lessons. While we can’t all have such a
nicely balanced portfolio of jobs, it does make sense to try.

E AT LIKE A C AVEMAN , L IFT LIKE A C AVEMAN

Some of Taleb’s applications of his favored principle are pretty farfetched. Taleb
notes that the human body seems well adapted to short periods of deprivation, so
that people who eat irregularly thrive and avoid contracting diabetes. He also
believes, as do many people, that what humans ate when we were evolving in
primitive conditions is healthful, so he recommends a “paleo” diet, one that
emphasizes the lean meats, fruits, vegetables, and unprocessed foods that were
available to our hunter-gatherer ancestors.

Taleb, Greek Orthodox by background, finds that the many fasts observed by that
religion correspond well to the pace of food intake he favors. The lifestyle sounds
terrible. The Greek Orthodox monks of Mount Athos, who follow the fasting schedule
rigorously, are famously undernourished (see Michael Lewis’ book Boomerang). But
Taleb himself is big and strong, as he is inordinately fond of boasting. Wanting to
appear more physically intimidating, Taleb took up weightlifting, but (of course) not in
the conventional way. He only lifts the heaviest weight he can handle, and avoids
repetitions – roughly what a caveman would have done — believing this method to
be both time-efficient and good for his muscles and bones. Maybe it is, but I hope his
joints and ligaments are also antifragile, or he’ll have a tough time getting around in
20 years. One cannot apply a single clever idea to every possible situation.

F IGHTING THE L AST W AR

Another shortcoming of Antifragile is that its prescriptions seem designed to win the
last war, the war to keep the global financial system from collapsing. While this could
happen again, the problems that now seem most acute to me are not generally ones
of systemic or even corporate fragility. I am more concerned about slow growth, high
unemployment, skill mismatches in the labor market, massive government spending
and debt, and a mushrooming number of retirees and disabled people per active
worker. These difficulties are not infrastructural — as financial-system problems are —
and the quest for antifragility has limited applicability to them.

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The ongoing pension and Social Security crisis, however, is a fragility problem par
excellence. The pay-as-you-go Social Security system depends on an ever-expanding
pool of worker-taxpayers and collapses if the next generation is smaller than the
current one. Thus it is intrinsically fragile. But as Paul Samuelson (who helped design
the system) confesses, it was intended to be that way.2 Some fragile institutions were
put into place to satisfy powerful political desires — in the case of Social Security, the
desire to keep benefits high and taxes low — and it is very hard to undo these
decisions or to avoid them in the first place.

T HE C RASH OF 2008: B LACK S WAN OR B LACK T URKEY ?

Taleb’s reputation soared when the crash of 2008 appeared to vindicate his concern
about Black Swan events, but his ongoing characterization of that particular market
decline as a Black Swan is classic Talebian overstatement.3 A black swan is an event
that is so unlikely that it cannot be foreseen from past history and so influential that, in
the words of the University of Chicago economist Thomas Coleman, it “completely
changes the terms of discussion.”1

As I pointed out in a 2010 Financial Analysts Journal article, “the crisis was a black
turkey, an event that is everywhere in the data — it happens all the time — but to
which one is willfully blind.”4 Without looking very hard (that is, leaving out oddball
asset classes and emerging markets), I found 10 other financial-market crisis of
comparable severity in the last 110 years. They affected stocks, bonds, gold, and oil.
The most recent was only 11 years ago. To call the crash of 2008 a black swan is more
puffery than science.

T HE R ELATIONSHIP B ETWEEN S CIENCE AND T ECHNOLOGY

An interesting line of thought pursued by Taleb is that technology precedes and
motivates scientific discovery. Most people think of this process as occurring the other
way around, with scientific advances enabling later technological improvements. An
example of Taleb’s theory from finance is option trading, which began in the days of
the Greek merchant and philosopher Thales. Option trading was a refined art for
centuries before the French mathematician Louis Bachelier and others who came later
made a mathematical science of it. The existence of the options and of a body of
knowledge used to trade them inspired scientists to formalize the various option
pricing equations that now decorate finance textbooks.

This story, which is accurately told, supports Taleb’s more general hypothesis that
scientists do not typically create disembodied thoughts for which engineers and
businessmen later find applications. Instead, the relationship between technology and
science is two-way and organic. This thought is immensely appealing and, for many
readers, sheds new light on the way that invention and innovation take place. But
scientists should not shy away from basic research with no visible application.
Sometimes, that approach really does turn up something valuable.

1
Thomas S. Coleman, “Black Swans and Brown Turkeys.” Unpublished.
http://www.closemountain.com/papers/brownturkeys.html. Coleman is executive director of the Becker
Friedman Institute at the University of Chicago.

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M Y L IBRARY ISN ’ T B IG E NOUGH
I’d like to think I could study any subject covered in a popular book without building
a new wing on my house to store the further reading. Taleb makes me wonder. In
one particularly packed six-page section (pp. 309-314), he drops the names of
Simonides of Ceos, Raymond Aron, Ovid, “the French-Russian poetess Elsa Triolet,”
Jules Verne, H. G. Wells, George Orwell, Hero the Alexandrian, Leonardo da Vinci,
David Edgerton, Homer, Plato, “the very modern Shakespeare” (agreed), Phidias,
Michelangelo, and “the great Canova.” Is this my idea of fun? Sure. But it is also the
signature of an insecure author who is trying too hard.

T ALEB THE M AINSTREAM A CADEMIC

A notable irony is that, while Taleb lampoons conventional finance — and academic
knowledge in general — in his popular writings, he is also a serious scholar and
professor who is directly engaged in the academic world. His title at Polytechnic
Institute of New York University, distinguished professor of risk engineering, suggests
he might actually be a fragilista in his day job. I don’t think he is, but I don’t think his
nemesis Robert Merton is either.5

R EAD THIS B OOK (B UT B RING A G RAIN OF S ALT )

Any anti-intellectual intellectual book — any book that says there are earthier roads to
wisdom than book learning — is going to have shortcomings. The main shortcoming
of this genre is that the great thinkers deserve more respect than the writer is inclined
to give them. Antifragile fits this description. But if readers have a big vocabulary or
would like to acquire one and do not mind an author whose persona alternates
between bullying know-it-all and charming raconteur, they will find much of
Antifragile to be thought-provoking fun.

1
Taleb attributes the option pricing formula to “Louis Bachelier, Ed Thorp, and others” (The Black Swan,
p. 282). I don’t know Thorp’s work very well, but Bachelier’s formula certainly anticipated major aspects
of Black-Scholes-Merton, without being identical to it.

2
http://gregmankiw.blogspot.com/2011/09/paul-samuelson-on-social-security.html

3
While the statement is not in Antifragile, it is very much a part of Taleb’s ongoing conversation with the
investing public. The BBC’s Janan Ganesh writes, “Taleb has labelled the 2008 financial crash as a ‘black
swan’ event” (http://www.bbc.co.uk/news/uk-politics-17287845). In the process of raising funds from
investors for his tail risk portfolio insurance product, called Black Swan Protection Protocol, Taleb has
been quoted as saying that his fund doubled its money in the crash year of 2008.

4
http://www.cfapubs.org/doi/pdf/10.2469/faj.v66.n4.4. Coleman and I disagree on whether the turkey is
black or brown.

5
Merton and other academics had a substantial role in the building of Long-Term Capital Management,
a hedge fund that failed in 1998 after racking up huge leverage-related debts. Although this failure made
the financial system more fragile, it is just a highly visible example of the principle that, while businesses
are supposed to externalize (get other people to pay their costs or losses) to the extent made possible
by law, the “other people,” usually represented by governments, are supposed to stop them. The
knowledge that a bailout was almost certainly forthcoming thus made it attractive for LTCM to take
extraordinary risks, because they faced only the limited downside of going out of business (and later
starting new businesses). Merton and the other academics are not blameless because they knew their

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strategy might wind up exploiting unsuspecting taxpayers, but it seems clear that they understood the
risks they were taking.
A clue to Taleb’s animus toward Merton, however, is in the footnote on page 282 of The Black
Swan: “I am selecting Merton because I found him very illustrative of academically stamped
obscurantism. I discovered Merton’s shortcomings from an angry and threatening seven-page letter…”
Thus, there are personal reasons for it.