Nassim Nicholas Taleb on Antifragility
Jan 16 2012

Nassim Taleb, author of Fooled By Randomness and The Black Swan, talks with EconTalk host Russ Roberts about antifragility, the concept behind Taleb's next book, a work in progress. Taleb talks about how we can cope with our ignorance and uncertainty in a complex world. Topics covered include health, finance, political systems, the Fed, your career, Seneca, shame, heroism, and a few more.

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John Kay and Mervyn King talk about their book, Radical Uncertainty, with EconTalk host Russ Roberts. This is a wide-ranging discussion based on the book looking at rationality, decision-making under uncertainty, and the economists' view of the world.
Nassim Nicholas Taleb on Black Swans
Nassim Taleb talks about the challenges of coping with uncertainty, predicting events, and understanding history. This wide-ranging conversation looks at investment, health, history and other areas where data play a key role. Taleb, the author of Fooled By Randomness and...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Steve Fritzinger
Jan 16 2012 at 10:41am

On the “do nothing” criticism of Hayek.

It’s it strange that when a person gets into financial trouble, people say “cut your expenses, pay off your debt, prioritize your needs, and live within your means”, and no one ever complains that this isn’t positive advice? People will even pay to have some one tell them this obvious truism.

But when it’s governments which are in crisis, anyone suggesting the exact same advice is accused of not having a plan.

Krzysztof Ostaszewski
Jan 16 2012 at 12:46pm

Russ Roberts comments in this podcast about how the European Union bureaucracy works — People say that by being so large it can be more efficient, but, Russ says: “Yes, if it were run by God, but it is run by people.” Russ — if you are religious, then, well: God runs the world. Interestingly, God does not run it through a centralized bureaucracy.

Jan 16 2012 at 2:12pm

Taleb claims not to want to regulate society but uses numbers (e.g. the $400B compensation of managers and the $5T loss of the “stock market”) that imply that he’s set his sights well beyond managers in a position to take advantage of TBTF. He can’t stand that shareholders cut deals with their agents that he wouldn’t do, and he impugns the intelligence of the shareholders and the ethics of the agents. Then he claims he doesn’t want to regulate people’s lives. Disgusting. Please don’t bring this guy back again.

Russ Roberts
Jan 16 2012 at 3:08pm


I don’t understand your complaint. Because Taleb disapproves of something, you presume that he wants to regulate people’s lives? Evidence, please?

Jan 16 2012 at 3:40pm

I am surprised that I have not heard Taleb advocate free banking as a more resilient monetary system. In fact he does not spend as much time supporting the idea resilience through diversity as I expect given his view of tail risks.

Greg Linster
Jan 16 2012 at 4:00pm

I thought this was a fantastic episode, Russ. Your listeners may also enjoy reading Taleb’s answer to the 2012 EDGE essay question titled “Hormesis Is Redundancy“.

I’ve really enjoyed hearing guests like Taleb, DeVany, and Taubes talk about health. It’s painfully obvious that economists aren’t the only ones guilty of Platonicity.

Jan 16 2012 at 4:14pm

Another great podcast with Taleb, thanks for having him on Russ.

I enjoyed the portion about tail risks being compounded with added complexity. I hope Anti-fragility gives that idea a closer work.

Also, the view I got of Seneca from his previous work is somewhat different from what he spoke of this time. Did he mention how his view of stoicism evolved in this later writing? (if it did at all).

Jan 16 2012 at 6:15pm

Wow Russ he’s right there invoking Hammurabi’s Law as preferable policy using the example of the condemned architect. This is in the context of the world of “managers,” not just TBTF financiers in the more limited conversation later in the podcast. He did this in his NYT article too, saying “… cooks should taste their own cooking; engineers should stand under the bridges they have designed when the bridges are tested; the captain should be the last to leave the ship.” Or was that just about TBTF cooks?

Maybe you could show me where he equates “managers” for non-TBTF companies with the agents of non-SIFI (as determined by whom?) hedge funds who he feels should be able to make as much as they can because their investors are grown-ups unlike the “managers'” shareholders? I’ve been listening for him to say that for years (I was reading Taleb when he was still writing technical material about derivatives), and the closest thing I ever find is “I don’t want to regulate society.” I get enough of that from Mr. Obama to know that that sentence means nothing without material support, which seems lacking.

Jan 16 2012 at 7:41pm

I almost never get so much from single podcasts as I do when Taleb is at his best. This is one of his best, no doubt. When I listened to the derivatives of error rates on tails the second time, I got it. But I’ll have to listen a few more times until it sinks in.

I would add that I see a lot of this matter of anti-fragility in computing systems and it is quite true that anti-fragility is different than robustness and different than redundancy. It’s difficult for a lot of people to understand that not doing is often better than doing robustly. I’ll give an example.

I’ve been around since the very beginning of the web, and there was a time when there weren’t a lot of fonts, graphics, interactive features and advertising. You will find now that some of the worst websites are those that possess all of those winky blinkies, especially in ‘Web 2.0’. You now find tools like Flipboard, Feedly and Clearly that work to reduce all of those distractions from the text. Obviously there are developers at cross-purposes, some web developers who have spent lots of time making content embeddable into schmancy templates (and sometimes force you to click multiple times on their obscenly small pages) and others who have built tools that liberate the text from that content management prison.

And obviously, open source practitioners are invested in having the insides of their software be beautiful like the best cabinetmakers.

Jan 16 2012 at 11:55pm

Kevin: I don’t think Taleb cares what people do with their money or how much they make as long as he or I or You don’t have to bail them out of their stupidity.

So to turn it around, what are your proposals to prevent these too large and too unstable companies from socializing losses and privatizing gains? Another proposal I’ve heard is the Swiss banking model where owners and managers are liable for losses.

Jan 17 2012 at 5:00am

The solution to fragility in the financial system is not to treat TBTF banks like public utilities, but to have 100% reserve banking. The fractional reserve system is a fraud and shouldn’t be allowed to exist. When you’re talking about Hayek – 100% reserve banking is one of the main themes of the Austrian School.

Taleb thinks that the current system will fail and we’ll return to artisans and local government. Maybe we will, but it could take a long time before the current system (modernity) fails. Many countries have experienced a total failure of their financial system through hyperinflation, yet they’ve always come back and they’re playing the fractional reserve game again.

Jan 17 2012 at 5:03am

Thoughts on systems and their stressors:

If African women are strengthening their bodies and improving their posture by carrying 100-200 pound water jugs on their heads, why can’t female soldiers in the US Army be trained and conditioned to carry a combat load? Maybe they should use their heads.

More seriously, perhaps economic systems have more in common with inorganic systems than biological ones. Every schoolboy knows that, up to a certain point, a paper clip can be bent repeatedly without changing its shape or diminishing its strength. But bend it past a certain point and it cannot be returned to its original shape. Bend it repeatedly past that point and it eventually breaks.

Modern aircraft are equipped with strain gauges which monitor and report stresses taken by various components during flight. With the computer power available today, perhaps “strain gauges” could be developed and deployed throughout a banking system or an entire economic system which could indicate how much strain the system is experiencing and warning when the system is approaching the breaking point.

Thanks for another enlightening podcast.

Jan 17 2012 at 11:05am

I would humbly suggest Taleb looks at money itself.

It is involved in half of all transactions yet it is very unnatural in the sense that what else in nature is analogous to a fractional reserve banking system?

If banks were more like warehouses or intermediaries for borrowers and lenders, the size of debt, government, massive corporations that Taleb fears are so fragile would arguably never have gotten as big.

Edward C Cazier
Jan 17 2012 at 11:24am

I have listened to all the previous interviews with Taleb, and eagerly cued up this one once I noticed it had been downloaded on my iPod. I was not disappointed. As you point out, the fundamental concepts are not new, but the insights and applications to other social systems are very fresh.
I am a petroleum geologist, and deal with risk and uncertainty on a daily basis. Taleb’s insights have been great tools to convey these concepts to non-technical people (like economists) with whom I work.
One criticism, however. One of the greatest writers – maybe the greatest living writer – was a journalist: Gabriel Garcia Marquez.
This single error, however, does not disprove all of Taleb’s work.

Jan 17 2012 at 11:30am

This is all very interesting but suffers from selective history. In the Great Depression, the traders, etc. had skin in the game. There was no bailout of financial institutions. Did matters turn out better then? No. Taleb may be thinking like Praxelogue that any paper money system leads to overwhelming debt, but there are plenty of examples prior to paper money of governments taking on unsustainable levels of debt.

Tom Okeh
Jan 17 2012 at 1:51pm

Was there a point? When he got down to tangible hypotheses, they seemed things no one would disagree with (e.g., be anti-fragile). Even ‘too big to fail’ is an idea with less than 50% support in academia.

Jan 17 2012 at 2:12pm

Well, in the financial system we have regulators that stress test banks for different scenarios. The scenarios are predetermined ofc and so can’t encompass every possible future scenario.

A listed company on the stock exchange is put through stress tests daily as speculators and other market participants trade on their knowledge of the company and so aggregate information about it. The management reacts, bankruptcy or the market for control. There are companies that have been through a lot and others that have yet to see their first winter. Without more information than this one would perhaps prefer the more robust one (the survivor, hardened by many winters). I imagine I read something like this in Aaron brown’s red blooded risk

Listed banks are a bit more difficult to test in the same manner as their balance sheet (which they make money with) can be quite opaque to outsiders. Not mentioning off balance sheet activity.

Greater disclosure of the balance sheet might thus be desirable. And if Basel gives more leeway to banks in future on what securities they can use as capital reserves (corp than gov debt?) then banking might become really interesting and more of a business again as more central decisions are devolved to the bankers.

Some banks are more robust due to the way they choose do business (see handelsbanken and Niels Kroner) by not having their treasury carry loads of liquidity risk.

Many people are arguing for the more risky parts of buldge bracket banking being moved to hedge funds in a larger extent than what is already the case (more money than god- guy).

Then there’s the problem with the prime brokers that serve the hedge funds and other institutional investors. How can one make sure that they don’t blow up whilst performing their market making activities?

By having more stress testing somehow… that would register the pressure points the daily market run would make felt on the company’s hull as it sails the seas of high finance.

Perhaps, if the data analysis/nlp etc. crowd now hard at work at hedge funds would make their presence felt here on the ground instead of just in the financial stratosphere sitting on top of their mountains of data. Then, in that case, maybe we could get better instruments to guide us as we tumble through the markets.

Jan 17 2012 at 2:18pm

I always enjoy when Taleb is on but is there some way you can get him on a better connection. He tends to mumble and with the bad sound quality i cant make out a lot of what he is saying. Skype is crystal clear it sounds like hes calling on a phone from the 1920s.

Jan 18 2012 at 12:21am

Zathras: Indeed. There was a collective stupidity. That is a given in a human system. The cascading problem was debt; first the margin lending to traders, then as the downturn and crisis spread we saw the farm banks, manufacturer’s banks etc. fail.

Taleb’s idea is that a robust system handles failure by redundancy. If for example, in the 29 crash there wasn’t any margin debt, how would the selling dynamics been different? Even today when a market drops the participants are forced to liquidate positions at a loss to get cash to cover obligations. MF Global was borrowing against their clients collateral, and as their positions collapsed, there was no redundancy available.

A collapsed lung is an emergency situation calling for drastic measures. But if both collapse, you have three minutes. A leveraged financial system, a highly indebted country or corporation works fine until it doesn’t and the collapse is sudden and consequential. Far different from having a bad quarter which draws down on the cash reserves.

And by definition, leverage or debt diminishes the skin you have in the game relative to the whole.

Jan 18 2012 at 6:22am


Banks collapsed during the Great Depression because they were fractional reserve banks. When you have 100% reserves, a collapse of the financial system is impossible – even if the government defaults. The fundamental problem is that once fractional reserve banks start to collapse, the whole payment system is broken. There would be no reason for a bank run in a 100% reserve system.

Fractional reserve banking is like trading on margin. A bank deposits money in the central bank (reserve requirements) and borrows at least 10times as much from the central bank. Then they lend it out and collect interest. If the value of their collateral goes down, they never get a margin call because the central bank doesn’t want them to fail. So the central bank buys some collateral from the bank (lender of last resort).
The whole system is inherently fragile and will always lead to crises (= one of the most important insights of the Austrian School).

The purpose of every central bank is to save commercial banks when the “music stops playing” (Charles O. Prince) and to monetize government debt. All the academic discussions about “monetary policy” are total nonsense.

Jan 18 2012 at 6:30am

I’m pretty sure the intelligence of the shareholders and the ethics of the agents impugn themselves just fine. Unless the managers are supposed to be paid 10 cents for every dollar they lose their customer. And if that’s the case I’m off to Wall Street since I too can toss fistfuls of cash into a roaring fire!

Shayne Cook
Jan 18 2012 at 7:42am

I was intrigued by all of this (as I usually am of Taleb’s thoughts and writings), and something occurred to me during your discussion of the Rubin payoff and the public bailouts in general. The most systemically damaging artifact of the 2008 “Bailout”was not the amount of money ($700 Billion) or even necessarily the recipients.

The most abominable and damning artifact of the “Bailout” (and all publicly funded bailouts, for that matter) is that it shattered the notion that voluntary private contracts are indeed private. The “Bailout” enshrined the notion the the Federal Government has a RIGHT, in all cases, to insert itself into ANY and ALL private contracts, and commit public monies to satisfy the private obligations of the contracting parties. At that point, the United States ceased to be a nation of laws, and became a nation of the judgement of men – specifically in the case of the 2008 “Bailout”, the judgement of the Secretary of the Treasury, a political appointee.

It seems to me that the solution to “too big to fail” phenomena is a Constitutional Amendment that specifically precludes the Federal Government from intervening, with public monies, in any private contract under any circumstances.

Jan 18 2012 at 8:09am

Taleb’s work is a worthy read, but I hope he broadens the roster of the “fragilistas” to include more than just the “elites” you all discussed. The economics of DEFINED BENEFIT PENSION PLANS for Public Employees is a glaring omission from his list. These plans are verifiably mispriced as free options (see Anrew Biggs work on this, e.g.), often have return enhancing provisions that make “look back” options sane, they arise from the worst of perverse agency-public choice flaws, and they will actually affect taxpayers far more than whether a banker got too fat a bonus (on which he paid the state 60% in taxes).

Moreover, I also hope his discussion ends up being more nuanced about exposing the qualititative difference between achieving optionality of returns through arms-length negotiations compared to those achived through coercion, fraud, or fiat. Market forces aim to chip away at free or underpriced opitions. Additionally, I would love for him to include not only big shots among those benefitting from free options.

Jan 18 2012 at 8:31am

Derek, I certainly agree with you that margin trading was a huge problem. It’s important to realize though that this was a problem of too little governmental interference instead of too much. Who else would ban margin trading other than the government?

Andrej, you appear to have missed the second part of my post. Economic crises were just as bad and lasted much longer when there was a gold standard. Governments still could rack up huge amounts of debr, and the absence of a modern monetary system severely tied the hands of those who wanted to do something about it. France 1789, Spain and Netherland a century prior are all examples of this.

Jan 18 2012 at 9:38am

Zathras, France was experimenting with paper money in the 18th century, it ended with hyperinflation –

Jan 18 2012 at 10:29am

The paper money issues for 18th century France were both both long before 1789 (Mississippi bubble) and after 1789 (during the Revolution). The government was on purely hard currency in the 1770s and the 1780s when it racked up this debt.

James Liu
Jan 18 2012 at 10:55am

Surely Jobs is not the last artisan. I doubt very much that he’s any kind of artisan at all, though I might buy that he was a graphic designer (a very fine one at that). And while I’ve heard that the insides of Macs are pretty, they are a bear to actually take apart and work on. Surely one sign of an artisanally created product is that it is meant be taken apart and fixed instead of thrown away and replaced?

One thing about artisans is that they don’t really get famous, because they make things instead of lead countries or companies. While I don’t claim that it’s impossible for one person to do both, it’s surely difficult. One example might be Grant Achatz, chef of Alinea. Until very recently, he would work a station every night at his restaurant, and would chop his own shallots. In fact, he trained a server to do the expediting, because expediting is one of the most difficult tasks during a service, and is usually handled by the chef at a grand restaurant.

My other suggestion for modern artisan is Cervelo, a bicycle company. Here is a video describing how the R5ca was created. The apex model of that bike is hand-built by the engineers. (And costs like you’d imagine such a thing to cost).

Jan 18 2012 at 12:14pm

Bravo, Russ! Wonderful podcast. Can’t wait to read Taleb’s next book.

Incidentally, people can read Chapter 13 (“Skin in the Game, Antifragility at the Expense of Others”) from the new book online at That chapter alone will be worth the cost of the whole book.

Jan 18 2012 at 7:51pm

Wow, that was awesome! So many possible applications, my head is spinning! Also thanks for the links to Edge and the ethics chapter.

I have experienced the the complexity Taleb talks about with my portfolio. I was trying to follow multiple sectors and realized that while theoretically a good idea, practically I was not able to do the right thing with each sector each time. And this ended up demoralizing me, since it was pretty much guaranteed that something would go wrong somewhere all the time. I came to the same conclusion of having the large part of the portfolio in very low risk fixed income and having a small portion in very speculative stocks I like and care about. If they blow up it was for a good cause and the effect is *not* demoralizing, because the high risk portion is small enough for me to handle.

This also prevents me from being too liquid and getting tempted to scalp here and there, which in the long term never worked out for me.

Bradley Calder
Jan 18 2012 at 8:00pm

It would be fantastic if Dr. Taleb could be a more frequent guest.

Jan 18 2012 at 9:44pm

@ Andrej

You said:

Fractional reserve banking is like trading on margin. A bank deposits money in the central bank (reserve requirements) and borrows at least 10times as much from the central bank. Then they lend it out and collect interest. If the value of their collateral goes down, they never get a margin call because the central bank doesn’t want them to fail. So the central bank buys some collateral from the bank (lender of last resort). The whole system is inherently fragile and will always lead to crises (= one of the most important insights of the Austrian School).

What you’ve described above is not fractional reserve banking–and contains many misconceptions about the functions of central banks. Fractional reserve banking is the requirement that a bank hold a given fraction of its deposits at the central bank or in vault cash. For instance, a reserve requirement of 10% would require a bank to lend out no more than 90% of its deposits. With a 100% reserve requirement, there would be no bank runs, but only because there would be no lending and no banks.

Jan 18 2012 at 11:11pm

I enjoy when speakers can bring in lots of rich historical stories, as Taleb always does. So few people have any awareness of history or desire to understand it these days. However, I struggled to find a meaningful takeaway from this discussion.

Jan 19 2012 at 1:19am

I find myself very drawn to Taleb, both his thought and his manner of presenting it, but there are a few points of caution.

Anecdotally it is worth pointing out that Seneca, far from having the last word with fate (etc.) was put to death (rather instructed to put himself to death) by Nero, meaning he either failed miserably at being robust enough to withstand his black swan event, or he simply prepared himself to accept his black swan event without excessive parting emotion, which would seem very much not a piece of Taleb conceptual universe. The worry here is that too many extraneous ideas are being brought in to support what is essentially a guideline to actions rather than a principal describing the way things are. there are times when he sounds as though he is turning toward the formulation of a principal, which necessitates that these extraneous examples be made to fit. One thing I enjoy about Taleb is his singular toughmindedness; it would be a shame if he succumbed to the weaker road of universality.

The ideas around working out also illustrate this and lead to my main concern. The evolutionary approach to what the body requires, also here referred to as an example of antifragility i believe, consigns many ways of working out to an ineffectual waste of time which I know by direct evidence to have very real results and have even seen to dramatically alter the quality of peoples lives. It was another guest i believe who suggested jogging was useless because cavemen didn’t jog, only sprinted to catch or flee from prey, so our bodies are not genetically evolved to benefit from jogging. The problem is that there is a definate sweet spot, say jogging up a semi steep hill, which is faster than a slow jog but slower than a run, at which body seems to find its optimal performance.

The upshot, aside from the above comment that this topic is not being very well vetted before it is fit to the concepts, is the dependency that Taleb and many other seem to have on this evolutionary optimization (i forgot the term for it, pehaps it could be called ‘what would cavemen do?) as a fundamental framework to support worldviews that are skeptical or otherwise ‘tough minded.’ I heard a skeptic on Freakanomics recently cast many things into doubt, including global warming, and then explain something by speaking about evolution as though it was a truth of physics. It would seem to me that evolution is every bit as much on the hot seat as anything else, and that even a belief that it is true would hardly justify extrapolating truths about the way the body works from unverifiable assumptions about what cavemen would do. I know there is more thought and science behind this category of ideas than a bumper sticker slogan would suggest, but these are still very wild assumptions (it would be easy to argue that cavemen, being nomadic, traveled, or rather migrated vast distances, and developed a fast jog as an evolutionary trait that allowed the adaptational winners to arrive more quickly to areas of scarce resources, that this “fast jog” trait was in fact the first competitive advantage and the birth of economics!) on which to base or with which to gird up rather sophisticated ideas about the way the world works.

Jan 19 2012 at 6:55am


that the Greeks did not have a word for blue. The color of the sky. The wine-dark sea. Homer did not have a word for blue; he did not have the full spectrum of colors. And these developed much later; and ancient Mediterraneans, the Greeks, the Hebrews, the Semites, didn’t have a word for blue or for many similar words.

I’m not sure for other languages, but for hebrew it’s not true (Hebrew Wikidictionary quotes three Bible verses with “blue”). Assuming Hebrew bible is the earlier known hebrew language source the above statement needs further improvement.

David Taylor
Jan 19 2012 at 11:19am

It is interesting to note how many of these comments focus on subsets of what seems to be the larger topic of instability and “anti-fragility.” The discussion of the topic seems to have some of the character of the story of the blind men and the elephant.

i think I read Taleb’s “Fooled By Randomness” and “The Black Swan” too soon after Benoit Mandelbrot and that colored my impressions. (At the time, Taeb’s points seemed a bit too derivative of all that came after Mendelbrot’s cotton price – “long-tail” analysis and fractals.) The anti-fragility and stability problem can also be related to the work of others (e.g. Rene Thom), but now I see this context differently.

There is a problem with the way we measure risk, stability and fragility. We look at small perturbations of a system and extrapolate to larger perturbations where the connections break down. This is obvious with a pendulum problem driven into a nonlinear regime, but it is obvious because the experiment that shows the nonlinear effect is easy to do. The simple pendulum theory presents a mathematical description without the terms that produce the instability and the big problem in a stability context is that the description works most of the time. Then you find your model has lost contact with the real world.

Guillermo Barba
Jan 19 2012 at 7:54pm

As usual Taleb invites you to think in a different way. Excellent interview.
How to solve the dilemma of “doing something” and therefore ‘adding’ vs. ‘removing’ things is critical.
As a suggestion, if in the transcripts you could differentiate Russ from the person being interviewed, by using a different type, it would facilitate understanding.

[Hi, Guillermo. We do understand that it would be helpful in the Highlights to differentiate the speakers. The idea of using a different font may be the best yet because it could possibly be implemented with only one keystroke while listening/typing real-time. No promises, but I’m going to think about this one. Thanks! –Lauren, Econlib Ed.]

Kevin S
Jan 19 2012 at 9:46pm

Antifragility is a very interesting concept. For example, how stress on bones makes them stronger. They are made better by the attempts to damage them (up to some upper limit as they discussed during the show).

However, I think I may have discovered something that is actually improved by damage, and now I’m wondering what the word for that is… Think of you favorite pair of worn blue jeans. When they’re brand new, they aren’t as valuable as when they are slightly damaged. What should we call that?

Jan 19 2012 at 11:13pm

I always thought Stoicism had to have something going for it when its two best-known exponents were an emperor and a slave–Marcus Aurelius and Epictetus. But Taleb misunderstands Buddhism, which he brings up next. He says they believe in “completely separating” from worldly sentiments and possessions, which at best misses the point. It’s the Buddhists who believe in “being here now,” which is not at all equivalent to “completely separating.” “Be here now” is an antidote to the hedonic treadmill; instead of striving and wishing for more, fully experience whatever it is you’re experiencing. Could that be what Seneca was after by imagining away all his wealth every night and starting afresh every morning?

Per Kurowski
Jan 20 2012 at 12:29pm

@Russ Roberts “You use a metaphor that I also use myself, which I find deeply provocative and educational, which is the forest fire.”

What an extraordinary coincidence. In May 2003, as an Executive Director of the World Bank I addressed over a hundred bank regulators, working on Basel II, in a risk management workshop at the World Bank, with the following words, which are here copied from my Voice and Noise of 2006.

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

Occupy Basel!

[ url replaced with full url. Please do not use bitly or other shortened urls on EconTalk or EconLog. Our readers want to know where they are going when they click a link. Also: Broken link removed. Please test your links before posting them. –Econlib Ed.]

Jan 20 2012 at 11:21pm

Why the need for a neologism for the antonym for fragile? Why won’t resiliant or durable suffice?

Krzysztof Ostaszewski
Jan 20 2012 at 11:44pm

Isn’t “via negativa” merely a synonym for traditional morality, and isn’t Mr. Taleb effectively restating Hayek’s (or really Hume’s) insight that morality is not designed by human reason, but by societal evolution?

Jan 21 2012 at 1:09am

GAAPrulesIFRSdrools: Resilient withstands stress. Anti fragile improves with stress.

Per Kurowski
Jan 22 2012 at 8:16am

The current fragility in the banking sector resulted from the capital requirements based on officially perceived risk of defaults, which guaranteed an excessive bank exposure to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, and an underexposure to what is officially perceived as risky, like lending to small businesses and entrepreneurs.

In this respect it should be clear that the “via negative” route in this case, must be giving the banks more incentives for true risk-taking… reestablishing a more natural balance by increasing the capital requirements for the not-risky and lowering them much for the risky: By the way that would not make our banking system less robust, because never ever has a bank crisis resulted from excessive exposures to what is ex ante perceived as risky.

Jan 25 2012 at 2:44pm

I think Taleb is an intellectual heavyweight who contributes a lot, and I admire him very much. I have to say, however, my main criticism of his ideas is that they arise in somewhat the same arena they criticize.
For example, what is his categorization of the fragile, robust, and anti-fragile, across diverse, (unrelated…maybe, can we really know) spheres? It looks a lot like a model to me. It isn’t strictly empirical, but it is a model of how Dr. Taleb understands the phenomenal world, and it serves to confirm his ideas. This is the kind of model that leads people in the world of finance to say things like: a global meltdown and depression like we haven’t seen since the revolutionary war will benefit my portfolio.
I think my (or Fat Tony’s) portfolio in that scenario would be food storage and guns. But of course, who wants to live like that. To some extent we should enjoy, and make the most of the probable, in this unpredictable world. But again, I do appreciate a lot of his insights.

Edvin David Lemus
Jan 26 2012 at 9:12pm

Although, Mr. Taleb’s ideas are quite new and for many complex, here are some more interesting thoughts:

Antifragility has layers, moreover, there are weak, strong, local and global properties.

Robustness is necessary as it creates information.

Fragility: one has to be intelligent with dealing with it as, say, a risk manager, yet that which is fragile will eventual break, one can predict the future by simply taking away what is detected as fragile.

These are effects to Black Swans.

Gregory Slater
Feb 5 2012 at 3:21am

I agree with Taleb that we have leaders with enormous power but no skin in the game, and no courage. For example, when dubya launched his pointless pre-emptive attack on Iraq. War is an inherently risky business, and bush, cheney, rummy, condi et. al. were reckless and arrogant. They had a thin-tail theory that Iraq was a piece of cake… $6 trillion and half a million needless deaths of innocent men, women and children later, and we have created a mess that still shows no sign of stability and is also controlled by Shia who are allied with Iran. So, to get skin in the game, if a reckless war goes sour then the President, the entire cabinet, and the entire Joint Chiefs are summarily executed. Another example is deep water drilling. obama had a thin-tail theory (that he proclaimed ~week before the Deepwater Horizon blew up and spilled 10^30 barrels of oil into the gulf) that deep water drilling was incredibly safe. Skin in the game rules would have obama and his cabinet executed…. Unfortunately, such accountability is total fantasy, because we have a completely corrupt government controlled entirely by bribes from big money, so our leaders (President, Congress) will never pass ‘skin-in-the-game’ legislation to hold themselves accountable. We will continue to be screwed into oblivion by reckless, ignorant, devil-may-care policies by our fully corrupt leaders. Look at the reckless push to bomb Iran, another incredibly risky and unnecessary adventure that we’ll all have to pay for dearly. Nothing is learned and nothing is corrected.

Edvin David Lemus
Feb 5 2012 at 12:32pm

Taleb has a quip: “We don’t learn that we don’t learn.

Rather than rely on fallible politicians to make mistakes, one needs to understand the structure of things. For example: nation-states have always been belligerent, Taleb himself says it, nation-states like war, city-states like commerce. His stoic-aristocratic values (Nietzsche called them the truth-makers or the truth sayers, along with its rich traditions) are handy to cleave on to in this random world. Of course as a concern individual I pay attention to the deficit, and in on whether I shall pick up my daughter at school.

Feb 6 2012 at 7:43am

A minute or two in, Taleb says something that the transcript shows as “[?].” Here’s what it sounds like to me:

gets to [the] destination unharmed

Thanks for putting up the transcripts, by the way; they’re really helpful.

Feb 10 2012 at 12:38am

Just a follow-up on Gregory Slater points.

While listening to the podcast for the third time I started to realize how Russia and China could justify their veto of a U.N. Syria resolution. Of course, it is an attempt to prevent ‘the fire of all fires’. Let Syrians sort out their differences on their own and get strong in the process.

Forget economy. The political and social stability of the world just can’t be maintained by constant interference in the internal affairs in other countries.

[unreadable character changed to single quotes–Econlib Ed.]

Feb 10 2012 at 10:02am

For a while I have had mixed feeling on idea of limited liability corporations. The whole ethics section of the discussion should really lead one to think how we should increase personal liability of agents in a corporation. However we don’t want to totally eliminate limited liability which has huge benefits when it comes to risk taking.

I don’t know what the answer should be I think we need to look at designing the meaning of limited libility to work quite diffrently than it currently fuctions and means.

Feb 10 2012 at 11:58am

There is a misquote that changes the meaning of the author’s comment.
“The President of the United States was suppose to be first in battle. Not someone pushing a button”

Your quote ommitted “The President of”

Please change if possible as it is a key point.

[Fixed. Thanks.–Econlib Ed.]

Quant Apology
Feb 11 2012 at 10:32am

[Comment removed pending confirmation of email address. Email the to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.–Econlib Ed.]

John Thompson
Feb 14 2012 at 5:08pm

Taleb’s comments about “via negativa” and “what do you do when you don’t know what is going on” reminded me very much of the comments of John Keats (the English poet) about “negative capability”. Though I don’t have the exact quote here with me, Keats wrote that Shakespeare’s greatness was related to his “negative capability” which Keats defined as “as capacity for being in doubts without any irritable reaching after fact and reason”. I think this quality of mind is what Russ and Nassim were talking about. It is hard to “do nothing” when you are in doubts about what is going on, but the capacity to do nothing (no irritable reaching after fact and reason) is a source of great power.

ps There is a wikipedia entry about Negative Capability. Go here:

Comments are closed.


About this week's guest:

About ideas and people mentioned in this podcast:Books:

      • Defence of Seneca and Plutarch, by Michel de Montaigne. Essays of Montaigne, Volume 6. Originally published 1580. Free online at the Online Library of Liberty.


      • "The Complexities of Skeletal Biology," by Gerard Karsenty, Nature, #423, 316-318 (15 May 2003). Read online by fee.

Web Pages:

      • Taleb Glossary. PDF file with the dramatis personae, ideas, and spellings of various words in this podcast. At
      • "Seneca" at the Stanford Encyclopedia of Philosophy.
      • Guy Deutscher's Home page, with link to Through the Language Glass (mentioned by Taleb discussing the Greeks and the color blue).

Podcasts and Blogs:



Podcast Episode Highlights
0:36Intro. [Recording date: December 19, 2011.] This book is in process, you estimate it's roughly a year away. So, we are here to have a conversation that is in progress. I did my first EconTalk on the day of the release of The Black Swan. So nice, so fun. I know a lot of listeners out there are very jealous because I've had the privilege of reading the manuscript-not the final book. It's in process. But for those of you who are out there, excited, this will have to satisfy you for maybe about a year. Nine months. Well, that's a good gestation period. Now you start off with a very provocative idea. The title of the book is a little bit strange. I don't think it's a word in the English language: antifragility. You start off by asking: What is the opposite of fragile? And of course we think we know what that is. The opposite of fragile is robust, you say; it may be unbreakable. But you argue that's not right way to think about it. It doesn't capture the essence of fragility. So, why do we need another term? Because if you send a package by mail to your cousin in Australia and it has champagne glasses, you write "Fragile" on it. If it is something that is robust, you don't write something on the package. You don't say you don't care, you can do whatever you want. So the fragile, the upper bound comes back unharmed or [?] and of course the worst is completely destroyed. So, that's the fragile. The robust has an upper bound of unharmed and a lower bound of unharmed. The empty fragile would be a package on which you'd write: Please mishandle. Because a lower bound would be unharmed. And the upper bound would be improved--you'd get, instead of sending 6 champagne glasses, 8 would arrive. Exactly. Like in mythology. Or they'd be better glasses, stronger somehow. Like the Hydra--you cut one head, two heads grow back. So the robust would be more like the Phoenix--you shoot it and it comes back. So the upper bound and the lower bound are both unharmed; with Hydra, the Hydra wants harm. When I first read that idea I thought: Okay, that's interesting, true; but why is it relevant. There are not that many Hydras around, life doesn't consist of many Hydras. But much of the book convinced me and the reader that actually antifragile is a very powerful idea. So, where is that important, where is it relevant in our lives? The first thing, the reason I had that word--I had an equivalent word for something like volatility, but it was not powerful enough to capture it. And it was called long volatility or love volatility, but it didn't quite capture the idea. But one day I read this book by Guy Deutscher on language, and he reports in a book something that was discovered by the U.K. Prime Minister Gladstone, and that was to the shock of everyone, about 140 years ago--that the Greeks did not have a word for blue. The color of the sky. The wine-dark sea. Homer did not have a word for blue; he did not have the full spectrum of colors. And these developed much later; and ancient Mediterraneans, the Greeks, the Hebrews, the Semites, didn't have a word for blue or for many similar words. They were not color blind. They were biologically okay. They were just culturally color blind. So, I realized you just give light on something by coining a word; and that turned out to be "antifragility." And once I wrote it down, I realized, I started seeing it in places I never suspected. It had this property. Give us some examples of things that are anti-fragile. We understand what things are fragile. Actually, I am even going to go beyond. Half the book is about things that love volatility, love stressors, love uncertainty--political life. But we'll get to that in a minute. The human body, the bones. The bones need stressors, constant stress. They communicate with the environment with stress. If you spend Christmas vacation in a space shuttle, you'll come back with diminished bone density. Which is weird. Because you'd think it would be great to be in the space shuttle because your bones will get to rest. What could be better than getting them unstressed? Actually, a complex system, a paper that really changed my thinking, by Gerard Karsenty, a 2003 paper in Nature, and of course he had a lot of follow-ups; and in it he showed it's not aging that causes weakness in the bones, the reverse is equally true. You have a complex system with feedback loops that are not as obvious as in a linear, ordinary system. And therefore the idea that weak bone mass makes you older. And vice versa. Weaker and older. You can see the bone density of females in African villages who carry jugs of water on their heads, between 100 and 200 pounds--they have excellent posture and excellent health. And even male reflective [?] abilities are affected by bone density. Which means if you go to the gym you are wasting your time because you need weight-bearing stressed, not these [?] machines that waste your time. We'll go into that in more detail later; you bring it up in the book and it's a very interesting idea: that certain things are good for our body, exercise and weight lifting, actually are not. We've talked a little about this with Art De Vany, who I know you are a fan of. Art gave me a lot of ideas and suddenly everything flashed together, when I made the distinction between two types of systems, the organic and the non-organic. The organic has the property that the difference between the living and the dead, the living and the non-living; the living, between living and a machine for example, requires stressors. That's how the complex systems communicate with their environment. You need a stressor. As with the bones, with your muscles, a lot of things. And usually overcompensate for the stressors--there is a mechanism in biology called hormesis. This table I have in front of me will never get better if I bang on it. Use it and lose it. On the other hand, the human body gets better if it is exposed to the right amount of stressors. Of course, you have to define the stressor and the quantity of stress. But then that makes a difference between two worlds--the organic and the engineered. And now, if you can apply that to economic life--is economic life in the first or second category? If it's in the first category then we should have bailouts, top-down engineers, everything. If it's in the second category then sorry, you know, it doesn't work that way.
9:05You use a metaphor that I also use myself, which I find deeply provocative and educational, which is the forest fire. So, if the goal of fire policy is to have no fires and you are constantly putting out every fire as quickly as you can--which is to me what the bailout policy of the last 30 years has been about--it's true that in the short run it looks great because there are no fires. There's no damage, everybody is fine, it turns out okay; and people even brag--we didn't have any out-of-pocket, all we did was guarantee these loans; we didn't even have to pay anything because the guarantee never was invoked. But the problem is, is that the brush starts to build up--in the natural case--and then when the fire does come, it's the fire of all fires. It is incredibly destructive. Exactly. So, what you are doing is you are not lowering volatility. You are increasing fat tails. Which means that most of the contribution to the damage will come from a small number of events or one single event. It's the same thing in economic life with Greenspan, or anybody. If you put someone in a germ-free environment for 15 years, then invite him to take a ride in a New York subway at rush hour, I think he will last a few minutes. The Greenspan example is--you are fine-tuning and steering and averting every possible bad event; and then suddenly there comes a bad event you can't overcome any more. Exactly. Because we had something I noticed in 1997 with barrier options--if you take variations, when you spend a long time without variation, you have a lot of exposure built that would be harmed by it. And it's linear with time. So if you go 5 or 6 months without a new low, for example, and you make a new low, you have a lot more blowups. You see? So quiet periods aren't very healthy for financial markets. And I noticed it in dynamic hedging, by showing how the number of barrier options start building up below the lows. It was a metaphor that kept in my mind for 15 years and here it popped up when I started talking about the economy, how it causes it to get weaker. Let me now make one statement about antifragility that's quite important. Is what benefits from the following phenomena: volatility, stress, uncertainty, error, chaos, variation, time--because time is volatility and things like that. Now these categories I've just enumerated are qualitatively and theoretically different. Volatility and stress are different things. But the phenomenology is the same. That is what is quite central to the book; had to explain that something that gains from volatility tends to gain from stress. And something that gains from volatility gains from time. So, this is quite central in the book, to explain it early on. This kind of analogy can be very dangerous. There's a temptation to say--I've fallen prey to this temptation myself; I think it's true but it is a little bit risky--the temptation to say: Well, this works in nature and because economic systems are organic, then the same phenomenon is happening here. The question is: Is that really true and what are the underlying causes of that? And I think what you get at that is so interesting is really the fundamental nonlinearities in these organic, unconstructed, unengineered, emergent systems. The way I think about it is: there is no reason that Federal Reserve policy should really be like fire policy. It's really interesting, amazing, that it could be the same phenomenon; the question is, is it? I think the reason it is gets at the nonlinearities you talk about, which is that if I have a bad event happen ten times, it's not the same as a ten-times worse single event. That massive large event, because the damage is not linear, the effects of the damage get dramatically worse as the size of the damage occurs. You talk about this in many different ways in the book. You talk about it mathematically in terms of convexity and concavity; but the simple way that I understood it is: if you have a bunch of little financial errors, even though they could add up to a relatively large number, they are not very harmful. But one financial error that is equal to all those little ones by itself can be unbelievably harmful in terms of the systemic effects. So, this seems to be the essence of what's going on in these organic systems. Yes, that's one thing. Whenever you have nonlinearities, then you have a certain effect, and it so happens that that effect translates into either fragility or antifragility. Nonlinearities implies one or the other. And actually, this idea to detect risks that Taylor has of stress-testing, I am collaborating with him on a paper on Taylor risk, seeing if you have nonlinearities in exposure--for example, these stress tests that we do, they are nice; they work sometimes; sometimes they don't. Why? Because the number you have to come up with for a stress test is arbitrary. Why are we stress-testing 10% and not 11%? So, someone who has nonlinear exposures and you stress-test him at 10% and he passes the test, as many European banks did before the last rout. But then if you test them at 11% or 12% and see the risk increasing then you realize you have a huge exposure to error from that nonlinearity. Now that one, this phenomenology is identical to the one that allows me to detect physical fragility. Let me give you the idea. You take a car; you drive it against a wall at a 10th of a mile per hour, a hundred times, a thousand times. Are you going to be harmed? No. The car will have some damage, but not you. Now drive the same car once at 100 miles an hour. You are dead. The definition of fragility, universal systemic physical fragility, model fragility, has to have some nonlinear term or what we call short gamma in option trading. It's quite universal. This coffee cup I have on my desk now has suffered a lot of shocks, with zero material fatigue. You can't see me do it, but if I let it fall to the floor it will break, it will shatter. It's not a shock that it gets every few hours on the table. What you have is that if you are harmed increasingly, if 10% harms you disproportionately more than 9%, 11% disproportionately more than 10%, you have accelerated harm, then you are fragile. And vice versa for antifragile.
16:57Let's talk about the antifragile side, because that's the less intuitive side. We understand this idea that if I bump a coffee cup a little bit against the side of the table, I can do that a thousand times and there's no damage. There might be no cumulative effect, even. It might be relatively harmless. But one large shock, like dropping it three feet rather than an inch 36 times is totally different. It's not just a little worse--it's over, it's dead. Now how does that work on the antifragile side? The argue has to be, to carry it over, it gets stronger and stronger and stronger, so that in fact, the bigger the bump, the better, as long as I stay below some threshold. Exactly. Of course, the second derivative flips in sign at some point. But a very simple example: you go to the gym. What's better over a week--to lift a tenth of a pound a thousand times, or to lift 100 pounds once? So, that's my body. You have fast twitch fibers in your body and these are very antifragile. Fast twitch fibers require strain, even more pronounced. But you have low twitch fibers that benefit from say an earlier--it has some convexity that stops very early. So, there's a chapter in the book on health, which listeners know I'm very interested in, recently I've started to eat differently and work out in a rigorous way. But it's much more important than just about your health. A huge part of the book is about both career advice and about policy advice. Let's talk a little bit about career advice. You point out, it's a provocative idea, that the tails are very different from the middle. Essentially again a nonlinearity. So, a person who is working at a minimum wage job, you argue, in a certain dimension is very antifragile, and a person who has a nice steady job at a bank, who is say a clerk, is very fragile. And yet that's not our common sense. Talk about those differences. There is something I call the barbell in the The Black Swan where I showed that a portfolio that has 90% in Treasury Bills and 10% in extremely risky securities was more robust because your measure of volatility--I mean, provided of course adjusted for inflation or if you have inflation-linked securities for 90%--would be a lot more robust because it doesn't depend on computation. It doesn't have model error. It was very risky, you know it's very risky; so that's a lot more robust than a regular portfolio. Likewise, if you walk and sprint, as De Vany says, it's vastly better for your health than jogging. Right. And then I continue: if you want, a company should have a certain amount of its energy in the things that make money, but should have dual strategy of very safe and then very speculative. Just like monogamous birds--the strategy in female kingdom, even in monogamy, is you have the accountant, and once in a while is you get pregnant by the rock star. That's the barbell strategy. Another barbell strategy--I notice that the great writers did not work as journalists. They had a cushy job that had a barbell; and then when they wrote it was very speculative literature. Like Kafka didn't write a journal article a day. It's not like he was a journalist. That's very common in the French literature--when their parents are rich they become diplomats; when the parents are poor, they become postal workers. And you write on the side, rather than have that middle. Einstein was a clerk; and then did his theories at night instead of being an academic. Faulkner worked in a boiler room somewhere when he was writing his best books. But why is that relevant? Why is it bad to work as a journalist? That seems okay. Things in the middle sometimes--some I can explain, some I can't explain. But when I go to a restaurant, I like to have my steak and salad first and then the dessert later; I don't want to mix the steak with the salad and the dessert and bring them to me at once, you see? You want a separation of function, a separation of things. In a lot of domains it confers some robustness on the grounds that to get antifragility, first you have to remove fragility. It's not symmetric. Antifragile is what has a right tail. Fragile is what has a left tail, but the antifragile requires no left tail. In other words you have to clip your left tail; you have to have so much safety and then be very speculative, a lot of volatility. And underlying that idea, which is very beautiful in the book, is this idea of an option, where the downside comes, but you are not subject to it. You can refuse it. And then you can embrace the upside. Exactly. And I took it to epistemological grounds by saying that in finance you may pay for the option because nobody will give it to you for free and typically an option is highly overpriced because people are scared of them when they are labeled as options. But in real life, people don't notice the options. Optionality situations [?]. And I took it to epistemological grounds by showing how if trial and error is a rational option--in a sense you keep what you like, nature, actually, thinkers, and we discovered only 40 years ago that nature knows it can't make a perfect baby, so you have spontaneous abortions 50% of the time without anyone knowing about it. So, trial and error is embedded in my idea of the convex economy. Most mutations are not productive and they get weeded out. They don't get to reproduce; they are failures and they are just thrown out. Exactly. There are fractal layers of antifragilities. There's a gentleman who read my draft, top notch physicist turned geneticist; and he uncovered the mechanism within your cells that causes, why premature aging comes from not stressing your system because there's a competition between molecules in your system. So, what you have as a resolution is an antrifragile process. It likes some volatility, otherwise you don't have selection bias. There is selection. Likewise in your body you have competing things, and you want to always accelerate the weakness of the weak in order to get rejuvenation of cells. And there's a mechanism called hormesis that was known by the ancients--if you give someone a little bit of poison he becomes immune, a process called mithridatisation. Mithridates was a king who became immune to poison that way. But they noticed also that it went beyond, was actually stronger with very small doses of exposure. It's not what you think. It's definitely not homeopathic. It is something actually that has a lot of domains. Small dose of radiation protects you from skin cancer. It's universally observed in science. It's very difficult to find a counterexample. The expression in everyday life is: The dose makes the poison. Meaning in a small dose it's good for you; in a large dose it could kill you or will kill you. We see it constantly. The discoveries about the benefits of alcohol; obviously in small doses it appears wine is good for your heart. In large doses it destroys you. That's true, but you have to be careful. That's what Paracelsus, one of the pioneers of homeopathy, discovered. I'm not talking about homeopathy where it's a matter of dosage. I'm talking about something that's evidence based process by which some amount of exposure causes an overreaction on your part. And actually, when you go to the gym, what you have is an overreaction. I lift 100 pounds today; my body will project that I am going to have a stressor slightly worse next time. So it prepares for 105 pounds. Provided you have enough recovery. Homeopathy is something where you have very small things. The same applies to both, but I would be careful. I don't want my ideas to be used by people in homeopathy to justify their methods, because their methods have not yet shown any scientific empirical validity. And you are not suggesting you should be sprinkling arsenic in your food. You are saying that the right level of stress in small doses--what doesn't kill you, makes you stronger. Yes. And also but you have to make sure that you don't have selection bias as well. And I wrote about some illusions we have about things that get people stronger when in fact it's just selection bias. For example? There are a lot of things in antifragility that are counter common wisdom. You talk about that because of selection bias it looks like it's making it stronger but in fact it's just weeded out some of the weak ones. Exactly. Which is effectively how it works within the cells. It's more a destructive process within the cell than a strengthening process. And it can do the same with populations, you see?
27:52Let's talk about via negativa, which is a phrase you use to capture addition by subtraction. Part of this is a reaction to some of the criticism you got from The Black Swan, where people would say: So, every once in a while there's this really bad thing that happens, so how do I predict that really bad thing? And your insight, which is so profound, is that the whole point of the black swan is that you can't predict it; so rather than figuring out when it's going to come so you can be ready for it, the best thing is to create an environment where it can't hurt you very much. Exactly. And shifting to non-predictive methods. When I started writing this book I had a lot of bitterness in me because people didn't understand my Black Swan. They were buying it; it sold several million copies. And most of the people didn't get it. I'm not talking about I'm trying to prevent people from exposure to position errors. And nature is not predictive. And via negativa, is what I call negative advice, acts of omission. And when people ask me what should I do, I tell them: Don't get exposed to negative black swans. It's very easy to remove negative black swans from your life. If you are a bank, sell tails; if you are in a business don't do these things; if you are an individual, don't smoke, don't have fructose sugar. So people didn't understand; they said: I want advice. And they couldn't get the point that the rookie tries to win; the professional tries to make the other person lose. Or for example, via negativa, by removing things than by adding in. People didn't want to hear it. By preventing people from smoking you save more lives than by producing insulin cumulatively. Likewise all these things--people are looking for the miracle drug or the miracle cure or the silver pill or anything to make people live longer. The philosophers don't realize that starvation is the most effective way, and we have enough evidence of that. We even now have evidence and another paper last week that if you starve people for four months, you reverse diabetes and they can gain their weight back and they will still be normal. Reverse--by subtraction. Remove food. The ancients knew that. So, the via negativa is--I've got a little more aggressive with via negativa by showing that removing does not have side effects, or no long term side effects. You see? Whereas in a complex system, every time you add something you have side effects. And you can't predict what they are, by nature of complex systems. So via negativa is not. People ask me what would you do in economics; I tell them: just remove Geithner to start with; everything will be okay. Then we will have less control by certain crowd. Democracy works by via negativa. The idea is not to find good rulers but to be able to remove the bad ones. The American Constitution, when it was put in place, was designed to talk about what government can't do, and instead government has become more concerned about what it can do.
31:44You talk in the book very provocatively about our bias toward intervention, which this is all a part of. I want to know the vitamin pill I should take. I don't want to hear about what I shouldn't be doing. I want to be proactive. We have this incredible psychological bias toward being proactive rather than passive. Which again is a nice example of your opposite. The opposite of proactive isn't reactive. It's doing nothing, it's passive, doing nothing. Letting things happen. That doesn't mean nothing is going to happen. It sounds terrible. Fabius, the Cunctator, [?] whose big achievement resisting and making sure Hannibal destroyed himself before attacking. Big general; he was not a coward. He just said: My asset is time. This ties in a little book, well to me a lot, where you have a nice diagram in the book. You have a giant cube, which is the real world. And then you have a little tiny cube, which is what we know about the real world that is scientifically rigorous, experimental, tested through rigorous techniques. And unfortunately it's a fact that what we understand rigorously is a very small part of what we'd like to understand. But we can't help ourselves. We want to believe that that real world is a lot more understood than it actually is. How do you explain that? This is where I have the character Fat Tony where he didn't have knowledge of the small world but he had rigor in the large world. And what matters is rigor in the large world. Last time we spoke I was talking about this fantasy we have. Procrustean bed. This fellow as bad and he would abduct travelers and feed them; and put them in his bed. And if they were too tall, he would amputate their legs; and if they were too short he would stretch them. The bed was always a perfect fit. We have a tendency in a lot of things to try to put people in a Procrustean bed. Fat Tony had the rigor of thinking outside the bed, or outside the box. But it's not trivial, because there are rules outside the box. And these rules--you can actually catalog them; you can actually change the small world by coming from the large world rather than doing the opposite. The artistic [?] whatever you want to call it. Analytical, scientific. [?] Like trying to impose logic on [?]. Logic works but seems a lot more ambiguous. So, via negativa is a central idea. Harnessing antifragility [?] by trial and error and focusing on payoff, which is non-predicted, rather than focusing on probabilities which have predictive thing in it. Probability is predictive, has a predictive aspect to it. So it has a different paradigm when you work in the large world. And of course we have the invisible what I call logic of rules we have inherited from the elders. And typically, just like you mentioned, the American Constitution, you have the heuristic work, heuristics, inherited from the elders. And typically these are all the negative rules, what not to do. I think that's probably almost always true. Yes. Like debt. The Babylonians had an interdict against that; so were the Hebrews. The Greeks did not like debt but didn't have a strong interdict. [?] had a fatua about that. "Neither a borrower nor a lender be"--Shakespeare. And then of course Islam bans debt. But the language used by [?] is vastly stronger than the language used in Islam against debt. So you learn. There's no reason you don't understand the logic. There is something in risk management--the largest n you find, you are going to find it in nature or in history. So, if you are talking on statistical grounds. Big sample. And yet we always think we just need to manage it. Debt is bad of course, but I don't need to worry about it because I've got a theory, I've got a model, I can make it work. I've used the very same convexity effects to show why you need stochastic, why of course hormesis, what you were calling benefits of small doses of something are less harmful, and all the other things. There is the same convexity effect. Size and debt, and overspecialization, fragilization. And leverage. They fragilize. A redundancy makes you robust. And actually necessary even for becoming antifragile is to have large redundancies. It may seem strange, non-optimal, but we have inherited, as I said last time, we have two lungs and two kidneys. An economist would never design a human being with two lungs and two kidneys. It's wasteful. Deadweight loss. So, the opposite of spare parts would be debt. And nature doesn't like debt. Nature likes redundancies. This mechanism of overreaction is redundancy. Let me give you a little hint here. When you take a trader or risk manager at a bank, they look at the past for the worst-case scenario. And actually making a mistake does not recursing. They say: Well, the worst day was 22% in the stock market, so let's use 22%. The human body doesn't do that. The human body doesn't think that the worst harm is going to be the next worst harm. The human body builds a margin on top of that. It thinks the worst day was 22% in the market? The human body would say, let's calibrate and adjust and manage for 27%. Or 50%. Not that much. If I lift 100 pounds, my body will start coding for an ability to be able to lift 105 pounds. And then if you lift 105 pounds, it will code again for a little more. There are limits of course, structural limits, but they will go to these limits.
39:28The other side of this, which again is incredibly fascinating--it helps you see the way the world is working these days--is that in today's world, because of policy we've imposed already, we allow fragile people to impose--they become antifragile and they push their fragility onto others. You have many examples of this in the book. Talk about some of those and what that means. I went into ethics in the last section of the book, what I call Book V, because I discovered at some point that I had a lot of books in the book. So I call them Book I - Book V, because of their separate topics after the first section where I present antifragility and the last one I call "Skin in the Game: The Ethics of Antifragility." What happens is that some people in society have the option, namely the bankers, the managers of businesses, they have other people's skin in the game, the left column. No skin in the game other than they keep the upside and transfer the downside to others. You can see this, the stock market has lost about $5 trillion over the past 10 years, comparatively because a lot of stocks were at a higher level compared to cost of funds. Managers of companies made $400 billion. Why? Because you have the upside and no downside. So they actually own the option and they benefit from volatility. So, no skin in the game--in that category I put bureaucrats, journalists, corporate executives, bankers of course, and other people I call Fragilistas. Now, people with skin in the game are citizens, people who have the upside and downside of their actions. If they don't pay their mortgage, they lose their house. Or, if I make a mistake, then you have skin in the game. And of course my rule of ethic is what I write about, is to have the corresponding position in the market, so I don't really care about right or wrong; what matters is the payoff. Anyway, so this is the middle column, people with skin in the game. And of course the right column is an interesting column of people who actually don't have upsides. They are there to take the downside of others. And they have the highest status in society, traditionally. Compare a banker who has upside and no downside, because they don't have negative bonuses, to someone in the military. He doesn't have a bonus and he has his life on the line. It's a very beautiful insight. Honor is bestowed on those who take the bullet for others. Exactly. These don't have to be a saint, a knight, a warrior, a soldier, a prophet, or a philosopher in the pre-modern sense. Or a maverick. You can be just like the babysitter who pushes herself and lost her life because she had a responsibility for the baby she was holding. And you argue that modernity is pushing more and more people into the left column, the Fragilistas who impose their downside on others, and we don't spend as much time on that right column. Our culture doesn't do that. In fact, we look at those people sometimes as fools--they could have avoided that harm; they are idiots. Exactly. And in fact it's the first time we have power for people who don't have courage. It's the first time in history in which the people on top have power without courage. First time. You cannot find that in any society. Take the knights. The knights were people who, their trade was that they were risking their lives. This is why they or lords were supposed to die first. And of course the President of the United States was supposed to be first in battle. Not someone pushing a button. It changes the incentives. So, the only way you can have a safe society is by moving the first column, the left column, moving these people out of there, making it more accountable. It's hard to get there, though. You can, with the legal system you can in various ways. But I think society will explode because then you start having a growing wedge between what is ethical and what is legal. And I name names in here; I don't know if you want me to name them. It's your choice. I'm willing to take a lawsuit. It's your book. I name people who to me--for example, some academics can cherry-pick; they can give contradictory advice and retain the one, because they don't have skin in the game; they don't go bankrupt from the bad trade, so to speak. They are always going to be there. The problem is a Nobel Prize in economics. People are not penalized for being wrong. You cannot have a proper functioning. I just wrote a paper in a policy journal in which I show that without accountability, risks will keep going because people will hide them, and we had a system in ancient societies for that. That's Hammurabi's Law. Hammurabi understood risks very well. And it was as follows: if the house collapses and kills the owner of the house, the architect is put to death. Why? Not because to punish people. As a deterrent, because no inspector, no regulator, nobody will ever know more about what's in a foundation than the architect himself. So, you can hide risks from society, you can cherry-pick, you can do a lot of things unless you have a direct responsibility for the results of your action. When I put it in the New York Times, it seemed too simplistic. I put that proposal there by saying capitalism is not about incentives; it's about disincentives. People said it would be too easy; can you implement it? Of course. Society can only survive when everything is based on very simply heuristics, not 2800 page documents. No appendices with lots of Greek letters. No.
46:37It's a deep idea because it really gets at this interface between what I would call effectiveness and ethics. I had a conversation this past week with someone; I was suggesting that the Federal Reserve, the Chair over the last 15 years, has encouraged imprudence. Has honored and rewarded malfeasance; has insulated people from recklessness. Relentlessly. And maybe there are some bad incentive problems with the way the Fed was structured. And her reaction was: I don't like to think that about the Chair of the Fed. I think they are trying the best that they can. That's nonsense. No society has ever put someone in a position of responsibility without accountability. I said that's nice; it could be true; but when has there ever been a person who had that much power who didn't succumb to the dark side of it? It's nice that there might be such a person, but like you say they don't really exist in history. So the counterargument is their reputation: their reputation will protect us from their malfeasance. But the problem is it's very hard to evaluate. It's true. When you don't see the link between action and consequence. So, when I talk about fragility in my central chapter, chapter 5, on political systems, I talk about localism. Talk about Switzerland. People think that Switzerland doesn't have a government, or it has a government at a very localized level, it's a collection of municipalities and the noises washes out. So their political system is remarkably intelligent; it's just that it's small. So the mistakes are made small, and things aggregate up without the mistakes. The other element in it, concerning ethics is if you make a mistake in forecasting or make a mistake, any kind of mistake, it's not like Alan Greenspan who has never done wrong to you or other victims. You encounter these people Sunday at 10 o'clock at church. So you have this biological skin in the game, that doesn't exist when you--at Russell's for example, when you can have this loss of ethics at the level of [?]. Shame. Shame plays a role in everyday life. If the only people you see are the people you are helping. Exactly. This is why in my column to the right I have the artisans. The artisan, the last great artisan we had was Steve Jobs. Where people have their ego in the game. They have their product. You know, Steve Jobs had the inside of the computer, he was just like cabinet makers, unlike these commercial shelves you buy, they look great on the outside but ugly on the inside because their inside is not meant to be displayed, to be seen. It's the same thing with Steve Jobs--he had the inside of the computers look good. Although you can't open them. Which is kind of crazy. That's an artisan; he is not in the game except for to do a little authenticity [?]. That is artisans. You will see that with politicians at a local level. This is one of the great arguments. Now Sweden, you think has some 60% of the GDP in government. It's not the same as the United States because the bulk of the money is spent locally. It makes a big difference. A huge difference. I'm not sure that's the only difference between the countries. Size has a lot of effects. I use the same argument--size is visible everywhere. Forecasting errors grow with size. I have a very sinister theory of the size bias, which is--you point out Switzerland works very well, that small mistakes are relatively harmless, they just stay small, they don't aggregate up. And then you look at the euro, the European Union, and you think it's obvious that the European Union (EU) is not going to work well; it's too many people, there's the accountability, and the feedback loops aren't there. And yet the people who want to run the EU are going to tell you it's so much more efficient. Well, of course it is if it could be run by God, but when it's run by human beings it doesn't work that way. Exactly. They themselves have a certain principle, this subsidiarity [?] principle, that any problem should be dealt with at the lowest possible level. Only necessary things should go up to Brussels. But given that you have a lot of bureaucrats in Brussels, these people make their job look--of course they are going to create jobs for themselves, and you know, metastatics, bureaucracies have always been metastatic. That's what destroyed ancient Egypt, by the way, the first centralized nation-state. Metastatic autocracy. Doesn't work very well.
51:55Let me ask you something--I'm going to take a shot at you; and then I'm going to defend you; and I want to know if maybe your defense is different. But this is the way I defend your ideas. Some people have said about your work--I would consider this your third work in a trilogy. It starts with Fooled by Randomness, it goes to The Black Swan, and it goes to this one. And some people say it about your first two books--they may say it about this one, too, but it doesn't really matter--they say: There's nothing really new in there; we knew it already; we knew there are tails; this is uncertainty; people understand that probability is hard to assess, that we get fooled. And I have a very different take on your work. Basically I see it as: it's all the same book, and I view that as a plus, not a minus. There's nothing new under the sun, to take a very old insight. What's new is how we think about them. And it gets at your distinction between the inventor and the implementer. People love the inventor; they don't give much honor to the implementer. But the real issue is insight isn't worth anything unless you absorb it. So, if I tell you don't put all your eggs in one basket, and you write it down; but if it doesn't get into your bones, it's not going to change your life. And the power of your ideas is that they get in your bones, the way you write, the use of metaphor, the use of humor, the use of characters; and you go deeper and deeper into these ideas; and they are very deep. Both your criticism and your answer confirm one thing to me, is that what I'm saying is not wrong. That's a plus. Exactly. The point is that when people tell me that what you are saying is not new, and they find it completely in predecessors [?], it makes me smile, because what I am saying is exactly the opposite of what they consider not new. Traditionally we have put the most trust in small probabilities, the most risk in small probabilities. And I am trying to stand this argument completely on its head: this is where we don't understand anything. And it was never written before that small probabilities are completely uncomputable. You see? In proportion to how small they are and in proportion to p, the probability itself. And this is what they are not getting; but the fact that they are saying it is not new means that they are agreeing with me. So, what I am proposing here is a system; and it took me a long time to develop it. I know I'm saying the same thing; I hope I'm saying the same thing--because as I said in the Introduction, I'm not writing close-ended books on closed topics with an expiration date. I am going deeper and deeper into the central element of daily life, or of life--what you do when you don't know what is going on. That's a great way to describe it. We face a government, an individual, a corporation, a dentist, anything--what do we do when we don't know what is going on? That's the most important question that I am obsessed with, and I am trying to answer it. Now, the best compliment I can ever hear is when someone tells me it's not new, because I know it's not written elsewhere, or maybe some portions of the derivation exist elsewhere. But this notion that the smaller the probability, the less we know what's going on, is exactly in reverse of the common understanding of such a problem. And that's because...? It's because of convexity effects, because small probability is very convex to error. Meaning the consequences are so different. No, no, no. It's the probability itself. Take the Gaussian distribution. And actually in a separate paper I finally proved something that has taken me three years. Take a very thin-tailed distribution such as the Gaussian. Thin-tailed, the normal distribution. You have two inputs, one of which is standard deviation. Standard deviation is very much your error. Now, if you take a remote event, say, 6, 7, 8 sigmas, you increase the standard deviation away from the mean; you increase the sigma by 10%, the probability of that is multiplied by several thousand, several million, several billion, several trillions. So, what you have, you have nonlinearity of remote events to sigma, to the standard deviation of the distribution. And that, in fact if you have uncertainty, the smallest uncertainty you have in the estimation of the standard deviation, the higher the small probability becomes and at the same time, the bigger the mistake you are going to have about the small probability. So, in other words, most of the uncertainty in parameterizing the model, most of the tails. So, you take an event like Fukushima, you see, where they said it should happen every million years; you perturbate probabilities a little bit and one in a million becomes one in thirty. Or the financial crisis. Or anything. So, what I meant is, what I managed to derive is the following: Any small probability is derived with an error rate. You have an error rate. Because only God doesn't have an error rate. God doesn't have probabilities. You have an error rate, and that error rate has an error rate. And this in turn has an error rate. You continue. Then you end up with power loss. Depends on the regime, of course, depends on how big the error of the error of the error is going to be. And in the power lies a very fat tail. And of course how to privatize. And of course that was how--you can derive the power of fat tails with some counterfactuals. But what is essential here, what I am saying is essential, in my work, is that you can have certainties; you are never going to get into big trouble in the body of the distribution. Where you are likely to get into trouble is in the tails. And the benefits of being right in the tails are very small. It's a small imprecision, multiplies a 10 sigma event by several trillion; you shouldn't be talking about 10-sigma events.
59:13But I want to come back to the way you formulated a minute ago, because I think it's very deep and very important. You said: What do you do when you don't know what's going on? And I would add, which I think comes right out of your book: and most of the time, you don't know what's going on. It's not like it's a special case. I think about it a lot of the time with economic policy, because when I suggest that maybe we should do nothing or if maybe the government should get smaller, we should reduce debt across the board, people say: How can you do that? You've got to have some positive. The reason, say, Hayek, says it doesn't matter--I don't think it's a fair criticism of Hayek, but people say: He didn't want to do anything. And one counter is: You don't know what you are doing. You have no idea what you are doing. You claim you have a scientific basis for it. I may have some more solutions here, based on this convexity effect. It's not all pessimistic. I know, for example, from convexity effects, that I pretty much can map the extent of the unpredictability. And let me give you an example. A specific, big convexity effect or fragility, is in traffic. You put 80,000 cars on a street, you have no traffic. You move 90,000, now traffic time goes up 10%, 90,000 cars. You go to 100,000 cars, and traffic times doubles. Those are those little perturbations, that each person is struggling to keep up with the person in front of him, and that slows the person behind him down; and congestion is very nonlinear. So, we have an idea. You can apply the same thing to the size of corporations. Nature applies it to the size of animals, and the size of an elephant is speculative--there are negative convexity effects. You can pretty much use it with speed. We do the same thing with speed. We actually do it. We limit speed to 55 miles per hour. Because accidents at 55 miles an hour aren't a tenth as dangerous as accidents that take place at higher miles an hour. So we can do things using this concept, the convexity effect, in other areas. And how much redundancy do you need? How many mean deviations do you need to be away from your accelerated harm? Heathrow, for example. Those who built Heathrow Airport didn't realize that the smallest perturbation causes 4-, 5-, 6-hour delays. Which means you have to reduce it by a certain amount. And actually, I'm talking a lot to the Cameron Administration to use these methods to control size. So, the analog, in the financial system: Would you favor limiting the size of banks? Or limiting the size of leverage? Or both? Or neither? I don't know if we can limit as a society. It happens that companies destroy themselves. Unless we save them. Exactly. So we should not save them, and we should have a pact. And what I proposed to the Cameron Administration and they like the idea. On paper. No, no, they like it. They called me to go there, visibly, because they want to really do something. They want to go after size. Size is their big enemy. Before that they had romantic arguments about small is beautiful, before these convexity effects. And I said: It's very simple; you take the convexity and you certify whether company sales--you don't know if it's going to fail, but you know, should it fail, the taxpayer has to bail it out? Yes/No? If you think the taxpayer would need to bail it out, if it fails, then automatically the employees can no longer can no longer get bonuses. De facto, potential civil servants. And you can't play the long option game at the expense of taxpayers. Remember, my ethics problem is someone who owns the option at the expense of taxpayers or someone else. That would automatically force companies to be of such size as they won't be bailed out. It's a very nice pact you make with a company. You say: You can do whatever you want, you can pay each other as much as you want, we don't care. Provided we don't deem that you are to be bailed out. Now, of course, it's a gray area, a large gray area. For a lot of companies we know it's very visible. We know we are going to bail them out. Therefore they are civil servants. And now by putting caps on how much banks can pay in bonuses, people are moving to hedge funds, the risk is slow into hedge funds, and these are not to be bailed out. Great; let them go. Exactly. So, I am not asking to regulate society. So, government can use something to protect citizens from large corporations. Not exactly a rent directly in proportion to their size. It's an interesting way to limit their size organically, in theory at least. It's a way to discourage them from growing because they realize that if they do they will lose their opportunities for the upside. Exactly. They no longer can use the option, it's the option of society. Or do what I call the Bob Rubin. Bob Rubin had $5 million in bonuses, retroactively financed by the taxpayer. We have to eliminate the Bob Rubin problem.
1:05:08When you are talking about modernity, your insights into our culture and the clamor by experts for solutions they claim are scientific--it reminds me of "The Second Coming," by Yeats, where he says: "The best lack all conviction, while the worst / are full of passionate intensity." It saddens me how overconfident so many people are who have no grounds for it, and how cautious or lacking in conviction are people who really understand the limits of our knowledge. But you see, at some point, things can change, because you can have--we think that systems can survive for a long time while being weak like that. They can't. Fragility will get you eventually. Can I mention something, do I have time to talk about modernity? Go ahead. Modernity, to me--I love modernity and a lot of things--the rise of the nation state. That's the first thing, top-down government. In the past, we had some top-down governments, but the government did not have the means to reach around the place. France, even Colbert, could not reach provinces. Only a few cities along the tax routes. This is why France had 400 [?] and about 72 dialects. The good old days. So, modernity is the rise of the nation state, military state-nation states. Rise of the expert, the predictive methods, pseudo-science, the rise of social science; and of course the no-skin-in-the-game. Diseases all. All dangerous. And of course the bailouts. And of course the thing will destroy itself. And what will replace it? I feel the future very positively. You will have more and more artisans. At no point in time, we've never been that rich yet we've never been more in debt. So, when the dust settles, we'll have more robust systems. More and more artisans in the sense of people really liking what they do. That's sort of my definition of an artisan--it doesn't have much to do with scale. Again when I talk about scale, scale is specific to the industry, specific to the type of function. You see? You have the death of the nation-state, which we are witnessing; a rise of local government; and of course, the end, the utopia for me, is what we are starting to see in Europe right now. They are all talking about golden rules and the golden rule, Rabbi Hillel's golden rule, is: No government deficits. That's a good heuristic. No government deficits makes things a lot less fragile. Very simple heuristic. Again, solutions can only come from very simple heuristics. That's what we've been doing now since civilization started. And of course the codification [?], the first one we have is Hammurabi's Law.
1:08:56Here's a little postscript. You wanted to say something else about Seneca. Go ahead. Most people don't understand what Stoic is. They think that a stoic wants to sort of be robust, no positive nor negative emotions, get rid of. The attachment from the world. Exactly. Become a vegetable. That's the impression that for a long time, about 2000 years, of the Stoics, because nobody really read them. People kept commenting on comments. But when I read the best expository of Stoicism, the best two expositors, Marcus Aurelius and Seneca--and probably also to some extent, Cicero--I realized these are not that type of people. Very different. And now, recently I saw some papers confirming my idea. That was what Seneca was, was about being long in options. He wanted to keep the upside and not be hurt by the downside. That's it. It's just how to set up his method. Seneca was the wealthiest man in the world. He had 500 desks, on which he wrote his letters talking about how good it was to be poor. And people found inconsistency. But they didn't realize what Seneca said. He was not against wealth. And he proved effectively that one philosopher can have wealth and be a philosopher. What he was about is dependence on wealth. He wanted the upside of wealth without its downside. And what he would do is--he had been in a shipwreck before. He would fake like he was a shipwreck and travel like he was a shipwreck once in a while. And then he would go back to his villas and feel rich. He would write off every night before going to bed his entire wealth. As a mental exercise. And then wakes up rich. So, he kept the upside. In fact, what he had, my summary of what Stoics were about is a people who really had, like Buddhists, an attitude. One was to have the last word with [?]. And my definition is a Stoic is someone who transforms fear into prudence, pain into transformation, mistakes into initiation, and desire into undertaking. Very different than the Buddhist idea of someone who is completely separated from worldly sentiments and possessions and thrills. Very different. Someone who wanted the upside without the downside. And Seneca proved it. And the way you get there, Seneca is suggesting, is through mental exertion. Through renunciation--some of it's action, but some of it is the way you look at your life and what you prepare yourself for and how you affect your expectations. Exactly. He understood the hedonic treadmill that Daniel Kahneman rediscovered 2000 years later. He understood it very well. And he understood wealth, debt from others or from fortune. And he wanted to write off debt from fortune and he wanted to remove his dependence on fate, on randomness. He wanted to have the last word--was randomness. And he did. Not a bad goal.