Nassim Nicholas Taleb gives a short introduction to the idea of antifragility. This concept is covered in length in Taleb’s book, Antifragile Thingss That Gain From Disorder. It’s part of a series of books from Taleb. The others are Fooled by Randomness, The Black Swan, and The Bed of Procrustes.
This book and interview are difficult to understand. It’s quite the idea and concept, but Taleb knows that too. I’ve found a few great summaries here that can help: Max Mednik’s extensive notes, notes from Nat Alison and four minute book notes.
One day looking at a coffee cup, I realized that I may have an interesting definition of fragility.
We’ll get to anti-fragility in a minute, but you need to understand the fragile.
So we have an interesting definition of fragility.
Fragility is what does not like randomness. What does not like variability. What does not like shocks. What does not like a cluster of things.
And when I look at this coffee cup, when I put it on the table, it’s safe on the table. It wants peace and tranquility.
That’s why it’s fragile.
I realized the fragile has some properties.
Now that we can define fragile that way, does not like some shocks and a few other things.
Let’s see what is the opposite.
If I’m sending a package to South Africa from New York, what do I write on it?
Fragile. Equals, in other words, handle with care.
The opposite of such a package would necessarily be something not neutral. Just like the opposite of concave is not linear. The opposite of positive concavity is not linear, it’s negative concavity.
So the opposite of fragile would not be the equivalent of “hey I don’t care.” It would be something written on it, please mishandle.
And that gives us a definition of the opposite of the fragile.
The Ancients they had the concept that something like disorder. They used it extensively, they understood it.
But somehow with science we lose this ancient wisdom because they’re not formatted in a crisp way with definitions.
They had the image of Damocles. I’m sitting here and there is a sword on top of me, nothing good can happen just like the coffee cup. Nothing good can happen, except something bad can happen.
I’m either going to be neutral, no better off, or worse off. Just like the coffee cup, it can break, but it’s not going to improve from any random event.
The second one is Phoenix, the mythical bird. You shoot it, it comes back. You shoot it, it comes back. It’s not going to improve. It’s not going to worsen.
And the third category, of course, would be Hydra. One head, two grow back. It’s not a good idea to attack it, attacking it will make it a lot stronger. You have to beware.
Of course, it’s up to a point. In the Mythology, Hydra was contained by tricks because you always have some vulnerability somewhere.
So you’re always fragile or anti-fragile with respect to something.
For example, this coffee cup may be more fragile with respect to shocks than it is with respect to heat. It could be the opposite for a plastic coffee cup.
It would be much more thermally fragile, but much more robust when it comes to shocks.
I noticed one thing as an option trader, when you don’t like volatile, when you have a portfolio that is fragile, a 20 percent drop in the market would harm you more than twice than a 10 percent drop.
So there is some linearity. There is some class of what we call acceleration. There is an acceleration of the harm.
This, effectively, can allow us to detect fragility. Because everything that is fragile has some non-linearity.
I can tap on this [coffee cup], it doesn’t matter. I increase 10 percent, it breaks. I can tap a thousand times at a certain intensity, doesn’t matter, 10 percent it would break.
There is effectively a non-linearity that needs to be present everywhere. And I’ve based my research on that.
What is fragile has to have more downside than upside with respect to random thoughts.
And what is anti-fragile will benefit more from variability and necessarily, will have more upside than downside from random shocks.
For example, if I fall 10 meters, I’m harmed more than 10 times than if I fell one meter.
If you have a portfolio that is anti-fragile, a 10 percent move in the market would benefit you a lot more than 10 times a one percent move in the market.
These concepts, of course, verbally don’t appear clear. Like anything in science, it’s not very intuitive. It takes some time to work through the points.
Read more of Nassim Nicholas Taleb’s thoughts here.