Wednesday, January 30, 2013

Review of Antifragile: Things That Gain from Disorder by Nassim Taleb

In the past I would have described myself as a fan of Taleb - he even has a tag on this blog. Reading his latest, Antifragile: Things That Gain from Disorder, has tempered my enthusiasm.

If you can say that this rambling, bloated, self-indulgent book has a thesis, it is primarily that "antifragility" is a property of systems that have survived, and that depriving these systems of volatility and stressors harms them.

This leads in to a good (but short) critique of the new Steven Pinker book about violence, comparing the idea of a safer world to the bubble era concept of a "great moderation" created by the Federal Reserve. Of the competing explanations for Fermi's paradox, my favorites are vast distances, inverse correlation between intelligence and fertility, and destructive wars. It is just too early to say how often and to what extent nuclear weapons will end up being used.

One reason I've been fond of Taleb is that as a trader he was always long vol, and many of my strategies have been long vol as well (betting on collapses). So, we both know what it's like to have a rather painful stream of P&L's come in because of noise or propaganda, punctuated by discontinuities where a company fails or the market crashes. He points out that "the more frequently you look at data, the more noise you are likely to get" rather than signal. This means that long term investors (long or short) should not obsessively watch prices on their screen - or watch CNBC.

He says that complex systems are vulnerable to "multiplicative chains of unanticipated effects". Less is more. While true, Charles Perrow's book Normal Accidents: Living with High-Risk Technologies was a novel, and much more interesting, discussion of this. Falkenstein has pointed out a tendency of Taleb to neglect to survey what was already known about a subject or point out how his contribution differs.

Another example - he writes about how regulators love complex regulation because their knowledge of the glitches and loopholes gives them an edge that they can sell to private businesses later. Of course! But, James Wilson said it better.

In the climate change discussion where he attacks a petrochemical engineer by saying that we are "doing something new to the planet" and that "the burden of evidence is on those who disturb natural systems". Yet, Taleb's own commentary on iatrogenics is that the burden should be lower for technologies and interventions that deliver immediately obvious benefits. Are we going to stop using fossil fuels and have a 95 percent population die off on the chance that global warming theory is both correct, urgent, and unsolvable through other means? What is the expected value of that for someone in the 95%, i.e. someone not invited to Davos?

Taleb goes to Davos?! And he thought that conversations at Davos happen for the purpose of "saving the world from evil"? Crooks are going to stop looting governments because he writes a ponderous book? Why does he think that he gets invited to Davos - it's so that he can be co-opted! Why does he think he gets so much airtime?

The most interesting thing about Taleb is what it tells you about being a successful book seller. He has even identified it in print: no such thing as bad publicity. Also, there are increasing returns to size where a certain proportion of readers will decide to read everything you write, which means it's beneficial to have a big back catalog.

I think Falky summed it up best: "contra Antifragile I would say: don't bias your portfolio towards lottery ticket investments, even if only 10%. Find something you are good at, become excellent at it, and invest your time and speculative wealth there."

Taleb likes lottery ticket type investments with high gamma. Does he like worthless stocks? If not, how does he differentiate between the many types of high gamma investments - most of which we know for a fact are overpriced because of the longshot bias?

The trouble is that to allocate resources, you need a theory of pricing. Thorp had this for warrants, other great investors have their niches. Falky's idea of becoming excellent at something means having a comparative advantage at pricing (assessing) opportunities.

2/5; also retrospectively downgrading the entire Taleb oeuvre (other reviews forthcoming)

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