Nassim Taleb explains how fragile economies crumble under stress

Nassim Taleb explains how to invest in fragile and 'antifragile' economies
The author of The Black Swan explains his latest 'antifragile' theory, which divides the world economy into three categories: fragile, robust and antifragile.
The theorist's main idea is that vertical systems and systems with too much control find it problematic to survive. More chaotic systems that have experienced trauma and know how to react to disaster are considered to be 'antifragile' and better investments.
“We need to measure upside and downside of every event to understand the level of its fragility. For example, the US economy is very antifragile, and is resistant to unpredictable surroundings. Taleb considers uncertainty to be a positive thing. The counter example is Saudi Arabia, which has never experienced a major economic upheaval.
The Lebanese native and naturalized American citizen spent years as a derivatives trader at Credit Suisse UBS, Banque Indosuez, Deutsche Bank, and BNP Paribas. Currently, he is an honorary professor of risk analysis at New York University's Polytechnic Institute.
His previous books are The Black Swan and Fooled by Randomness, which were critiques of economists and financiers and less theory-based.
Discovering fragility theory by staring into a cup of coffee
He started his speech with a cup of coffee. But not the one he was drinking from, but the mug he used to drink coffee from during his days on the trading floor.
“Many professionals enjoy coming to work at 10:00 AM,” he said. “Traders, however, come at 7:00 AM and drink a lot of coffee. So I was looking at my cup once and realised it can teach me a lot. I saw that my cup was a fragile thing. But why? Then it occurred to me: because it doesn't like when surroundings are volatile, if something happens, it can break easily. I then started to think that many things in the economy are fragile as well. And I created a concept of economic fragility. I can now say that FRAGILE is everything that doesn't like volatile conditions. We can't predict how exactly it will break, but it will. I started to look deeper into the theory and looked into how systems work with chaos, volatileness, unpredictability”.
Anti-fragility and Greek mythology
When Mr Taleb wanted to find a word that meant the opposite of fragile, he realised that there is no word in English. So he invented one: ANTI-FRAGILE. So now in his theory fragility is a low level of interest in volatility and anti-fragility is, conversely, almost an instinct for it.

Fragile, robust, and antifragile represented in Greek mythology
There are three types of systems: Damocles sword, Phoenix bird and Hydra
He then realised that although there is no word, the concept of anti-fragility existed in Ancient Greece in the myth of Hydra – an animal with many heads, whose heads grow the more you cut them off.
That made him realise that there are three types of systems, according to their fragility, all described by the Greek mythology.
The first system type is fragile. They can be described using the myth of Damocles Sword: if you do not move, it is ok, but the tiniest move could cause a tragedy.
The second type is stable, which Taleb likes to a Phoenix bird: it tends to stay the same, with no progress on the horizon.
The Third type of system is anti-fragile. They are like the mythical Hydra: if you attempt decapitation, two more heads will immediately sprout. The best example of this type of system is ISIS, according to Mr Taleb.
Uncertainty is natural
What is the difference between a cat and a washing machine? A wrist and a table?
“I hit a table with my wrist and it will become stronger over time. What about the table? Will it be stronger? The difference between organic, natural systems, and mechanic systems is that the first ones can learn. A cat can learn, but a machine cannot, organic systems are anti-fragile, mechanic ones are fragile.”
To illustrate this Mr Taleb suggests taking a trip into the forest.
“There are fires in the forest sometimes. How do you eliminate fire? With water. The logic is: if you do not want fires to happen, pour water over the forest and keep it there, keep trees wet. In that case, it seems like the fire will never happen again. But in reality such conditions will only trigger the organic processes that create fires and you'll have more. So the conclusion is: it is better to let the forest control itself”.
Similar logic is applicable in economics. If you try and control the economy, the sum level of risk grows, until the monster comes and destroys it.
Variability is good for survival
Usually, when we try to lower the risk, we lower variability. That is a central mistake because the more you try to regulate something, the more fragile it becomes. We see it in all systems that humans create and try to control.
Natural systems have their inner mechanisms of feedback, internal aspiration towards chaos and self-control. When we try to lower variability, we turn these mechanisms off. That means that we minimise the survival chances for the system itself.
“Organic systems are able to use trauma (facing chaos) for growth. In our culture, we do not appreciate the role of post-traumatic growth, but organic systems only benefit from stress”.
So invest in anti-fragility?
If we want to invest smart, we need to invest in anti-fragile economic systems. To understand them, we can use this graph. To remember the easy interpretation, we need to remember that smiley-shaped systems like volatility and are antifragile, while the grinning ones are fragile and volatility is their biggest enemy.

Small and a bit chaotic
In the systems that humans created it can be achieved by smaller sizes of the organisations and less control. Large firms do not like volatility and are therefore fragile.
“If an elephant falls from this stage, it will break a leg and won't survive, while you can throw a mouse from the window and it will live. So the mouse is much more effective from the point of view of the organic system. It survives better.”
To prove the need for chaos in companies, Mr Taleb suggests looking at Nokia, which started as an overshoe making company, or considering Viagra, which was fist invented as blood-pressure treatment.
“800, 000 drugs are certified in the world, but only 20 of them are used for the same symptoms as they were initially invented for. It is important to see new opportunities and grab them. Like Apple is now looking into car-making. Why? Because you never know best how to use the technology, even if you invented it.”
Antifragile vs. 'smart' investments
Economically it is important to see the way to make many little mistakes, none of which will be too expensive for you.
“If you throw a stone into a person, it may hurt them. If you make a dust from this stone and throw it with the same speed into a person – no harm. If you jump from 11 metres – it may hurt. If you jump 11 times from 1 metre – nothing bad happens”.
As humans, we are genetically made to like more complex systems that we create themselves, which means we like stress as well and prefer being antifragile. It is also beneficial for the systems to remember and use these principles, according to Mr Taleb.
Tags: bnp paribas, Credit Suisse, Deutsche Bank, nassim taleb, UBS
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