I love vacations – mostly because I have time to read, think and write (three of my favourite hobbies). I’m writing this from an incredibly peaceful veranda on the cruise ship, staring out into a black ocean (it is about 11pm here). I haven’t had a more calming moment in quite a while.
Continuing my discussion of Antifragile by Nassim Nicholas Taleb (part 1 here). All bold and italics are direct quotes from the book. I want to explore antifragility in more detail in this post, identify how Taleb outlines a practical method of becoming more antifragile, and also show I have used it favourably in my life in regards to investment strategies.
So let’s start with an overview of the principle:
If you have more to gain than lose from an uncertain event (ie. volatility, stress, disruption, unanticipated or a unplanned change) then you are antifragile.
Antifragility implies more to gain than to lose, equals more upside than downside, equals (favourable) asymmetry.
If you have more to lose than gain from the same uncertain event then you are fragile.
Fragility implies more to lose than to gain, equals more downside than upside, equals (unfavourable) asymmetry.
Here is a simplified approach: if you have “nothing to lose” then you are antifragile because you only have upside. In other words, a negative event that you can’t anticipate (or control) cannot hurt you because you have “nothing to lose”, you only have something to gain from the event.
So how do you apply this philosophy? Is it even possible? If you always have something to lose will you always be fragile? Worst of all, doesn’t everyone have at least something to lose? Perhaps – however I don’t think this negates our ability to become antifragile, at least in some aspects of our life.
The first step to becoming antifragile is what Taleb describes as the “domestication of emotions” to remove downside from life, and to achieve this state he refers us to stoicism.
Stoicism is a philosophy that I have become intimately familiar with (borderline obsessed) over the past 3 years. I was first introduced to the concept about 5 years ago when I read Good to Great by Jim Collins. Collins, in articulating his “confront the brutal facts” principle uses an encounter he once had with Vice Admiral Jim Stockdale (the highest ranking POW held in the “Hanoi Hilton” during the Vietnam War).
Collins wanted to know what mindset made the difference between those who held on and survived captivity and those who didn’t. Stockdale’s answer surprised him. He articulated a form of stoicism derived from Epictetus which Collins would describe in the book as the “Stockdale Paradox”.
Essentially the principle was as follows (in my words):
Those who were able, at the same time (hence the paradox), to hold an optimism that they would be eventually rescued with a discipline to confront, and accept, the most brutal facts of their current state of affairs (and prepare for those facts to happen) were able to survive the brutality of captivity. The pure optimists died (broken hearted) and the pure pessimists gave up in despair. So in essence the ability to maintain hope, and at the same time, have the discipline to prepare for pain is a powerful survival mechanism.
Collins (in Good to Great) shows how companies that move past the “good” to become “great” are able to exhibit the paradox in action. I found the principle compelling because at the time Meghann and I were building our business (during my law sabbatical) and we saw a direct application. We needed to hold both mindsets at the same time (the paradox) – hope that we would be successful, but discipline to do the hard work, make the necessary changes and sacrifices (confront the brutal facts).
The strategy turned out to be very effective, which then motivated me to explore more into the life of Stockdale. In doing this I discovered his grounding in Stoicism (Collins doesn’t explicitly mention Stoicism in Good to Great). As I researched more I came across an essay Stockdale wrote about his experience as a POW in Vietnam (COURAGE UNDER FIRE Testing Epictetus’s Doctrines in a Laboratory of Human Behavior). Stockdale articulated his personal philosophy as rooted in the philosophy of Stoicism, particularly the writings of Epictetus and Marcus Aurelius.
Stoicism is a Greek philosophy that peaked in popularity around the mid-1st century AD but has recently experienced a rival because due to its popularity with many Silicon Valley executives and academics. It is commonly associated with the absence of emotions, but I would argue (having read at least a half dozen books on Stoicism including works by Epictetus, Marcus Aurelius, and Seneca as well as contemporary commentaries on the subject) that this is a mischaracterization.
I see Stoicism rather as an “operating system” that allows me to effectively navigate the human experience by understanding what is in my control (and what is not) and only focusing on the things that I can control (namely my actions and my thoughts).
Stoicism provides a portal to becoming antifragile – this is set out by Taleb. Through his discuss of Seneca.
Success brings an asymmetry: you now have a lot more to lose than to gain. You are hence fragile. …When you become rich, the pain of losing your fortune exceeds the emotional gain of getting additional wealth, so you start living under continuous emotional threat.
Seneca, whose Letters From A Stoic I encountered before reading Antifragile articulated a form of stoicism that is unique from others stoics (particularly Epictetus, whose Enchiridion formed the foundation of Admiral Stockdale’s philosophies). Seneca taught that dependence on circumstances and possessions induced a form of slavery, and was known to suggest that all he possessed could fit within a single back (which Taleb discusses in his section on “How To Survive a Shipwreck”). However he also embraced the upside that comes throughout life.
Seneca fathomed that possessions make us worry about downside, thus acting as a punishment as we depend on them. All downside, no upside. Even more: dependence on circumstances – rather, the emotions that arise from circumstances – induces a form of slavery.
A rebut to the stoic philosophy would be that possessions provide a “sense of security” however – there is a negative asymmetry (which is the foundation of fragility). The limited upside (emotional security) that comes from possessions is offset by the large downside (emotional anxiety and uncertainty) when you lose your possessions. Therefore a small payoff and a large potential loss in the event of volatility – hence possession are fragile.
Recall – something is antifragile if it has more upside than downside in the midst of volatility, that is, if a random event that we can neither predict or control, provides more upside (positive gain) than downside (risk of loss), then there is a positive asymmetry, hence the existence of a positive option, hence antifragility.
So if we can act as if we actually “possess” very little, other than our volition (our ability to make choices and act), then we can create a positive optionality. We have very little to lose and lots to gain.
Seneca’s practical method to counter such fragility was to go through mental exercises to write off possessions, so when losses occurred he would not feel the sting – a way to wrest one’s freedom from circumstances.
I started reading stoic texts long (several years) before I picked up Taleb. I started first with Epictetus (I find his Enchiridion to be a short, but powerful text), then migrated to Aurelius (the Meditations) and finally Seneca (Letters From a Stoic). The more I focused on the primary tenants: focusing on what is in my control in each moment and detaching from all else (including possessions, outcomes, what other people think or do) I felt at ease with my new found “uncertain” meta-physical understanding of the world. I also found stoicism to be more “applicable” than eastern traditions (such as zen), despite enjoying some of the texts (I found Zen Mind Beginners Mind to be very difficult to apply, but have very much enjoyed Zen in the Art of Archery).
So Stoicism, on its own, provided me with an emotional “robustness” (to use Taleb’s words). So it is easy to understand, when I first started to embrace the concepts in antifragile, why I found them so compelling – I could move down the triad, first by using stoicism to move from fragility to robustness, and then using Seneca’s unique brand of the discipline to move from robust to antifragile.
So what is so unique about Seneca?
Well for one, despite actively “writing off possessions in his mind” Seneca was fantastically rich (materially).
Seneca was all deeds, and we cannot ignore the fact that he kept the wealth. It is central that he showed his preference of wealth without harm from wealth to poverty.
Wealth without harm from wealth? What is that?
He played a trick on fate: kept the good and ditched the bad; cut the downside and kept the upside…There is an upside-down asymmetry. That’s antifragility in its purest form.
So how can this be used in your life. There are so many applications – let’s start with finance, and discuss the “Seneca’s barbell” strategy that Taleb outlines. This is a strategy that I have actively utilized in my life to great benefit.
Away from the “Golden Middle”
In order to establish an “antifragile” financial plan (positive asymmetry, optionality, more upside than downside) you have to stay away from the middle. This is almost exactly opposite of what most financial advisers will tell you. What is the middle? A “balanced portfolio” invested across multiple asset classes. This has never worked for me – and frankly I don’t know a single person who has every gotten rich this way. I’m waiting to meeting one.
However many people have gotten rich through employing a “barbell strategy”. A barbell strategy is antifragile, and one that I will continue to employ throughout my life. What is the “barbell strategy”? Back to Taleb:
Antifragility is the combination aggressiveness plus paranoia – clip your downside, protect yourself from extreme harm, and let the upside, the positive black swans, take care of itself. We saw Seneca’s asymmetry: more upside than downside can come simply from the reduction of extreme downside (emotional harm) rather than improving things in the middle.
How this works for investments is to keep a very large portion of your holdings in inflation protected cash (clip the downside, maintain optionality to invest in new projects as they come up) and then with a small portion of your portfolio invest it in very risky ventures (like start-ups, private companies, hedges, derivatives (long not short because that would create downside exposure), speculative ventures, venture capital, widely range of industries and asset classes). This is a similar holding strategy to many venture capital companies. Taleb suggests 90% inflation protected cash and 10% risky ventures.
It has worked for us. The “big wins” financially in my life have not come from a “balanced portfolio” but from being in the right place at the right time and having “skin in the game”.
This is really only possible when A) you have enough cash reserves to do something (which is why so much of your portfolio must be in liquid reserves) and B) you concisely pull the trigger on risky ventures. If you hit a black swan (which I will define in a future post) then one winner can easily offset hundreds of small losers. Each “small risky venture” you invest in is like a long call option. It might expire out of the money (then you lost your premium) but it might not.
You only need a couple over the course of your lifetime to really pay off. For us we’ve had some significant “start-up success”, while protecting our downside constantly, and then we pool cash and continually look for new “risky ventures” to invest a small portion of the portfolio in. It is a strategy that is totally antifragile. You aren’t hurt by randomness, you are actually quite benefited by it since it is likely that one of your “speculative ventures” will receive quite a bump in the event of volatility.
This subject – antifragility – is one that is so interesting for me. I want to explore it more and more including posts on the following subjects:
- Fragility and a choice of careers
- Fragility and the law (or as it applies to lawyers and law students)
- The principle of Via Negativa and its application
- The “Lindy Effect” and its application across domains (including religion).
Much more to come on this topic, so hopefully (if you made it this far) you are enjoying the exploration of the concept.