Author Nassim Nicholas Taleb

The renowned political and financial thinker explains his argument that chaos should be embraced—the position he takes in his new text, Antifragile.

Nassim Nicholas Taleb was a businessman and quantitative trader for almost two decades before becoming a full-time philosophical essayist and academic researcher, specializing in the risks of unpredicted rare events. A best-selling author who predicted the 2008 financial crisis, his book, Fooled by Randomness, was a cult "must read" on Wall Street, and The Black Swan—called one of the 12 most influential books since World War II—spent more than a year on the NYT best-seller list. Taleb has done work for the IMF and is a professor of risk engineering at NYU's Polytechnic Institute. His latest book is Antifragile.


Tavis: Nassim Nicholas Taleb is a professor of risk engineering at NYU’s Polytechnic Institute and the author of two “New York Times” best-selling texts, “The Black Swan” and “”Fooled by Randomness.”

His latest is called “Antifragile: Things that Gain from Disorder.” He joins us tonight from Washington. Professor Taleb, good to have you back on this program, sir.

Professor Nassim Nicholas Taleb: Thank you for inviting me again.

Tavis: I want to get straightaway into the book, but let me start with the news of the day. As you well know, everybody in Washington where you sit tonight, talking about the fiscal cliff, so-called fiscal cliff. They’re not talking to each other at the moment, apparently, but that’s what the conversation is ultimately going to get to – how do we avoid going over this so-called fiscal cliff?

I read something the other day where you suggested that the fiscal cliff might be good, but I got a chance to go through your book. I understand why you might think you might feel that way. The book basically argues that we need disorder to develop. That we need disorder in our world to develop.

We’ll come back to the book in a moment, but based upon that notion of needing disorder to develop, why might, to your mind, the fiscal cliff, or going over it, be a good thing?

Taleb: We’ve been stuck now for four years in a state of complacency. Nobody wants to do anything about accumulating problems. Everybody knows about the problems. I think that the stabilization, artificial stabilization, is masking deeper problems.

If you let markets – in general, my belief is that if you let markets give you information, they’ll give you the information rather than artificially prop up everything by having the Federal Reserve control prices and buy back the debt. This is not a long-term, sustainable situation. What I think should happen, if you’re going to fail, you’d rather fail early than fail late in general, in this and other situations.

Tavis: So I’m trying to understand where the line is between things that happen to us, as you argue in the book, that we can’t control, so we have to deal with it, so there are things that happen that we have no control over, versus folk in Washington where you sit tonight who don’t want to have courage or conviction or commitment to anything.

They don’t want to compromise on anything, and so we end up in this mess. This is not something that happened to us. This is man-made, yes?

Taleb: Well, the situation is not just the fiscal cliff. The fact is we’re spending a lot more than we’re earning as a nation, and the nation is rich enough to try to live within its means. The problem is, of course, that people keep delaying he final problem.

At some point you’re going to have to find a solution. They keep delaying the solution and they delay the solution, and every time we have a worse risk. So I’d rather have things solved early than late. That’s my situation. I’d rather have the market tell us what – I’d rather have events precipitate events, rather than just sit there like passive people in Washington.

Tavis: So we –

Taleb: But the core of my idea is that it’s not just a fiscal cliff. We have had, ever since Greenspan came to run the Federal Reserve, we have had this artificial stabilization masking problems for a long time, stabilizing markets, stabilizing a lot of things.

And it’s very harmful, sort of like a forest in which you stifle every small fire. In the long run, you’re going to have flammable material accumulating, and the big fire is going to be a lot worse.

Tavis: So we go over this cliff and in the best of worlds, what happens once we go over the cliff?

Taleb: Then we’ll be forced to find a solution, you see? Let people find a solution rather than have politicians out there just bickering with each other. They don’t have skin in the game. They’re not representing us, they represent their own interests. I’d rather take things to their conclusion.

Tavis: If in the process the American people get hurt, then what?

Taleb: The point is not to hurt. The American people will eventually get hurt by this accumulated deficit. That’s the problem. We have too much deficit. We have to find a solution.

If they see the abyss, they’ll be forced to find a workable solution. Now they don’t seem to have the incentive, and then they patch things up and then come back and reopen it six months later or one year later. This is not a sustainable solution.

Tavis: Right.

Taleb: But it links sort of to my – the more general problem for me is that any system that is deprived of its natural volatility, with government up (unintelligible) volatile, any system becomes very fragile, just like the economy became fragile by eliminating variations, by micromanaging it during the (unintelligible) days.

Tavis: So let me use that now to segue into the text.

Taleb: Exactly.

Tavis: This book, again, called “Antifragile.” Define for me antifragile.

Taleb: Okay. When you ask people what’s the opposite of fragile, they tend to say robust, resilient, adaptable, solid, strong. That’s not it. The opposite of fragile is something that gains from disorder.

I was an option trader for a long time, half of my life before I became an academic, and I had a name for things that were harmed by volatility and things that gained from volatility.

I realized that you could map fragility as something that loses from volatility, and of course things that gain from volatility, we had to have a name different from resilient, because they need volatility to operate. And I called them antifragile.

So the antifragile needs variation, needs information, but people made mistakes shooting for robustness and stability in things that really needed some variability. Like you go to the gym, I’m certain. People work out, they stress their body, and their body gets stronger from stress.

The same thing applies to your bones. They need stressors. The same thing applies to economic life. They don’t realize that anything organic requires some dose of variability so it can adapt all the time, and fixing things is not a good idea. So we have departed from, since the enlightenment, from this notion of viewing economic life as something organic, to thinking that it’s more like an engineer.

I call it the mistake of mistaking your cat for a washing machine. A washing machine needs constant maintenance, you see. It doesn’t want any harm. It wants tranquility, and you need someone to – you’re not going to harm it by continuously monitoring it and adjusting it.

But something organic, like your body, you mess it up. This self-healing, it has some properties. It likes disorder. So is the economy something organic or is it something engineered? I think it’s closer to the organic. You harm it by artificially suppressing volatility in it.

Tavis: Does that mean that failing is a good thing?

Taleb: I think there are two kinds of systems. There are systems that use failure as fuel for improvement, where the cost of failure is small, the system, and let’s take the restaurant business – the reason you’re going to have a good meal tonight after the show, of course, is because the failure rate of the restaurant business never goes – the system benefits from failure, okay?

Failure saves lives. In the airline industry, every time a plane crashes the probability of the next crash is lowered by that. The Titanic saved lives because we’re building bigger and bigger ships. So these people died, but we have effectively improved the safety of the system, and nothing failed in vain.

Now, on the other hand, you take structures that are artificial and not well put together; say, the banking system. A bank fails, the odds of the next bank failing is higher, so this system is not natural; it’s not put together very well.

You want failures to be small and informational. Silicon Valley does very well. It knows how to use failure as a tool for improvement, and people learn, as I said earlier, to fail fast – fail fast, fail quickly, repeat it again. Make sure that you are in a situation where the constant mistakes are small and can be used for something.

Tavis: So you come out of a trial-and-error business. You are now an academic. Does that mean that trial-and-error is better than academic knowledge?

Taleb: I looked at history, and effectively, technology comes from largely trial and error and heuristics and experience. Usually we have small harm and big benefits. Later on, after a long history of we had the industrial revolution in the UK and all these things, then someone writes a textbook and then you make a theoretical, and we have the illusion that technology comes from academic theory rather than it comes from heuristics and trial and error.

So there is this mistake that we make. I call it lecturing birds how to fly. The asset of America is trial and error – it’s these people hungry, and they learn from their mistakes and they make a lot of small mistakes. That’s how we got here, that’s how the UK got there.

Now on the other hand, as countries get rich they start increasing education and the very educated people tend to not like trial and error, because they think they’re obligated to use the body of knowledge they have. The productivity dropped, the rate of innovation drops.

Tavis: You mentioned the UK; we’ve talked, of course, about the U.S. Let me throw a curve ball at you. How does this notion of antifragile or antifragility apply, or how is it playing out, to your mind, in a place like Egypt right now?

Taleb: The way I was complaining about Egypt even before the Arab Spring, when you suppress – political life loves some volatility. We benefit from volatility, and your (unintelligible) comes from the bottom, like Switzerland is the perfect place where you have volatility at a municipal level that nothing up top – small units competing with each other.

The exact, perfectly unstable system is like Saudi Arabia or Egypt, where Egypt before the Arab Spring, where the American foreign policy was to stabilize everything artificially, as Greenspan did. So we had no information for 40 years, about 40 years, no information. A system, artificially stabilized, and of course you have hidden risks under the surface, and you don’t know where the risks are.

Of course you remove the lid, as what happened with the Arab Spring, and now we’re seeing things that nobody understands and it may turn into a total mess. So a system was fragilized by depriving it of some political volatility. Italy, at the same time, had maybe 40 governments, fluctuates, doesn’t sink.

Tavis: Does embracing antifragility always lead to greater strength?

Taleb: Well, the whole idea is you want to favor systems that benefit from error, disorder, variability and things like that. You want to favor these systems and unfortunately, when – there’s something I call the Soviet (unintelligible) Illusion. The more the government becomes intrusive, the more things have to follow a script, and it can’t handle this kind of system.

So we are in a situation today where a lot of countries got there because of trial-and-error, and then suddenly you have bureaucrats at the top. It doesn’t work that way. And plus there are other problems involved, which is a moral hazard. That in the past, people were harmed by their own mistakes. They had skin in the game, and today we’re starting to see a wedge those who benefit from the mistake and those who were harmed by it.

For example, bankers, they’re not harmed by their mistakes. They benefit when things go right, and the society pays the price. So we have a lack of skin in the game, and so we are in a situation – today the world is not as stable as I would like it to be.

Tavis: Is that why you argue that bankers should not receive bonuses if they take federal funds?

Taleb: Exactly. The bonus for bankers fragilizes the system. Someone has the upside at the expense of others. You see, when you have the upside and little downside, you’re really antifragile. Volatility doesn’t harm you and can benefit you.

Then on the other hand, they transfer the down side to April 15, we pay for bankers’ bonuses indirectly. They make money, they keep the bonuses. When they lose money, we pay for it.

Effectively, a lot of the problem they have today comes from the fact, from that structure, where the system became very fragile because some people had vested interests in engaging in risky strategies, knowing they were not going to be penalized by it.

So we need to modify it. How can we modify it? We should have clawed back bankers’ bonuses; we should have done something to eliminate what I call a free option (unintelligible) bankers.

Instead, in 2010, two years after the crisis, after we bailed them out – Citibank, for example, was almost near receivership, right, without the taxpayer bailout – they paid themselves more bonuses than ever in history. So we have moved from the old capitalistic system of skin in the game, entrepreneur, risk-taker, you pay for your mistakes, and you have the upside and downside, to a system, where you have a class of people who have no downside.

They transfer that side to society, and they have all the upside for themselves. Absence of skin in the game is becoming extremely pervasive through the system.

Tavis: I want to come back to that larger society and everyday people in just a moment, how this notion of antifragility impacts our everyday lives. But let me just detour for a quick second, and it’s really not much of a detour, since we’ve talked about this before, but you were one of the persons years before this collapse happened who predicted that this would happen if we stayed on this particular track.

Let me ask you right quick whether you see anything today that suggests that any lessons have been learned, or are they as headstrong as they were prior to the collapse?

Taleb: We are worse. Let me explain what I saw before the crisis. There’s fragility, robustness, antifragility. The system with a lot of fragility visibly collapses. That brings fragility.

Moral hazard brings fragility. Asymmetry, someone makes the upside, transferring downside to other, brings fragility. We had that before the crisis, of course, and we have the huge amount of debt mounting in the system, and the problem hasn’t been cured. We’re just transferring private debt into public debt, which is intolerable.

So we are not better off than we were before. We have risks we didn’t have before, and we have, of course, some things have improved a little bit, and we wasted now five years, okay, five years after this crisis patching up and arguing and bickering.

Nobody is – they should sit down and realize that they’re not – people argue about a fiscal cliff, they’re not like two teams trying to score points. They should represent us.

Tavis: Let me come back now, as I said a moment ago, to how this notion of antifragility applies to our everyday lives. You argue in the book that if I spend my life working for one employer in this economy, in this world, I am fragile, but if I find myself into entrepreneurship and I have options and I can maneuver, then I’m antifragile. Tell me more.

Taleb: Exactly. I compare two brothers – one is in London, one is a taxi driver and he has a volatile income, and his brother has, on average, the same income and works in the personnel department of the company.

The same age, in their fifties. The taxi driver has fluctuation, but every day, every bad day he learns something from it that makes him adjust, okay, to for example if he doesn’t have rise in some sector, it forces him to adapt.

So he really is on top of his risk. He sees his risk, he has variations of his income, but nothing can be very severe, because it’s not going to be possible for him to go completely without any ride so long as people take taxis.

His brother, on the other hand, very stable income all his life, working for a same employer, literally, all his adult life, and is laid off at age 53 and three-quarters. When you’re that age, in an economy like the UK or Europe, you don’t – you’re done. Now you have to spend the rest of your life in a state of depression because you can’t find, you’re not used to dealing with the real world.

You have – so what happened was that he was not – he didn’t have a stable income. He had a lot of risk in his income, but the risks were hidden from him, whereas the taxi driver or the freelance person or the – anyone who has a variable income is vastly more protected from deep adversity than someone who has a very steady income.

This you can generalize to a lot of things, like when I compared Italy to Saudi Arabia or Egypt before the Arab Spring. It’s the same thing. I can generalize to about everything. Variability is very good in the long run to mitigate black swan risks, these big, deep crises.

Tavis: So the brother who at 53 lost his job, what might he have done differently?

Taleb: Well, if he were a consultant, self-employed, he would have had skills to fit the needs of the A market, whereas now he had one employer, dependent on that employer. They terminated his position; now he doesn’t have any skill applicable outside that employer, and the company was risky, you see?

So he could have done differently is change jobs, or change skills, or be self-employed, which is overall why a system with a lot of artisans and small companies and small corporations does a lot better, because small corporations have more variations and are forced to adapt faster.

Tavis: So if you’re watching this program right now and you’re listening to this example of these two brothers, and you are closer to the 53-year-old’s narrative than you are to the taxi driver’s narrative, what’s Professor Taleb’s advice to that person right now, before they get to that point where they get laid off and they’re 53 and can’t find a job right away?

Taleb: Exactly. Never, never, never think – that’s one lesson you should have in life. Never think that lack of variability is stability. Don’t confuse lack of volatility with stability, ever.

Tavis: Got it. Why do you think most of us do that, because we’re conditioned that way?

Taleb: Because of the naïve misunderstanding of risk, and that’s just at a level of the individual. A lot of people, before the crisis, you see, were buying these bonds that pay them a fixed income and seemingly were not risky, but in fact had a massive amount of risk hidden in them.

These notes, subprime notes. It’s not like (unintelligible) it’s not just limited to career choices. Anything that provides you with very, very stable income, very stable conditions, maybe generally stable, that often, it masks real risks, risks of blow-ups. So you should, like the Romans say, fluctuates, doesn’t sink.

But the same thing applies to your body. You’re a lot healthier – if you spend – think about it. Look at two brothers now, one spends 10 years in bed, no germs, nothing, and the other brother is out in the elements. Who’s going to be stronger after 10 years? The one who spent 10 years in bed? No. Visibly the one who spent 10 years in bed was seemingly in a very comfortable situation, but he’s going to be a lot weaker from that.

Comfort makes you weaker. We need some variability, some stressors. Not too much, but just enough.

Tavis: This notion – I thought I heard you intimate that where business is concerned there is a value in being a small business, that small is better, that small is more efficient. Did I hear you correctly?

Taleb: Yeah. I’m applying that to everything, from political systems to more decentralization in political systems, to projects. Why do we have big government deficits? Something I sort of show in the book – a project of $100 million may have cost overruns, 30 percent more cost overruns in percentage than a $ million project, so big is nice when things are right, but there are a lot of hidden costs to size, and especially the same thing applies to political systems.

A political system composed of a lot of municipalities, each one having a different policy. So you have states and municipalities and localities having – you have huge political diversity. Some are friendlier to the age, some are different.

So this kind of diversity protects the system from the big blow-up, whereas a system that’s monolithic, like Soviet-style, is definitely weaker. It looks more stable, but it’s weaker. So I’m generalizing the (unintelligible) as well.

Tavis: How do we go about changing where our body politic is concerned, having people making decisions who do have skin in the game? Because if you’re right, you’re right – if the folk who make decisions in Washington, the folk on Wall Street don’t have skin in the game, then none of this ever changes.

Taleb: Exactly. I have two simple rules. The reason municipalities work better, one of the reasons, than top-down government, is because people, when they make a mistake, they’re penalized socially. There’s ostracism, they go to church and people don’t say hello to them, for example. So they’re afraid of that thing.

Whereas a bureaucrat in Washington with an Excel spreadsheet is not going to be harmed by the spreadsheet if he makes a mistake. He’s not going to be ashamed by it.

This is one way to enforce skin in the game by having decentralization. It helps that. But another thing is the bankers. It’s very simple. I’ve been calling for years – if you’re going to bail out someone, he’s a civil servant. I don’t understand why they’re not treated like civil servants, you see?

We’re bailing them out. They have the upside; we pay for the down side. Not only it’s shocking, but it was even more shocking to do nothing about it still.

Tavis: There’s a wonderful quote from the book that I think sums up this entire conversation with regard to what “Antifragile” is all about. “Wind extinguishes a candle and energizes fire. Likewise, with randomness, uncertainty, chaos, you want to use them, not hide from them. You want to be the fire and wish for the wind.”

That from the new book “Antifragile: Things that Gain from Disorder,” by “The New York Times” perennial best-selling author Nassim Nicholas Taleb. Professor Taleb, good to have you on the program. Always a delight to talk to you, sir.

Taleb: Thank you very much for inviting me again. Thanks.

Tavis: That’s our show for tonight. Thanks for watching, and as always, keep the faith.

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Last modified: December 7, 2012 at 2:12 pm