Antifragile: Things That Gain from Disorder

by Taleb, Nassim Nicholas

  It would seem a reasonable investment if one accepts the notion that university knowledge generates economic wealth. But this is a belief that comes more from superstition than empiricism. Remember the story of Switzerland in Chapter 5—a place with a very low level of formal education. I wonder if my nausea comes from the feeling that these desert tribes are being separated from their money by the establishment that has been sucking dry their resources and diverting them to administrators from Western universities. Their wealth came from oil, not from some vocational know-how, so I am certain that their spending on education is completely sterile and a great transfer of resources (rather than milking antifragility by forcing their citizens to make money naturally, through circumstances).

  Where Are the Stressors?

  There is something that escapes the Abu Dhabi model. Where are the stressors?

  Recall the quote by Seneca and Ovid to the effect that sophistication is born of need, and success of difficulties—in fact many such variations, sourced in medieval days (such as necessitas magistra in Erasmus), found their way into our daily vernaculars, as in “necessity is the mother of invention.” The best is, as usual, from the master aphorist Publilius Syrus: “poverty makes experiences” (hominem experiri multa paupertas iubet). But the expression and idea appear in one form or another in so many classical writers, including Euripides, Pseudo-Theoctitus, Plautus, Apuleus, Zenobius, Juvenal, and of course it is now labeled “post-traumatic growth.”

  I saw ancient wisdom at work in the exact opposite of the situation in Abu Dhabi. My Levantine village of origin, Amioun, was pillaged and evacuated during the war, sending its inhabitants into exile across the planet. Twenty-five years later, it became opulent, having bounced back with a vengeance: my own house, dynamited, is now bigger than the previous version. My father, showing me the multiplication of villas in the countryside while bemoaning these nouveaux riches, calmly told me, “You, too, had you stayed here, would have become a beach bum. People from Amioun only do well when shaken.” That’s antifragility.

  L’Art pour l’Art, to Learn for Learning’s Sake

  Now let’s look at evidence of the direction of the causal arrow, that is, whether it is true that lecture-driven knowledge leads to prosperity. Serious empirical investigation (largely thanks to one Lant Pritchet, then a World Bank economist) shows no evidence that raising the general level of education raises income at the level of a country. But we know the opposite is true, that wealth leads to the rise of education—not an optical illusion. We don’t need to resort to the World Bank figures, we could derive this from an armchair. Let us figure out the direction of the arrow:

  Education → Wealth and Economic Growth

  or

  Wealth and Economic Growth → Education

  And the evidence is so easy to check, just lying out there in front of us. It can be obtained by looking at countries that are both wealthy and have some level of education and considering which condition preceded the other. Take the following potent and less-is-more-style argument by the rogue economist Ha-Joon Chang. In 1960 Taiwan had a much lower literacy rate than the Philippines and half the income per person; today Taiwan has ten times the income. At the same time, Korea had a much lower literacy rate than Argentina (which had one of the highest in the world) and about one-fifth the income per person; today it has three times as much. Further, over the same period, sub-Saharan Africa saw markedly increasing literacy rates, accompanied with a decrease in their standard of living. We can multiply the examples (Pritchet’s study is quite thorough), but I wonder why people don’t realize the simple truism, that is, the fooled by randomness effect: mistaking the merely associative for the causal, that is, if rich countries are educated, immediately inferring that education makes a country rich, without even checking. Epiphenomenon here again. (The error in reasoning is a bit from wishful thinking, because education is considered “good”; I wonder why people don’t make the epiphenomenal association between the wealth of a country and something “bad,” say, decadence, and infer that decadence, or some other disease of wealth like a high suicide rate, also generates wealth.)

  I am not saying that for an individual, education is useless: it builds helpful credentials for one’s own career—but such effect washes out at the country level. Education stabilizes the income of families across generations. A merchant makes money, then his children go to the Sorbonne, they become doctors and magistrates. The family retains wealth because the diplomas allow members to remain in the middle class long after the ancestral wealth is depleted. But these effects don’t count for countries.

  Further, Alison Wolf debunks the flaw in logic in going from the point that it is hard to imagine Microsoft or British Aerospace without advanced knowledge to the idea that more education means more wealth. “The simple one-way relationship which so entrances our politicians and commentators—education spending in, economic growth out—simply doesn’t exist. Moreover, the larger and more complex the education sector, the less obvious any links to productivity become.” And, similar to Pritchet, she looks at countries such as, say, Egypt, and shows how the giant leap in education it underwent did not translate into the Highly Cherished Golden GDP Growth That Makes Countries Important or Unimportant on the Ranking Tables.

  This argument is not against adopting governmental educational policies for noble aims such as reducing inequality in the population, allowing the poor to access good literature and read Dickens, Victor Hugo, or Julien Gracq, or increasing the freedom of women in poor countries, which happens to decrease the birth rate. But then one should not use the excuses of “growth” or “wealth” in such matters.

  I once ran into Alison Wolf at a party (parties are great for optionality). As I got her to explain to other people her evidence about the lack of effectiveness of funding formal education, one person got frustrated with our skepticism. Wolf’s answer to him was “real education is this,” pointing at the room full of people chatting. Accordingly, I am not saying that knowledge is not important; the skepticism in this discussion applies to the brand of commoditized, prepackaged, and pink-coated knowledge, stuff one can buy in the open market and use for self-promotion. Further, let me remind the reader that scholarship and organized education are not the same.

  Another party story. Once, at a formal fancy dinner, a fellow in a quick speech deplored the education level in the United States—falling for low-math-grades alarmism. Although I agreed with all his other views, I felt compelled to intervene. I interrupted him to state the point that America’s values were “convex” risk taking and that I am glad that we are not like these helicopter-mom cultures—the kind of thing I am writing here. Everyone was shocked, either confused or in heavy but passive disagreement, except for one person who came to lend her support to me. It turned out that she was the head of the New York City school system.

  Also, note that I am not saying that universities do not generate knowledge at all and do not help growth (outside, of course, of most standard economics and other superstitions that set us back); all I am saying is that their role is overly hyped-up and that their members seem to exploit some of our gullibility in establishing wrong causal links, mostly on superficial impressions.

  Polished Dinner Partners

  Education has benefits aside from stabilizing family incomes. Education makes individuals more polished dinner partners, for instance, something non-negligible. But the idea of educating people to improve the economy is rather novel. The British government documents, as early as fifty years ago, an aim for education other than the one we have today: raising values, making good citizens, and “learning,” not economic growth (they were not suckers at the time)—a point also made by Alison Wolf.

  Likewise, in ancient times, learning was for learning’s sake, to make someone a good person, worth talking to, not to increase the stock of gold in the city’s heavily guarded coffers. Entrepreneurs, particularly those in technical jobs, are not necessarily the best people to hav
e dinner with. I recall a heuristic I used in my previous profession when hiring people (called “separate those who, when they go to a museum, look at the Cézanne on the wall from those who focus on the contents of the trash can”): the more interesting their conversation, the more cultured they are, the more they will be trapped into thinking that they are effective at what they are doing in real business (something psychologists call the halo effect, the mistake of thinking that skills in, say, skiing translate unfailingly into skills in managing a pottery workshop or a bank department, or that a good chess player would be a good strategist in real life).1

  Clearly, it is unrigorous to equate skills at doing with skills at talking. My experience of good practitioners is that they can be totally incomprehensible—they do not have to put much energy into turning their insights and internal coherence into elegant style and narratives. Entrepreneurs are selected to be just doers, not thinkers, and doers do, they don’t talk, and it would be unfair, wrong, and downright insulting to measure them in the talk department. The same with artisans: the quality lies in their product, not their conversation—in fact they can easily have false beliefs that, as a side effect (inverse iatrogenics), lead them to make better products, so what? Bureaucrats, on the other hand, because of the lack of an objective metric of success and the absence of market forces, are selected on the “halo effects” of shallow looks and elegance. The side effect is to make them better at conversation. I am quite certain a dinner with a United Nations employee would cover more interesting subjects than one with some of Fat Tony’s cousins or a computer entrepreneur obsessed with circuits.

  Let us look deeper at this flaw in thinking.

  THE GREEN LUMBER FALLACY

  In one of the rare noncharlatanic books in finance, descriptively called What I Learned Losing a Million Dollars, the protagonist makes a big discovery. He remarks that a fellow named Joe Siegel, one of the most successful traders in a commodity called “green lumber,” actually thought that it was lumber painted green (rather than freshly cut lumber, called green because it had not been dried). And he made it his profession to trade the stuff! Meanwhile the narrator was into grand intellectual theories and narratives of what caused the price of commodities to move, and went bust.

  It is not just that the successful expert on lumber was ignorant of central matters like the designation “green.” He also knew things about lumber that nonexperts think are unimportant. People we call ignorant might not be ignorant.

  The fact is that predicting the order flow in lumber and the usual narrative had little to do with the details one would assume from the outside are important. People who do things in the field are not subjected to a set exam; they are selected in the most non-narrative manner—nice arguments don’t make much difference. Evolution does not rely on narratives, humans do. Evolution does not need a word for the color blue.

  So let us call the green lumber fallacy the situation in which one mistakes a source of necessary knowledge—the greenness of lumber—for another, less visible from the outside, less tractable, less narratable.

  My intellectual world was shattered as if everything I had studied was not just useless but a well-organized scam—as follows. When I first became a derivatives or “volatility” professional (I specialized in nonlinearities), I focused on exchange rates, a field in which I was embedded for several years. I had to cohabit with foreign exchange traders—people who were not involved in technical instruments as I was; their job simply consisted of buying and selling currencies. Money changing is a very old profession with a long tradition and craft; recall the story of Jesus Christ and the money changers. Coming to this from a highly polished Ivy League environment, I was in for a bit of a shock. You would think that the people who specialized in foreign exchange understood economics, geopolitics, mathematics, the future price of currencies, differentials between prices in countries. Or that they read assiduously the economics reports published in glossy papers by various institutes. You might also imagine cosmopolitan fellows who wear ascots at the opera on Saturday night, make wine sommeliers nervous, and take tango lessons on Wednesday afternoons. Or spoke intelligible English. None of that.

  My first day on the job was an astounding discovery of the real world. The population in foreign exchange was at the time mostly composed of New Jersey/Brooklyn Italian fellows. Those were street, very street people who had started in the back office of banks doing wire transfers, and when the market expanded, even exploded, with the growth of commerce and the free-floating of currencies, they developed into traders and became prominent in the business. And prosperous.

  My first conversation with an expert was with a fellow called B. Something-that-ends-with-a-vowel dressed in a handmade Brioni suit. I was told that he was the biggest Swiss franc trader in the world, a legend in his day—he had predicted the big dollar collapse in the 1980s and controlled huge positions. But a short conversation with him revealed that he could not place Switzerland on the map—foolish as I was, I thought he was Swiss Italian, yet he did not know there were Italian-speaking people in Switzerland. He had never been there. When I saw that he was not the exception, I started freaking out watching all these years of education evaporating in front of my eyes. That very same day I stopped reading economic reports. I felt nauseous for a while during this enterprise of “deintellectualization”—in fact I may not have recovered yet.

  If New York was blue collar in origin, London was sub–blue collar, and even more successful. The players were entirely cockney, even more separated from sentence-forming society. They were East Londoners, street people (extremely street) with a distinctive accent, using their own numbering system. Five is “Lady Godiva” or “ching,” fifteen is a “commodore,” twenty-five is a “pony,” etc. I had to learn cockney just to communicate, and mostly to go drinking, with my colleagues during my visits there; at the time, London traders got drunk almost every day at lunch, especially on Friday before New York opened. “Beer turns you into a lion,” one fellow told me as he hurried to finish his drink before the New York open.

  The most hilarious scenes were hearing on loudspeakers transatlantic conversations between New York Bensonhurst folks and cockney brokers, particularly when the Brooklyn fellow tried to put on a little bit of a cockney pronunciation to be understood (these cockneys sometimes spoke no standard English).

  So that is how I learned the lesson that price and reality as seen by economists are not the same thing. One may be a function of the other but the function is too complex to map mathematically. The relation may have optionality in places, something that these non-sentence-savvy people knew deep inside.2

  How Fat Tony Got Rich (and Fat)

  Fat Tony got to become (literally) Fat Tony, rich and heavier, in the aftermath of the Kuwait war (the sequence was conventional, that is, first rich, then fat). It was in January 1991, on the day the United States attacked Baghdad to restitute Kuwait, which Iraq had invaded.

  Every intelligent person in socioeconomics had his theory, probabilities, scenarios, and all that. Except Fat Tony. He didn’t even know where Iraq was, whether it was a province in Morocco or some emirate with spicy food east of Pakistan—he didn’t know the food, so the place did not exist for him.

  All he knew is that suckers exist.

  If you asked any intelligent “analyst” or journalist at the time, he would have predicted a rise in the price of oil in the event of war. But that causal link was precisely what Tony could not take for granted. So he bet against it: they are all prepared for a rise in oil from war, so the price must have adjusted to it. War could cause a rise in oil prices, but not scheduled war—since prices adjust to expectations. It has to be “in the price,” as he said.

  Indeed, on the news of war, oil collapsed from around $39 a barrel to almost half that value, and Tony turned his investment of three hundred thousand into eighteen million dollars. “There are so few occasions in one’s life, you can’t miss them,” he later told Nero during one of t
heir lunches as he was convincing his non–New Jersey friend to bet on a collapse of the financial system. “Good speculative bets come to you, you don’t get them by just staying focused on the news.”

  And note the main Fat Tony statement: “Kuwait and oil are not the same ting [thing].” This will be a platform for our notion of conflation. Tony had greater upside than downside, and for him, that was it.

  Indeed many people lost their shirt from the drop of oil—while correctly predicting war. They just thought it was the same ting. But there had been too much hoarding, too much inventory. I remember going around that time into the office of a large fund manager who had a map of Iraq on the wall in a war-room-like setting. Members of the team knew every possible thing about Kuwait, Iraq, Washington, the United Nations. Except for the very simple fact that it had nothing to do with oil—not the same “ting.” All these analyses were nice, but not too connected to anything. Of course the fellow got subsequently shellacked by the drop in oil price, and, from what I heard, went to law school.

  Aside from the non-narrative view of things, another lesson. People with too much smoke and complicated tricks and methods in their brains start missing elementary, very elementary things. Persons in the real world can’t afford to miss these things; otherwise they crash the plane. Unlike researchers, they were selected for survival, not complications. So I saw the less is more in action: the more studies, the less obvious elementary but fundamental things become; activity, on the other hand, strips things to their simplest possible model.