Nassim Taleb: The True Nature of Fragile Systems

There's something interesting that I discovered that took me about 21 years to figure out. 21 years. I was an option trader for 21 years and then realized something. I knew unconsciously, but only became conscious of it one day as I was looking at this patently ugly teacup. All right, we have a definition of fragility, very simply connected to what we saw about options. And let me. Let me propose the following. Is fragile? What doesn't like volatility? If this teacup is on a table and there's an earthquake, will it benefit from it? No, you see, Very simple. It is. It wants fragile because it wants calm and predictability. It's harmed by disorder. You guys have earthquakes in California. It doesn't want an earthquake. It doesn't want to be in California. It'd rather be in New York. You see, very simply. And now from this concept of fragility, we're going to get into innovation and optionality. So this, the way I see it is short optionality. And let's look at what short optionality is. This is a payoff of a financial structure that is very vulnerable to phone calls at night, when in the middle of the night, the chairman of the company gets a phone call saying, oh, there's an event. So this payoff, this package, you know, you make or lose some money. But typically the losses, all right, are very large and the profits are very small. Exactly like the coffee cup, except the coffee cup has no variation. Except for the loss, the coffee cup will never improve. Let's see if you can connect this. This package is robust. And this package has an opposite payoff where all the gains are large. The kind of thing that only people in California seem to understand. People in New York, they don't get it because people in New York have this payoff. And let me explain. The banks are in a business of hiding risks. So they make, make, make, make, make, make small. They have no volatility, you know, most of the time. And once every 10 or so years, guess what? They lose everything they made. And then they come to the taxpayer for support. They have the setup for people to give them monetary policy to help them and all that stuff. And meanwhile, they keep their bonuses because it's a very efficient strategy where you make everybody think you're smart. And then when you lose, guess what? It was a bad environment. It was only a quarter when you lost. But visibly, you've lost more than you ever made. Banks lost in 2008 more than history of banking. And of course, they paid themselves a lot of money, they didn't return it to us. So this is a payoff that's very similar to a short, an option. You sell an option, you have very little return, you earn some money, but then something happens. You have unlimited losses or very large losses. That payoff resembles the threshold. The opposite of that payoff would be something that's long volatility. So when I went to try to explain this, people weren't understanding that the opposite of fragile isn't robust. It's not solid. It is not the opposite of fragile. The opposite of this. It's not the straight line. It's not a payoff where you end up unharmed. You agree? If I'm sending a package to, say, Mongolia interior, and the package is fragile, what do I write on it? Fragile. If the package is robust, what do you write on it? Nothing. So if the package wants volatility, wants to be harmed, wants something, wants stressors, wants disorder, wants earthquakes, it's not the same as robust. It'd be something on which you'd write, please mishandle. I am antifragile. It's the opposite of fragile. So the opposite of fragile is not something that is robust or something solid. It's something that when wants disorder. And guess what? There's something called the cluster. And if you like one, you like them all. Uncertainty, variability, imperfect, incomplete knowledge, trance, chaos, these. If you benefit from all of these, you are classified as antifragile. And it's very similar to someone who owns an option.