Antifragile: Things That Gain From Disorder

Nassim Nicholas Taleb's [NNT] latest book, Antifragility discusses how institutions can survive through chaos and diversity. In a lengthy interview with Reason's Nick Gillespie he indirectly promotes capitalism and simplifies his message by saying, "...I want errors to be multiplied, that's it." He then goes on to elaborate the overall theme of his book and relates it to banking finance, monetary policy, options theory, etc. So read on for my summary and to see the full interview as he shake's up the WS establishment yet again...

WHAT IS ANTIFRAGILITY?
A general analogy would be that any complex organic system communicates with the environment via stressors and so a fragile system has more down side to random events, hates volatility, and its payoff is concave. Conversely, an antifragile system has more upside than down side, is robust to random events, and gains from disorder as well as volatility. Subsequently, NNT's antifragility deals with three central points…

• Centralization: an aggregation of risk and coalescence of power such as TBTF.
• Leverage: high levered debt has systemic consequences and is fragile.
• Skin-In-The-Game: Large institutions essentially are short-volatility, selling out-of-the-money options on demand deposits.

WHERE DID WE GO WRONG?
He begins his critique during the Reagan Administration when the the S&L industry was bailed out. He accuses Alan Greenspan of further enhancing fragility and the buildup of asymmetries with his monetary policies. Then he boldy goes on to state outright that…

Banking is an inefficient business.”

NNT further adds that if there are no failures, information asymmetries, and risk-hiding [tail-risk] it prevents Adam Smith’s “robustness” in lieu of the collective individual pursuit of self-interests. Although he does make his point by ascribing three attributes of capitalism that have been lost through these policies, meshes well with his antifragility, and are antithetical to Nietzsche’s philosophy of, “what kills you, makes me stronger.”

1. Create Disincentives: institutions that fail create strong incentives not to replicate their behavior and today’s moral hazard prevents that.
2. Decentralization: draws upon the Island Effect and Roman city-states to argue against the problem of size and TBTF.
3. Failing Early: gives his opinion on heuristics to effectively deal with banking risk and fluidity between government and WS positions.


SEE FOR YOURSELF
So this was just my summary and an abbreviated one at that but don't just take my word for it. Check out the almost one hour interview below and come to your own conlusions. Also, if you're interested you can purchase NNT's book, Antifragility: Things That Gain From Disorder...I probably will.

NNT is usually controversial figure, so let's hear it in comments below monkeys!