understanding is a poor substitute for convexity -nassim taleb

8/13/2019 Understanding is a Poor Substitute for Convexity -Nassim Taleb

1/5

UNDERSTANDING IS A POOR SUBSTITUTE FOR CONVEXITY (ANTIFRAGILITY)

Something cent!"# $e% cent!"# i& mi&&ing in hi&toic!" !cco'nt& o &cientiic !n techno"ogic!"

i&co$e%* The i&co'&e !n conto$e&ie& oc'& on the o"e o "'c+ !& o,,o&e to te"eo"ogic!"

,og!m& (om telos,-!im-)# th!t i one& th!t e"% on ,e.&et iection om om!" &cience* Thi& i& !

!'/.e0!te1 "'c+ c!nnot "e! to om!" e&e!ch ,o"icie&2 one c!nnot &%&tem!ti3e# om!"i3e# !n

,og!m !nomne&&* The i$e i& neithe "'c+ no iection# 0't m'&t 0e in the !&%mmet% (ocon$e/it%) o ,!%o ! &im,"e m!them!tic!" ,o,et% th!t h!& "ie hien om the i&co'&e# !n the

'ne&t!ning o 4hich c!n "e! to ,eci&e e&e!ch ,inci,"e& !n ,otoco"&*

5ISSING T6E ASY55ETRY

The "'c+ $e&'& +no4"ege &to% i& !& o""o4&* Ionic!""%# 4e h!$e $!&t"% moe e$ience o e&'"t&

"in+e to "'c+ th!n to tho&e coming om the te"eo"ogic!"# o't&ie ,h%&ic&7e$en !te i&co'nting o

the &en&!tion!"i&m* In &ome o,!8'e !n non"ine! ie" "i+e meicine o engineeing# the te"eo"ogic!"

e/ce,tion& !e in the minoit%# &'ch !& ! &m!"" n'm0e o e&igne 'g&* Thi& m!+e& '& "i$e in the

cont!iction th!t 4e "!ge"% got hee to 4hee 4e !e th!n+& to 'niecte ch!nce# 0't 4e 0'i"

e&e!ch ,og!m& going o4! 0!&e on iection !n n!!ti$e&* An# 4h!t i& 4o&e# 4e !e '""%

con&cio'& o the incon&i&tenc%*

The ,oint 4e 4i"" 0e m!+ing hee i& th!t "ogic!""%# neithe ti!" !n eo no -ch!nce- !n &eeni,it%c!n 0e 0ehin the g!in& in techno"og% !n em,iic!" &cience !tti0'te to them* B% einition ch!nce

c!nnot "e! to "ong tem g!in& (it 4o'" no "onge 0e ch!nce)2 ti!" !n error c!nnot 0e

'nconition!""% eecti$e1 eo& c!'&e ,"!ne& to c!&h# 0'i"ing& to co""!,&e# !n +no4"ege to

ege&&*

The 0eneici!" ,o,etie& h!$e to e&ie in the t%,e o e/,o&'e# th!t i the ,!%o 'nction !n not in

the -"'c+- ,!t1 thee nee& to 0e ! &igniic!nt !&%mmet% 0et4een the g!in& (!& the% nee to 0e

"!ge) !n the eo& (&m!"" o h!m"e&&)# !n it i& om &'ch !&%mmet% th!t "'c+ !n ti!" !n eo

c!n ,o'ce e&'"t&* The gene!" m!them!tic!" ,o,et% o thi& !&%mmet% i& con$e/it% (4hich i&

e/,"!ine in Fig'e 9)2 'nction& 4ith "!ge g!in& th!n "o&&e& !e non"ine!.con$e/ !n e&em0"e

in!nci!" o,tion&* Citic!""%# con$e/ ,!%o& 0eneit om 'ncet!int% !n i&oe* The non"ine!

,o,etie& o the ,!%o 'nction# th!t i con$e/it%# !""o4 '& to om'"!te !tion!" !n igoo'&e&e!ch ,o"icie !n one& th!t !""o4 the h!$e&ting o !nomne&&*

Figure 1- More Gain than Pain from a Random Event. The performance curves outward, hence loos !conve"!. #n$where where such as$mmetr$ prevails, we can call it conve", otherwise we are in a concave position. The

implication is that $ou are harmed much less %$ an error &or a variation' than $ou can %enefit from it, $ou would welcome uncertaint$ in the long run.


2/5

OPA:UE SYSTE5S AND OPTIONALITY

F'the# it i& in com,"e/ &%&tem one& in 4hich 4e h!$e "itt"e $i&i0i"it% o the ch!in& o c!'&e.

con&e8'ence th!t tin+eing# 0ico"!ge# o &imi"! $!i!tion& o ti!" !n eo h!$e 0een &ho4n to

$!&t"% o't,eom the te"eo"ogic!"7it i& n!t'e;& mo'& o,e!ni* B't tin+eing nee& to 0e con$e/2 it

i& im,e!ti$e* T!+e the mo&t o,!8'e o !""# coo+ing# 4hich e"ie& entie"% on the he'i&tic& o ti!" !n

eo# !& it h!& not 0een ,o&&i0"e o '& to e&ign ! i&h iect"% om chemic!" e8'!tion& o e$e&e.enginee ! t!&te om n'tition!" "!0e"&* oh!n >en&en !n Lo'i& B!che"ie)* The&e ,o,etie& ienti% the ine$it!0i"it% o

g!in& om con$e/it% !n the co'nteint'iti$e 0eneit o 'ncet!int%ii iii* Let '& c!"" the -con$e/it% 0i!&-

the ieence 0et4een the e&'"t& o ti!" !n eo in 4hich g!in& !n h!m !e e8'!" ("ine!)# !n

one in 4hich g!in& !n h!m !e !&%mmetic ( to e,e!t# ! con$e/ ,!%o 'nction)* The cent!" !n

'&e'" ,o,etie& !e th!t !) The moe con$e/ the ,!%o 'nction# e/,e&&e in ieence 0et4een

,otenti!" 0eneit& !n h!m# the "!ge the 0i!&* 0) The moe $o"!ti"e the en$ionment# the "!ge the

0i!&* Thi& "!&t ,o,et% i& mi&&e !& h'm!n& h!$e ! ,o,en&it% to h!te 'ncet!int%*

#ntifragilei& the n!me thi& !'tho g!$e (o "!c+ o ! 0ette one) to the 0o! c"!&& o ,henomen!

eno4e 4ith &'ch ! con$e/it% 0i! !& the% g!in om the -i&oe c"'&te-# n!me"% $o"!ti"it%#

'ncet!int%# i&t'0!nce !nomne& !n &te&&o&* The !nti!gi"e i& the e/!ct o,,o&ite o the

!gi"e 4hich c!n 0e eine !& h!ting i&oe* A coee c', i& !gi"e 0ec!'&e it 4!nt& t!n8'i"it% !n

! "o4 $o"!ti"it% en$ionment# the !nti!gi"e 4!nt& the o,,o&ite1 high $o"!ti"it% ince!&e& it& 4e"!e*

Thi& "!tte !tti0'te# g!ining om 'ncet!int%# !$o& o,tion!"it% o$e the te"eo"ogic!" in !n o,!8'e


3/5

&%&tem# !& it c!n 0e &ho4n th!t the te"eo"ogic!" i& h't 'ne ince!&e 'ncet!int%* The ,oint c!n 0e

m!e c"e! 4ith the o""o4ing*


4/5

F'the# e&e!ch ,!%o& h!$e -!t t!i"&-# 4ith e&'"t& in the -t!i"&- o the i&ti0'tion omin!ting the

,o,etie&2 the 0'"+ o the g!in& come om the !e e$ent# -B"!c+ S4!n-1 9 in 9 ti!"& c!n "e! to

o the tot!" conti0'tion&7&imi"! to &i3e o com,!nie& ( o c!,it!"i3!tion oten come& om 9

in 9 com,!nie&)# 0e&t&e""e& (thin+ 6!% Potte)# o 4e!"th* An citic!""% 4e on;t +no4 the

4inne !he! o time*

Figure -Fat Tails /mall Pro%a%ilit$, 0igh mpact Pa$offs The hori2ontal line can %e the pa$off over time, or cross-sectional over man$ simultaneous trials.

) Sei!" o,tion!"it% (the c"i8'et ,o,et%)* A igi 0'&ine&& ,"!n get& one "oc+e into ! ,e&et in$!i!nt

,o"ic%# "i+e ! high4!% 4itho't e/it& 7hence e$oi o o,tion!"it%* One nee& the !0i"it% to ch!nge

o,,ot'ni&tic!""% !n -e&et- the o,tion o ! ne4 o,tion# 0% !tcheting ',# !n getting "oc+e ', in !

highe &t!te* To t!n&"!te into ,!ctic!" tem ,"!n& nee to 9) &t!% "e/i0"e 4ith e8'ent 4!%& o't#

!n# co'nte to int'ition ) 0e $e% &hot tem# in oe to ,o,e"% c!,t'e the "ong tem*

5!them!tic!""%# i$e &e8'enti!" one.%e! o,tion& !e $!&t"% moe $!"'!0"e th!n ! &ing"e i$e.%e!

o,tion*Thi& e/,"!in& 4h% m!tte& &'ch !& &t!tegic ,"!nning h!$e ne$e 0on 'it in em,iic!" e!"it%1

,"!nning h!& ! &ie eect to e&tict o,tion!"it%* It !"&o e/,"!in& 4h% to,.o4n cent!"i3e eci&ion&

ten to !i"*

H) Nonn!!ti$e Re&e!ch (the o,tion!"it% ,o,et%)*Techno"ogi&t& in C!"ioni! -h!$e&ting B"!c+S4!n&- ten to in$e&t 4ith !gent& !the th!n ,"!n& !n n!!ti$e& th!t "oo+ goo on ,!,e# !n

!gent& 4ho +no4 ho4 to '&e the o,tion 0% o,,ot'ni&tic!""% &4itching !n !tcheting ', 7t%,ic!""%

,eo,"e t% &i/ o &e$en techno"ogic!" $ent'e& 0eoe getting to e&tin!tion* Note the !i"'e in

-&t!tegic ,"!nning- to com,ete 4ith con$e/it%*

) Theo% i& 0on om (con$e/) ,!ctice moe oten th!n the e$e&e (the nonte"eo"ogic!" ,o,et%)*

Te/t0oo+& ten to &ho4 techno"og% "o4ing om &cience# 4hen it i& moe oten the o,,o&ite c!&e#

'00e the -"ect'ing 0i& on ho4 to "%- eect$ $i*

In &'ch e$e"o,ment& !& the in'&ti!" e$o"'tion(!n moe gene!""% o't&ie "ine! om!in& &'ch !& ,h%&ic&)# thee i& $e% "itt"e hi&toic!" e$ience o

the conti0'tion o 'n!ment!" e&e!ch com,!e to th!t o tin+eing 0% ho00%i&t&*$ii Fig'e &ho4

moe technic!""% ho4 in ! !nom ,oce&& ch!!ctei3e 0% -&+i""&- !n -"'c+-# !n &ome o,!cit%#

!nti!gi"it% 7the con$e/it% 0i!&7 c!n 0e &ho4n to &e$ee"% o't,eom -&+i""&-* An con$e/it% i&

mi&&e in hi&toie& o techno"ogie e,"!ce 4ith e/ ,o&t n!!ti$e&*

)Pemi'm o &im,"icit% (the "e&&.i&.moe ,o,et%)* It too+ !t "e!&t i$e mi""enni! 0et4een thein$ention o the 4hee" !n the inno$!tion o ,'tting 4hee"& 'ne &'itc!&e&* It i& &ometime& the


5/5

&im,"e&t techno"ogie& th!t !e ignoe* In ,!ctice thee i& no ,emi'm o com,"e/iic!tion2 in

!c!emi! thee i&* Loo+ing o !tion!"i3!tion n!!ti$e& !n theoie& in$ite& o com,"e/it%* In !n

o,!8'e o,e!tion to ig'e o't e/ !nte 4h!t +no4"ege i& e8'ie to n!$ig!te i& im,o&&i0"e*

) Bette c!t!"og'ing o neg!ti$e e&'"t& (the $i! neg!ti$! ,o,et%)*O,tion!"it% 4o+& 0% neg!ti$einom!tion# e'cing the &,!ce o 4h!t 4e o 0% +no4"ege o 4h!t oe& not 4o+* Fo th!t 4e nee

to ,!% o neg!ti$e e&'"t&*Some o the citic& o the&e ie!& 7o$e the ,!&t t4o ec!e&7 h!$e 0een co'nteing th!t thi&

,o,o&!" e&em0"e& 0'%ing -"otte% tic+et&-* Lotte% tic+et& !e ,!tent"% o$e,ice# e"ecting the -"ong

&hot 0i!&- 0% 4hich !gent !ccoing to economi&t o$e,!% o "ong o&* Thi& com,!i&on# it t'n&

o't i& !""!cio' !& the eect o the "ong &hot 0i!& i& "imite to !tiici!" &et',&1 "otteie& !e &tei"i3e

!nomne& con&t'cte !n &o" 0% h'm!n !n h!$e ! +no4n ',,e 0o'n* Thi& !'tho c!""& &'ch

! ,o0"em the -"'ic !""!c%-* Re&e!ch h!& e/,"o&i$e ,!%o 4ith 'n+no4n ',,e 0o'n 7! -ee

o,tion-# "ite!""%* An 4e h!$e e$ience (om the ,eom!nce o 0!n+&) th!t in the e!" 4o"#

0etting !g!in&t "ong &hot& oe& not ,!%# 4hich m!+e& e&e!ch ! om o e$e&e.0!n+ing$iii *

understanding is a poor substitute for convexity -nassim taleb

Documents