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You may already know all about what author Nassim Nicholas Taleb calls "Black Swan" events -- the game-changing and utterly unpredictable happenings that shape the world around us. From 9/11 and Hurricane Katrina to penicillin and the concept of global computer networks, nobody sees these disasters and breakthroughs coming.
But some systems -- companies, social structures, a handful of important people -- thrive through uncertainty. That's the topic of Taleb's latest book, Antifragile: Things That Gain From Disorder, which he calls his "central work." If you're only reading one volume of Taleb's philosophical trilogy, this one would be it. As Taleb says in his prologue, "Antifragile would be the main volume and The Black Swan its backup of sorts, and a theoretical one, perhaps even its junior appendix."
Strong words, indeed. So what's the idea of this central volume?
The central tenet of antifragility
It starts with some linguistic gymnastics. Fragile systems break under stress. The banking crash of 2008 is a prime example of this. The banking world was set up to deal with a certain level of crisis and financial stress, but the Black Swan event we now call the mortgage bubble came along and pushed that system beyond its limits.
The opposite of a fragile system, Taleb posits, is not a merely robust one. Regulators and industry powers could have built more safeguards into the pre-2008 financial systems, taking larger and scarier Swans into account. In fact, that's pretty much what happened in the aftermath. Banks now have to undergo stress tests and pay back bailout funds, reducing risk and going back to Banking 101 whenever possible. This is a more robust version of the failed system.
The true opposite would be an antifragile system, where additional stress brings the best out of the supposed victim. What doesn't kill you makes you stronger, in a real and direct way. An antifragile system loves Black Swans, even if it upends decades of industry traditions or is a natural disaster.
If you build something robust, you might survive the next megastorm. But it's not the best defense on the table -- "Avoidance of small mistakes makes the large ones more severe," Taleb says. If you went all the way and built something truly antifragile instead, you'll actually look forward to sea changes and revolutions -- because that's where your baby becomes a winner.
The idea was inspired by some very well-known natural phenomena. Live your life in a sterile bubble and you don't build much of an immune system. Exercise strengthens your body by automatically repairing the damage you're inflicting on your muscles. And likewise, a super-elastic financial, moral, or operational system gets better under stress.
It's simple stuff. Maybe too simple. Taleb thought of that objection, too: People will take your "trivial" ideas seriously "if you can say something straightforward in a complicated manner with complex theorems." So there's a large number of mathematical formulas and spiffy graphs to support the details of Taleb's theories, but it all boils down to this ultra-simple thing. Systems that benefit from Black Swans and other risky events will thrive when others die.
So how would Taleb have managed the banking crisis, if given a chance? He prefers a hands-off approach that lets bad businesses die while real winners survive. Bailing out Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) runs counter to his philosophy. Instead, market forces should have shaken out all the bad hands, allowing competitors with better policies to step in and steal the filing banks' customers. Citigroup's poison would be manna to an antifragile system.
He points to restaurants and airlines as models of antifragile industries. Bankruptcies are common in both of these sectors, but everyone learns something new from every failed business model. Regulations and standard practices improve with every spectacular failure. You don't see a lot of that in banking or insurance. So eateries and airlines are antifragile to some degree, but the banking world is fragile and just aiming for "robust."
From this angle, the 2008 crisis may have been the best thing that ever happened to American banking. If nothing else, that disaster shined a spotlight on the need for reform and revolution.
One antifragile business
I bet Taleb would love the way Netflix (NASDAQ: NFLX ) runs its digital video business. The entire operation is built on Amazon.com's (NASDAQ: AMZN ) cloud services, bolstered by a handful of data delivery experts. There are many points of potential failure, and Netflix keeps looking for more of them all the time.
Special programs under the code names "Chaos Monkey" and "Chaos Gorilla" constantly roam the systems, inflicting random failures and data errors. Nothing is sacred. Given 30 million customers streaming a billion hours of video streams every month, there's no way to monitor all of the potential failures by hand. So every subsystem is built to manage failures in hardware, software, networks, and human error. The monkeys were made to stumble across risk nobody had thought of -- so Netflix can invent automatic cures for every new problem.
Antifragility in action, baby.
You could even argue that Netflix applies this concept on a larger scale as well. The service blankets dozens of countries across the American, the Caribbean, and Western Europe. Every country is a unique proving ground, but the lessons learned in Canada and Mexico will surely help Netflix roll out an efficient business in Poland and Japan one day.
The final verdict
"Absence of randomness equals guaranteed death," Taleb says. A wise business manager, then, injects some randomness and risk into daily life rather than bending over backward to avoid it altogether.
Antifragility is a great common-sense idea, and Taleb presents it with both rigor and wit. Investors should keep an eye out for antifragile business models, because they're poised to live long and prosper as the next flock of Black Swans passes through.
Taleb's insights are easy to absorb, though some readers take issue with his brazen confidence. He's kind of used to criticism, though. Taleb expected a firestorm of controversy when he published The Black Swan, where he throws around a lot of fraud accusations. But you know how it works: "I was antifragile to all manner of attacks: the more attacks I got from the Central Fragilista Delegation, the more my message spread as it drove people to examine my arguments. I am now ashamed of not having gone further in calling a spade a spade."
The author clearly eats his own dog food. Maybe you should, too. Voracious readers become wise investors, and Antifragility is a handsome addition to any investing library.
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