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Taleb on emergence and trial and error

My review of Nassim Nicholas Taleb’s new book in
the Wall Street Journal:


You don’t need a physics degree to ride a bicycle. Nor, Nassim
Nicholas Taleb realized one day, do traders need to understand the
mathematical theorems of options trading to trade options. Instead
traders discover “heuristics,” or rules of thumb, by trial and
error. These are then formalized by academics into theorems and
taught to new generations of traders, who become slaves to theory,
ignore their own common sense and end by blowing up the system. In
a neat echo of its own thesis, Mr. Taleb’s paper making this point
sat unpublished for seven years while academic reviewers tried to
alter it to fit their prejudices.

Mr. Taleb, a former trader and expert on probability, tells this
story in “Antifragile: Things That Gain from Disorder” to
illustrate the point that “we don’t put theories into practice. We
create theories out of practice.” It is a startling insight, which
he applies not just to finance but to medicine, science and
philosophy. Successful medicine was a “craft built around
experience-driven heuristics” that had to fight against entrenched,
top-down theorizing from Galen and other wise fools.

Discovery is a trial and error process, what the French
molecular biologist François Jacob called bricolage.
From the textile machinery of the industrial revolution to the
discovery of many pharmaceutical drugs, it was tinkering and
evolutionary serendipity we have to thank, not design from first
principles. Mr. Taleb systematically demolishes what he cheekily
calls the “Soviet-Harvard” notion that birds fly because we lecture
them how to-that is to say, that theories of how society works are
necessary for society to work. Planning is inherently biased toward
delay, complication and inflexibility, which is why companies
falter when they get big enough to employ planners.

If trial and error is creative, then we should treat ruined
entrepreneurs with the reverence that we reserve for fallen
soldiers, Mr. Taleb thinks. The reason that restaurants are
competitive is that they are constantly failing. A law that bailed
out failing restaurants would result in disastrously dull food. The
economic parallel hardly needs spelling out.

The author is a self-taught philosopher steeped in the stories
and ideas of ancient Greece (a civilization founded, of course, by
traders like Mr. Taleb from Lebanon, as Phoenicia is now known).
Anti-intellectual books aren’t often adorned by sentences like: “I
have been trying to bring alive the ideas of Aenesidemus of
Knossos, Antiochus of Laodicea, Menodotus of Nicomedia, Herodotus
of Tarsus, and of course Sextus Empiricus.” So he takes his
discovery-that knowledge and progress are bottom-up phenomena-and
derives an abstract theory from it: anti-fragility.

Something that is fragile, like a glass, can survive small
shocks but not big ones. Something that is robust, like a rock, can
survive both. But robust is only half way along the spectrum. There
are things that are anti-fragile, meaning they actually improve
when shocked, they feed on volatility. The restaurant sector is
such a beast. So is the economy as a whole: It is precisely because
of Joseph Schumpeter’s “creative destruction” that it innovates,
progresses and becomes resilient. The policy implications are
clear: Bailouts risk making the economy more fragile.

Biological evolution, too, is anti-fragile. The death of unfit
individuals is what causes a species to adapt and improve. The body
is anti-fragile: Without stress it weakens. To build muscles, you
must push them to the point of failure. Though he has no truck with
homeopathy, Mr. Taleb is intrigued by hormesis, an old idea, now
enjoying a revival, that a small dose of a harmful substance is
actually beneficial.

It follows that, in Mr. Taleb’s world, the greatest sin is to be
a “fragilista,” somebody who encourages an institution to become
fragile. This word is defined in the book’s glossary thus:
“somebody who causes fragility because he thinks he understands
what’s going on. See Iatrogenics.” The latter term is from
medicine, meaning when doctors do more harm than good, for example,
by bleeding the patient in the past, or by putting ice on swellings

The Federal Reserve, in Mr. Taleb’s view, is an iatrogenic
institution run by fragilistas doing more harm than good by trying
to root out randomness. This might seem a cheap shot were it not
for Mr. Taleb’s track record in spotting some of the ingredients of
the recent financial crisis. In particular, after 2003, he took a
lot of criticism because “I kept telling everybody who would listen
to me, including random taxi drivers (well almost), that the
company Fannie Mae was sitting
on a ‘barrel of dynamite.'” He has little mercy for the Keynesian
economist Joseph Stiglitz and the Orszag brothers, Peter and
Jonathan, economic consiglieres to Democratic administrations, who
insisted around the same time that the probability of default in
the government-sponsored enterprises was “so small that it is
difficult to detect.”

As this illustrates, Mr. Taleb doesn’t suffer fools, a category
in which he includes virtually the entire profession of economics
and many other academics. Consider the definition of
“touristification,” from his glossary: “the attempt to suck
randomness out of life. Applies to soccer moms, Washington civil
servants, strategic planners, social engineers, ‘nudge’
manipulators, etc.” The opposite, strategy, which he approves, is
to embrace “optionality”-like a traveler without an itinerary
feeding off randomness by grabbing opportunities as they arise. The
author’s heroes, from Thales of Miletus, the first Western
philosopher, to his intuitive street-wise trader friend Fat Tony,
are people who find out how to do things empirically.

There are a few places in the book where I thought Mr. Taleb
went wrong-for instance, he seems to underplay the degree to which
unnatural medicine, while occasionally doing harm, also greatly
prolongs healthy life; and he doesn’t notice that climate models
deserve as much of his scorn as economic ones. Sometimes he is led
astray by his contrarianism, but then that is his point: If you
don’t take risks, you don’t get results.

This is a bold, entertaining, clever book, richly crammed with
insights, stories, fine phrases and intriguing asides. Does it
achieve its goal, or does it cram and twist the world on to a
Procrustean bed of one theory, thereby somewhat contradicting its
own empirical and pragmatic outlook? I am not sure. I will have to
read it again. And again.

Mr. Ridley writes the Journal’s Mind & Matter

By Matt Ridley | Tagged:  rational-optimist  wall-street-journal