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 Taleb's paper making this point sat unpublished for seven years while academic reviewers tried to alter it to fit their prejudices.Mr.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. (...)
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.
by Matt Ridley, WSJ | Read more:
