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Post also quotes Rick Bookstaber who uses a biological metaphor – survival over time – in weighing investment strategies.

This train of thought was jogged by a Wharton discussion with Nassim Taleb on fragility and over-optimization (available via Paul Kedrosky here).

In arguing why an oil shock could actually be a good thing — a sort of wake-up call to get us off our butts — Taleb brings up the concept of “anti-fragility,” also the subject of his “Black Swan” follow-up:

There is robustness, fragility, and anti-fragility. [Anti-fragility] is not robustness, it is beyond… you give someone a little poison and they get stronger.

Economic life gets stronger not with bailouts, but with bankruptcies. Evolution works not with bailouts — there are no bailouts in nature — but with competition and natural selection.

So you need to have some stressors. And we have not been stressed enough (in regard to oil prices)… this is the fragility of depending on one source, one product.

It is optimal to use oil, but more dangerous… almost 99 cases out of 100, optimization makes you vulnerable and fragile.

Shared by JohnH

Links to entire article which is available to non-subscribers until 6/13/11. HatTip to Dave Lull.

Take, for example, the recent celebrated documentary on the financial crisis, Inside Job, which blames the crisis on the malfeasance and dishonesty of bankers and the incompetence of regulators. Although it is morally satisfying, the film naively overlooks the fact that humans have always been dishonest and regulators have always been behind the curve. The only difference this time around was the unprecedented magnitude of the hidden risks and a misunderstanding of the statistical properties of the system.

What is needed is a system that can prevent the harm done to citizens by the dishonesty of business elites; the limited competence of forecasters, economists, and statisticians; and the imperfections of regulation, not one that aims to eliminate these flaws. Humans must try to resist the illusion of control: just as foreign policy should be intelligence-proof (it should minimize its reliance on the competence of information-gathering organizations and the predictions of “experts” in what are inherently unpredictable domains), the economy should be regulator-proof, given that some regulations simply make the system itself more fragile. Due to the complexity of markets, intricate regulations simply serve to generate fees for lawyers and profits for sophisticated derivatives traders who can build complicated financial products that skirt those regulations.

I break with my rule & post here because the idea was developed on this page (ANTIFRAGILITY comes from regular shocks). Thanks friends.

The Black Swan of Cairo
www.foreignaffairs.com
The upheavals in the Middle East have much in common with the recent global financial crisis: both were plausible worst-case scenarios whose probability was dramatically underestimated. When policymakers try to suppress economic or political volatility, they only increase the risk of blowups.