|Economic Bricolage |
We should treat failed entrepreneurs with the reverence that we reserve for fallen soldiers.
November 26, 2012, 4:06 p.m. ET
By MATT RIDLEY
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 Taleb's paper making this point sat unpublished for seven years while academic reviewers tried to alter it to fit their prejudices.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 today.
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 FNMA +0.36%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 column.