A (2:49)

Or they'd be stronger, better glasses somehow.

B (2:52)

Exactly. Mythology, it's like Hydra. You cut one head to grow back. So the robust would be more like Phoenix. You shoot it, it comes back. So the upper bound and lower bound are both unharmed. And with Hydra, Hydra wants harm.

A (3:08)

So when I first read that idea, I thought, okay, that's interesting, it's true. But why is it relevant? I mean, there are not that many Hydras around. Life doesn't, you'd think, consist of Hydras. But much of the book is to convinces me and the reader that actually antifragile is a very powerful idea. So why is it important? Where is it relevant in our lives?

B (3:30)

The first thing, the reason I had discovered that word is because I had an equivalent word for something that likes volatility, but it was not powerful enough to capture it. And it was called long volatility, or love's volatility. But didn't quite capture the idea.

A (3:49)

No, it doesn't.

B (3:49)

And then one day I read this book by great book by Guy Deutscher on language. And he reports in a book something that was discovered by the UK Prime Minister Gladstone. And that was to the shock of everyone, about 100 some years ago, 140 years ago, that the Greeks did not have a word for blue.

A (4:18)

Like the color of the sky. Exactly.

B (4:22)

The one dark sea, you know, so. And Homer, Homer, they did not have word for blue. Can you believe it? So they didn't have the full spectrum of colors. And these developed much later. And even, of course, ancient Mediterranean Greeks, the Hebrews, Semites, Phoenicians, they don't have a word for blue or for many similar words, but they were not colorblind. They were biologically okay. They were just culturally colorblind. So I realized that sometimes you just beam light on something by coining a word. And that word turned out to be antifragility. And once I wrote it down, I realized I started seeing it in places I never suspected were at this property.

A (5:12)

Right. And so give us some examples of things that are antifragile. We understand what fragile. Things that are fragile, we understand.

B (5:18)

Well, actually, I'm even going to go beyond half the book is about things that are love, volatility, love, harm, love stressors, love things like disorder, love, uncertainty, but are harmed because you don't have enough of it. Namely political life. But we'll get to that in a minute. Yeah, your human body, the bones. The bones need stressors, constant stress. They communicate with the environment, with stress. So if you go and spend Christmas vacation in a space shuttle, you'll come back with diminished bone density, which is.

A (5:54)

Weird because you'd think it'd be great to be in the space shuttle because your bones will get to rest. What could be better than getting them unstressed?

B (6:03)

Yeah, actually there's even. Because we're a complex system, I discovered a paper that really changed my thinking by a fellow called Carcenti 2003 paper on nature. And of course he had a lot of follow ups. And in it he shows that actually it's not aging that causes weakness in the bones, but the reverse. I mean, the reverse is equally true as well. You have a complex system with feedback loops that are not as obvious as in a linear ordinary system.

A (6:36)

And therefore the idea is that weak bone mass makes you older and vice versa, weaker and older.

B (6:43)

Exactly. And this is how you can see the bone density of the females and African and Indian villagers who carry jugs of water on their head between 100 and 200 pounds. They have excellent posture and excellent health. And even male. Reproductive abilities are impacted by bone density. Which means that if you go to the gym, you're wasting your time because you need weight bearing stress, not just these Taylorist machines that waste your time.

A (7:18)

Yeah, maybe we'll go into that in more detail later. You bring it up in the book. And it's a very interesting idea that certain types of what we think are good for our body, exercise and weightlifting actually are not. We've talked a little bit about it with Art Devaney, who I know you're a fan of.

B (7:36)

Yeah, Art gave me a lot of ideas and then suddenly everything flashed together. When I had this, made the distinction between two types of system, the organic and the non organic. The organic has a property that the difference between the living and the dead, living and the non living, the living between living and the machine, for example, requires stressors. That's how the complex system communicates with our environment. You need a stressor, like just as with the bones, as with your muscles, as a lot of things, and usually overcompensate for the stressors. There's a mechanism in biology called hormesis. But you see, so this table I have in front of me will never get better if I bang on it. So it says you use it and lose it. On the other hand, the human body gets better if it's exposed to the right amount of stressors. I mean, of course you have to define the type of stressor and the quantity of stress. But then that makes a difference between two worlds, the organic and the engineered. And now if you can apply that to economic life. Is economic life in the first or second category? You see, if it's in the first category, then we should have bailouts, top down, engineers, everything. If it's in the second category, then, sorry, it doesn't work that way.

A (9:02)

Well, you use a metaphor that I've also used myself, which I find deeply provocative and educational, which is the forest fire. So if the goal of a fire policy is to have no fires, and you're constantly putting out every fire as quickly as you can, which is to me what the bailout policy of the last 30 years has been about, it's true that in the short run it looks great because there are no fires, there's no damage, everybody's fine, it turns out okay. And people even brag, oh, we didn't even have any out of pocket. All we did was guarantee these loans. We didn't even have to pay anything because the guarantee never was invoked. But the problem is that the brush starts to build up in the natural case, and then when the fire does come, it's the fire of all fires and it is incredibly destructive.

B (9:47)

Exactly. So what you're doing is you're not lowering volatility, you're increasing fat tails.

A (9:53)

Yes.

B (9:53)

So which means that most of the contribution to the damage will come from a small number of events or one single event. Well, it's the same thing in economic life with Greenspan or the same thing with human body. If you put someone in a germ free environment for 15 years, then invite him to take a ride at New York subway at rush hour, I think he will last a few minutes.

A (10:15)

Right, and the Greenspan example is you're fine tuning and steering and you're averting every possible bad event and then suddenly there comes a bad event you can't overcome anymore.

B (10:27)

Exactly. Because we have something I noticed in 97 with barrier options. I realized that if you take variations, when you spend a time without variation, you have a lot of exposure built that would be harmed by it. And it's linear with time. So if you spend six months without a new low, for example, and you make a new low, you have a lot more blow ups. You see. So quiet periods aren't very healthy for financial markets. And I noticed it in dynamic hedging by showing the number of that how number of barrier options start building up below the lows. It was a metaphor that comes in my mind for 15 years. And here it popped up when I started talking about the economy and how managing the economy causes it to get weaker. But let me now make one statement about antifragility. Yeah, go ahead. That's quite important. This is what benefit from and the following phenomena. Volatility, stress, uncertainty, error, chaos, variation, time, because time is volatility and things like that. Now these categories I have just enumerated are qualitatively and theoretically different. Volatility and stress are different things, but the phenomenology is the same, you see. And that's what is quite central for the book. Had to explain that something that gains from volatility tends to gain from stress and something that gains from volatility gains from time. So this is quite central in a book. I had to explain it early on.

A (12:16)

Now this kind of analogy can be very dangerous. There's a temptation to say, I've fallen prey to this temptation myself. I think it's true. But it is a little bit risky temptation to say, well this works in nature. And because economic systems are organic, then the same phenomenon is happening here. The question is, is that really true? And what are the underlying causes of that? And I think what you get at that's so interesting is really the fundamental non linearities in these organic, unconstructed, unengineered emergent systems. And that is why, I mean the way I think about it is, I mean there's no reason that the Federal Reserve policy should really be like fire policy. It's interesting that it could be, it's amazing that it could be the same phenomenon. The question is, is it? And I think the reason it is gets at the nonlinearities you talk about, which is that if I have a bad event happen 10 times, it's not the same as a 10 times worse single event that that massive large event. Because the damage is not linear. The effects of the damage are. They get dramatically worse as the size of the damage occurs. And you talk about this in many different ways in the book. You talk about it mathematically in terms of convexity and concavity. But the simple way I think that I understood it is that if you have a bunch of little financial errors, even though they could add up to a relatively large number, they're not very harmful. But one financial error that's equal to all those by itself can be unbelievably harmful in terms of the systemic effects. So this seems to me to be the essence of what's going on in these organic systems.

B (14:01)

Yeah, definitely. Whenever you have nonlinearities, then you have a certain effect. And it so happened that effect translates automatically into either fragility or anti fragility. Nonlinearities implies one or the other. And actually even used this idea to detect risks in risks of tail events. And the stress testing, that's now, you know, I'm writing an IMF staff paper on it, collaborating with them on a method to detect tail risk by seeing if you have nonlinearity of exposure. If, for example, you know, these stress tests that we do, they're nice, they work sometimes. Most times they don't. Why? Because the number you have to come up with for stress test is arbitrary. Why are we stress testing 10%, not 11%. So someone has nonlinear exposures and you stress test them at 10% and he passes a test as many European banks did right before the last route. But then if you test him at 11% or 12% and see the risk increasing, then you realize that you have a huge exposure to model error from that nonlinearity. Now that one, this phenomenology is identical to the one that allows me to detect physical fragility. And let me give you the idea. You take a car, you drive it against the wall at tenths of a mile per hour, a hundred times or a thousand times, are you going to be harmed? No. Tenths of a mile per hour doesn't won't harm you. The car would have some damage, but not you. Now, drive the same car once at 100 miles per hour, you're dead. Okay, so the definition of fragility, universal definition of physical epistemic fragility, model fragility. Everything has to have some nonlinear term like what we call short gamma in option trading. And it's quite universal. This coffee cup I have on my desk now has suffered a lot of shocks, zero material fatigue because below the threshold, but you can't see me do it. But if I let it fall to the floor, it will break, it will shatter. And it's a shock that it gets cumulatively every few hours you see like on the table. So it is not. So what you have is if you are harmed increasingly. In other words, if 10% harms you more than disproportionately more than 9% and 11% disproportionately more than 10%, you have accelerated harm, then you're fragile and vice versa if you're antifragile.

A (16:56)

So let's talk about the antifragile side because that's the less intuitive side. Yes, we understand this idea that if I bump a coffee cup a little bit against the side of the table, I can do that a thousand times and I haven't really. There's no damage. But the cumulative effect of 1. Excuse me, but there might be no cumulative effect even it could be relatively harmless. But one large shock, like dropping it 3ft rather than an inch 36 times is totally different. It's just of a different. It's not just, oh, it's a little worse, it's over, it's dead. Now how does that work on the anti fragile side? The argument has to be to carry it over that the bumping is. It gets stronger and stronger and stronger so that in fact the bigger the bump the better. As long as I stay below some threshold.

B (17:44)

Exactly. And of course non linearity flips and sign, the second derivative flips and signs at some point. But a very simple example, you go to the gym, okay, what's better over a week to lift a tenth of a pound a thousand times or lift £100 once?

A (18:06)

And so that's. That's my body.

B (18:08)

That's your body. I mean, of course there's some nuances. You have three kind of fibers. You have fast switch fiber and these are very, very anti fragile. Fast twitch fibers in your system require, require the extremes. In other words, it's even more pronounced, but you have the low twitch fibers that may benefit from say an earlier. It has some convexity that stops very early now.

A (18:33)

So there's a chapter in the book on health which as listeners know, I'm very interested in recently as I've started to eat differently and work out in a rigorous way. But it's much more important than just about your health. There's a huge part of the book is about both career advice and about policy advice. So let's talk a little bit about career advice. You point out it's rather, it's a provocative idea that the tails are very different from the middle. It's again essentially a nonlinearity. So a person who's working at a, in a minimum wage job, you argue in a certain dimension, is very antifragile. And a person who's got a nice steady job at say the bank, who's a clerk, is very fragile. And yet that's not our common sense. So talk about those differences.

B (19:22)

Yeah, okay. There's something I call the barbell and the black swan where I showed that a portfolio that has, say 90% in treasury bills and 10% in extremely risky securities was more robust because your measure of volatility won't, I mean, provided of course, adjusted for inflation or if you have inflation linked securities for 90% anyway, it will be a Lot more robust because it doesn't depend on computation, it doesn't have model error. Okay, what's very risky? You know, it's very risky. So that's a lot more robust than a regular portfolio. Likewise, if you walk, and that's a devening idea. If you walk and sprint, you. It's vastly better for your health than jogging.

A (20:06)

Right.

B (20:07)

You see? And then I continue. If you want a company, a corporation should have a certain amount of this energy in a very thing that makes money, but should have dual strategy of very safe and then very speculative. Just like birds, monogamous birds. Well, the strategy in the female kingdom, even under monogamy, is you have the accountant and once in a while you get pregnant with rock star. Yeah, okay, so that's a barbell strategy, you see? Another barbell strategy. I noticed that the great writers did not work as journalists. Yeah, they had a cushy job, they had a barbell. And then when they wrote, it was very speculative literature. Like Kafka had a. Well, I mean, he had. He didn't have a job as a journalist. He didn't write during the day, you see, it's not like he was a journalist. So that's very common in French literature. When their parents are rich, they become diplomats. When their parents are poor, they become postal workers, you see? And you write on the side rather than have that middle. Einstein was a patent clerk and then did his theories at night. So instead of being an academic.

A (21:26)

Sorry, yeah. Faulkner worked in a boiler room somewhere when he was writing his best books. But why is that relevant? Why is it bad to work as a journalist? That seems okay, in the middle.

B (21:36)

I'm saying like things in the middle. Sometimes there's some I can explain, some I can't explain, you see? But when I go to a restaurant, I'd like to have my steak and salad first and then the dessert later. I don't want to mix the steak with the salad and the dessert and bring to me at once, you see? So you want a certain separation of function and separation of things in a lot of domains that confer some robustness on grounds that to get antifragility, first of all, you have to remove fragility. It's not symmetric. Antifragile is what has a right tail. Fragile is what has a left tail. But the antifragile requires no left tail, you see? In other words, you have to clip your left tail. You have to have some margin of safety and then be very speculative to be exposed to volatility, be long volatility.

A (22:31)

And underlying that idea, which is very beautiful in the book, is this idea of an option where the downside comes but you're not subject to. You can refuse it and then you can embrace the upside.

B (22:43)

Exactly. And I made the spec and then I took it into epistemological grounds by saying, okay, in finance you may say that people you pay for the option because nobody will give it to you for free. And typically, very often options are highly overpriced because people are scared of them when they label as options. But in real life people don't notice the options, you see. And it's not just real options, optionality situations. And I took it into the epistemological ground by showing how if trial and error is an irrational option, in a sense, you keep what you like. And nature actually thinkers. And we discovered only 40 years ago, 50 years. 40 years ago with Monois and Jacob, that nature knows it can make the precious baby. So it tinkers. You have spontaneous abortions 50% of the time without anyone knowing about it. You see? So the trial and error is embedded in my idea of a convex economy.

A (23:48)

Yeah. Most mutations are not productive and they get weeded out. They don't get to reproduce. They just, they're failures and they're just thrown out.

B (23:56)

That's exactly. And nature actually there's a fractal layers of antifragilities. And there's a gentleman who read my draft and Antoine Donchin who's a, you know, top notch physicist turned geneticist and he uncovered the mechanism within your cells that causes premature age. Why premature agent comes from not stressing your system. Because there's competition between molecules in your system. So what you have is evolution is an anti fragile process. It likes some volatility. Otherwise you don't have selection bias. It is selection. Okay. Likewise in your body you have competing things and you want to always accelerate the weakness of the weakness in order to get rejuvenation of cells. And then there's a mechanism called hormesis and that was known by the ancients. If you give someone a little bit of poison, he becomes immune. Called misread. I don't know how to pronounce it. Misreadatis was a king who became immune to poison that way. But they noticed also that went beyond that. You got actually stronger with a very small doses of exposure. It's not, you know what you think? It's definitely not homeopathy. It is actually something that has been tested in a lot of domains. Laser radiation protects you from skin cancer. Sorry.

A (25:29)

It's universally observed in science. It's very difficult to find a counterexample. The expression in everyday life is the dose makes the poison, meaning at a small dose it's good for you, with a large dose it could kill you or will kill you. And we see it constantly, we see it, you know, the discoveries about the benefits of alcohol. Obviously in small doses it appears wine is good for your heart, in large doses it destroys you.

B (25:52)

That's true. But you have to be careful with this. That was what Paracelsus who, you know, one of the pioneers of homeopathy discovered. I'm not talking about homeopathy really. It's a matter of dosage, you see, I'm talking about something that's evidence based process by which some amount of exposure causes overreaction on your part. You see, And I, and actually when you go to the gym, what you have is an overreaction. Yeah, I lift 100 pounds today. Okay. My body will project that I'm going to have a stressor slightly worse next time. So it prepares for 105 pounds. Yeah. Provided you have enough recovery.

A (26:34)

Right. You do it.

B (26:35)

Homeopathy is something where you have very small things. I mean the same applies to both. But I would be careful. I don't want my ideas to be used by people in homeopathy to justify their methods because their methods have not yet shown any scientific empirical validity.

A (26:57)

And you're not suggesting you should be drinking, taking a lot of arsenic, sprinkling arsenic on your food, you're saying that the right level of stress in small doses makes you what doesn't kill you, makes you stronger.

B (27:10)

Yes. And also. But you have to make sure that you don't have selection bias as well.

A (27:17)

For sure.

B (27:17)

And I wrote about some illusions we have about things that get people stronger. In fact, it's just a selection bias, for example. So there are a lot of things in antifragility that are counter common wisdom, right?

A (27:33)

Yeah. You talk about how because of selection bias it looks like it's making you stronger, but just you've weeded out some of the weak ones.

B (27:39)

It's not exactly, exactly how it works within the cells.

A (27:43)

Right.

B (27:43)

You see, it's more of destructive process within your cell than a strengthening process and can do the same within populations, you see.

A (27:50)

So let's talk about via negativo, which is a phrase you use to capture addition by subtraction. And part of this is a reaction to some of the criticism you got from the Black Swan where people would say, okay, so every once in a While there's a really bad thing that happens. So how do I predict that really bad thing? And your insight, which is so profound, is now the whole point of the Black Swan is that you can't predict it. So rather than figuring out when it's going to come so you can be ready for it, the best thing is to create an environment where it can't hurt you very much.

B (28:22)

Exactly. Shifting to non predictive methods. When I started writing this book, I had a lot of bitterness in me because people couldn't understand my Black Swan. They were buying it, it sold several million copies and most of the people don't get it. I'm not talking about Black Swan. I'm trying to warn people against exposure to prediction errors. And you see, nature is not predictive. And via negativa is of course, I realize, is what I call negative advice, acts of omission. And when people tell me what should I do? I told them, well, don't get exposed to negative Black swan. It's very easy to remove negative black swans from your life. If you're a bank, don't sell tails. If you're in business, don't do these things. If you're an individual, don't smoke, don't have fructose sugar, don't hang around members of the mafia and don't do that. So they didn't understand, they said, no, I want advice. And they couldn't get the point. That which I say is in a Black Swan, in a certain way, that the chess player, the rookie, tries to win, the professional tries to make the other person lose. Or that, for example, you'd contribute more via negativo by removing things than by adding, but pharma doesn't, of course, does want to hear it.

A (29:50)

You save more lives.

B (29:51)

If you prevented people from smoking, you saved more lives than everything done since Peninsula, cumulatively, right? And people don't want to hear it. Likewise, you see all these things, these drugs, people are looking for the miracle cure or the miracle pill or the silver pill or anything to make people live longer, okay? The philosophers don't realize that starvation is the most effective way. And we have enough evidence of that. We even now have evidence. And another paper last week, that if you starve people for four months, you reverse diet and they can gain their weight back and they will still be normal, they will be insulin sensitive. And so you can reverse diabetes, really, by subtraction, remove food. The ancients knew that. So the via negativa is. I mean, I got a little more aggressive with via negativa by showing that you remove the things. Removing does not have side effects or no long term side effects, you see? Whereas in a complex system, every time you add something you have multiplicative side.

A (30:59)

Effects and you can't predict what they are is the big.

B (31:01)

And you can't predict by the issue of complex system, you see. So via negativa is not so removing. People told me, what would you do in the economy? I said, just remove Geithner to start with. Everything will be okay. All right? Then we'll have less control by the, you know, by a certain crowd of what's going on on Wall Street. Removal is much easier. And democracy works by via negativa. The idea is not to find to have good ruler, but to be able to remove the bad ones.

A (31:30)

Well, in the American Constitution when it was put in place, it was designed to talk about what government can't do. And instead it is government's become more concerned with what it can do. You talk in the book very provocatively, I love it. About our bias toward intervention, which is this is all of course a part of. I want to know the vitamin pill I should take. I don't want to hear about what I shouldn't be doing. I want to hear what I can do. I want to be proactive. We have this incredible psychological bias toward being proactive rather than passive. And I think, which again is a nice example of your opposite. The opposite of proactive isn't passive. Excuse me, People think the opposite of proactive is reactive. It's not. It's doing nothing. It's passive. It's letting things happen. It doesn't mean nothing's going to happen. But it sounds terrible.

B (32:26)

It's a Fabian, there's a Fabius comptator whose big achievement is resisting and making sure Hannibal destroys himself before attacking. And this is. He's a big general and he was not a coward. He just said, my asset is time, I want to use it.

A (32:50)

This ties in a little bit well to me a lot. I think in the book also where you talk, you have a very nice diagram. You have a giant cube, which is the real world and what we know about it. The real world, excuse me. And then you have a little, tiny, tiny cube, which is what we know about the real world that is scientifically rigorous, experimental tested through rigorous techniques. And unfortunately it's a fact that what we understand rigorously is a very small part of what we'd like to understand. But we can't help ourselves. We want to believe that that real world is a Lot more understood than it actually is. How do you explain that?

B (33:32)

Yeah, this is here. This is where I have the character Fat Tony, okay, Who had a lot more. He didn't have knowledge of the small world, okay. But he had rigor in the large world. And in the end what matters is rigor in the large world. You see, last time we spoke I was talking about Procrustin bed, about, you know, the tendency we have to, you.

A (33:55)

Know, tell the story, tell about the.

B (33:57)

Better procrastinates we had. There was a fellow had a bed and he would abduct travelers and put them, feed them and then put them in his bed. Those who were too tall, he would amputate their legs. And those who were to short your stretcher.

A (34:13)

So that was a perfect fit.

B (34:16)

A perfect fit. Always perfect fit. We have a tendency in a lot of things to try to use to put people in a Procrustian bed. And Fat Tony had the rigor of thinking outside the Procrustian bed. What we say is thinking outside the box or something, but it's non trivial because there are rules outside the box and these rules are non. I mean, you can actually catalog them and you can actually change the small world by coming from a large world rather than doing the opposite. The autistic, whatever you want to call.

A (34:49)

It, analytical, analytical, micro.

B (34:51)

It's like trying to impose logic on larger one because logic works, but things are a lot more ambiguous. So via negativa is a central idea, you see, harnessing anti fragility, trying to discover things about trial and error and focusing on payoff which is non predictive rather than focusing on probabilities which have embedded the predictive thing in it. You see, probability is predictive and predictive aspect to it. So we have a different paradigm when you work in the larger world. And of course we have the invisible, what I call logic of rules we have inherited from the elders. And typically, just like as you mentioned, the American Constitution, you have the heuristic, what I call the ancestral heuristics, what we have inherited from the elders and typically the negative rules, what not to do.

A (35:53)

Yeah, I think that's probably almost always true.

B (35:55)

Yeah, like debt. I mean the Babylonians had an interdict against debt. So were of course the Hebrews, so were the Greeks did not like debt. They didn't have a strong. Aquinas had a fatwa against that.

A (36:13)

Neither a borrower nor a lender be.

B (36:15)

Yeah, exactly. Of course. And then of course Islam bans debt. But this language used by Aquinas and his Summa is vastly stronger than languages used in Islam against debt. So you learn there's no reason, you don't have to understand the logic. But there's something in risk management, the largest end you find, you're going to find it either in nature or in history, you see? So if you're talking on statistical grounds, it's a much more ecological test and with a very large end.

A (36:51)

Yeah, big sample. And yet we always think, well, we just need to manage it. Debt is bad, of course, but I don't need to worry about it because I know how to. I've got a theory, I've got a model, I can make it work.

B (37:05)

Yeah. I've used the very same convexity effects, okay, Both to show why you need stochastic feeding. Why, of course, you know, the hormesis, what we call, you know, what you were calling harm, I mean, benefits of small doses of something otherwise harmful and all the other things. There's the same convexity effect, size and depth and over specialization, fragilize and leverage, they fragilize. You see, a redundancy makes you robust and it's actually necessary even to become anti. For becoming antifragile is to have large redundancies. It may seem strange, non optimal, but we have inherited, as I said last time, we have two lungs and two kidneys. An economist would never design a human being with two lungs and two kidneys.

A (37:57)

It's wasteful. Dead weight loss.

B (37:59)

Exactly. So the opposite of spare parts would be debt. And nature doesn't like that. Nature likes redundancies. And actually this mechanism of overreaction is redundancy. And let me give you a little hint here. When you take a trader or risk manager at a bank, they look at the past for the worst case scenario, okay? And actually, you know, making a mistake of not recursing, they say, well, the worst day was 22% in the stock market, so let's use 22%. The human body doesn't do that. The human body doesn't think that the worst harm is going to be the next worst harm. The human body builds a margin. On top of that, it thinks, ah, the worst day was 22% in the market. Your human body would say, okay, let's calibrate and adjust and manage for 27%.

A (38:59)

Or 50 if we can. Sorry, or 50%, whatever.

B (39:03)

I mean, not that much. Like what if I lift 100 pounds, my body will start coding. You see, for an ability to be able to lift 105 pounds and then if you lift 105 pounds and then it will code again for a little more. There are limits, of course, structural limits, but they will go to these limits.

A (39:26)

The other side of this, which again is just incredibly fascinating and helps you see the way the world is working these days, is that in today's world, because of policy we've imposed already, we allow fragile people to impose their. They become antifragile and they push their fragility onto others. So you have many examples of this in the book. Talk about some of those and what that means.

B (39:52)

Yeah, well, I went into ethics in the last section of the book and what I call book five because actually I was starting, you know, I discovered at some point that I had a lot of books in the book. So I call them book one through book five because they're separate topics. After the first section in which I present antifragility, and the last one is, I call it Skin in the Game. The Ethics of Antifragility. What happens is that some people in society have the option, namely the bankers, the managers of businesses. Okay, left column. They have other people's skin in their game, no skin in the game. They keep the upside and transfer downside to others. And you can see it easily, managers. The stock market has lost about 5 trillion over the past 10 years comparatively, because a lot of stocks were issued at higher level compared to cost of funds, say 5 trillion. This is a ballpark figure. Managers of companies made 400 billion. Why? Because they have the upside, no downside, so they're actually the only option and they benefit from volatility. So no skin in the game. In that category I put bureaucrats, journalists, corporate executives, I mean bankers, of course, and other people I call sagalistas. Now, people who skin in the game are citizens. People who have the upside and downside of their actions.

A (41:27)

They don't pay their mortgage, they lose their house.

B (41:31)

People. Yeah, I mean, if I make a mistake, then you have skin in the game. And of course my rule of ethic is whatever I write about is to have a corresponding position in the market. So I don't really care about being perceived right or wrong. What matters is the payoff. Anyway, so this is the middle column. It's people with skin in the game. And of course the right column is an interesting column of people who actually don't have upsides. You see, they're there to take the downside of others and they have a highest status in society. Traditionally, they've had the highest status in society. Just compare a banker who has upside and no downside because they don't have negative bonuses, okay. To someone in the military, he has his life, he doesn't have a bonus and he has his life online. You see.

A (42:25)

It's a very beautiful insight. Right. It's basically that the people. Yeah. Honor is bestowed on those who take the bullet for others.

B (42:37)

Exactly. People who, just like I gave example, it could be in any. You don't have to be a saint, a knight, a warrior, a soldier, or a prophet or a pre modern philosopher in the pre modern sense. Okay. Or a maverick. You can be just like a babysitter who pushed herself, okay. And lost her life because she wanted to protect. She had responsibility for the baby. Okay. She was holding. You see?

A (43:05)

And you argue that modernity is pushing more and more people into the left column, the fragilistas who impose their downside on others. And we don't spend as much time on that right column.

B (43:17)

Exactly.

A (43:17)

Our culture doesn't do that. In fact, we look at those people sometimes as well. Fools. Oh, they could have, they could have avoided that harm. And yet they're idiots.

B (43:25)

Exactly. And in fact, it's the first time we had power for people who don't have courage. It's the first time in history in which people on top had power without courage. First time, you cannot find any society. Take the knights. The knights were people who, of course, the reason their trade was that they were, they were risking their lives. This is why they were, you know, or lords were supposed to die first. Okay. And of course the President of the United States was, you know, supposed to be first in battle. You see? Not someone pushing a button. Okay.

A (44:05)

Changes the incentive.

B (44:08)

And the only way you can have a safe society is by moving the third, the first column, the left column. Moving these people out of there, making them more accountable.

A (44:18)

Yeah. It's hard to get there though.

B (44:21)

You can with a legal system. You can in various ways. You can, but I'm saying society will explode because then you start having a growing wedge between what is ethical and what's legal. And I've named names in here.

A (44:33)

Yes, you do.

B (44:33)

I don't know if you want to name them, but I'm ready to take your choice. A lawsuit?

A (44:38)

It's your book.

B (44:40)

No, no, I've named people who to me, for example, some academics can cherry pick. They can give a contradictory advice and retain the one because they don't have skin in the game. They don't go bankrupt from the bad trade, so to speak. They were always going to be there. You see the problem with the Nobel Prize in economics, People are not penalized for being wrong. They're not penalized. You cannot have a proper functioning. I just wrote a paper in a policy journal in which I show that without accountability, okay, risks will keep growing because people will hide them. And we had a system in ancient societies for that, and that's Hammurabi's law. And Hammurabi understood risk very well. And it was as follows. If the arkit is the house collapses and kills the owner of the house, the architect is put to death. Why not? Because to punish people, it's as a deterrent. Because no inspector, no regulator, nobody will ever know more about what's in a foundation than the architect himself. Yeah, you see? So you can hide risks from society. You can cherry pick, you can do a lot of things unless you have a direct responsibility for the results of your action.

A (46:02)

Yeah, it's.

B (46:04)

When I put it in the New York Times, it seemed too simplistic. I put that proposal in the New York Times by saying that capitalism is not about incentives, it's about disincentives. You see, people said, well, it'd be too easy. Can you implement it? But of course, society can only survive when everything is based on very simple heuristics. Not 2800 page documents, no appendices with.

A (46:32)

Lots of Greek letters.

B (46:33)

No.

A (46:35)

It's a deep idea because it really gets at this interface between what I would call effectiveness and ethics. And I had a conversation this past week with someone I was suggesting that the Federal Reserve, that the chair of the Federal Reserve over the last 15 years has encouraged imprudence, has honored and rewarded malfeasance, has insulated people from recklessness relentlessly, and that maybe there was some bad incentive problems with the way the Fed was structured. And her reaction was, I don't like to think that about the chair of the Fed. I think they're trying the best they can.

B (47:13)

That's nonsense. No society has ever put someone in position of responsibility without accountability and downside.

A (47:20)

I said, that's nice. It could be true. But yeah, when has there ever been a person who had that much power who didn't succumb to the dark side of it? It's nice that there might be such a person, but I don't know them. They don't ex. Like you say, they don't really exist in history. So the counter argument is, oh, but their reputation. Their reputation will insulate them from. Will protect us from their malfeasance. But the problem is, it's very hard to evaluate.

B (47:47)

It's true. We don't see the link between Action and consequence. So when I talk about Fajr and in my Central Chapter, Chapter 5 on Political Systems, I talked about small, the local. I mean localism.

A (48:02)

About Switzerland. Talk about Switzerland, Yeah.

B (48:06)

I mean Switzerland doesn't have. And people think that Switzerland has. Switzerland doesn't have a government. It has. Or if it has a very centralized government at a very local level, you see, it's a collection of municipalities and the noise washes up. Okay, so it's not that their political system is remarkably intelligent, it's just that it's small. So the mistakes are made small and things aggregate up without the mistakes. You see, the other element in it, concerning ethics is that if you make a mistake in forecasting, you make a mistake, any kind of mistake. It's not like Alan Greenspan, who's never going to run into you or other victims. You encounter these people Sunday at 10 o' clock at church, you see? So you have this biological skin in the game that doesn't exist, you know, when you. In Brussels, for example, where you can have this loss of ethics at the level of lobbyists.

A (49:05)

Shame. Shame plays a role in everyday life. You can't play a role if the only people you see are the people you're helping.

B (49:11)

Exactly. This is why on my column to the right I have the artisan. The artisan someone. And the last artisan we had, the last great artisan was Steve Jobs. Where people have their ego in the game, you see.

A (49:22)

That's right.

B (49:23)

They have their product. You know, Steve Jobs had his. The inside of the computer. He was just like cabinet makers. Unlike these commercial shelves you buy, they look great on the outside and ugly on the inside. Because meant to be displayed, their inside is not meant to be seen. It's the same thing with Steve Jobs had the inside of computers look good, although you can't open them, which is kind of crazy. That's an artisan. It means he's not in the game for anything except the deliver authenticity. You see that with artisans, you see, you will see that with politicians at a local level. This is why one of the great arguments now Sweden, you think, has 60 some percent of the GDP, okay. In government, it's not the same as the United States because the bulk of the money is spent locally.

A (50:22)

Makes a big difference, a huge difference. I'm not sure that's the only difference. But between.

B (50:28)

Here's the difference. Size has a lot of effects. I mean, I use the same argument. I mean size is visible everywhere. Forecasting error grow size.

A (50:39)

See, I have a very sinister theory of the size bias, which is you point out Switzerland works very well, that small mistakes are relatively harmless. They just stay small, they don't aggregate up. And then you look at the euro, you look at the European Union, right, And you think, well, it's obvious that the European Union's not going to work well, it's too many people. There's the accountability and the feedback loops aren't there. And yet the people who want to run the European Union are going to tell you it's more effective, efficient. Well, of course it is if it could be run by God. But when it's run by human beings, it doesn't work that way.

B (51:10)

Exactly. I mean, they themselves have this certain principle, the subsidiarity principle, that any problem should be dealt with at lowest possible level. You see, only necessary things should go up to Brussels. But given that you have a lot of diplomats and, sorry, bureaucrats in Brussels, these people make their job look, I mean, of course they're going to create jobs for themselves. And you know, metastatic bureaucracies have always been metastatic since that's what destroyed ancient Egypt, by the way, the first centralized nation state and the metastatic bureaucracy.

A (51:52)

Yeah, they don't work very well. Let me ask you something. I'm going to take a shot at you and then I'm going to defend you. And maybe your defense is different, but this is the way I defend your ideas. Some people have said about your work, I would consider this book sort of the third book in a trilogy. It starts with Fooled by Randomness. It goes to the Black Swan and it goes to this one. And some people say about your first two books, they may say it about this one too, but it doesn't really matter. They say, oh, there's nothing new in there. We knew it already. We knew that there's risk, we knew there's tails. Oh, this is uncertainty. People understand that probability is hard to assess and we get fooled. And I have a very different take on your work. And basically I see it as it's all the same book and I view that as a plus, not a minus. And the reason I do is that there's nothing new under the sun. To take a very old insight. What's new is how we think about them. And it gets at your distinction between the inventor and the implementer. People love the inventor. They don't give much honor to the implementer. But. But the real issue is insight isn't worth anything unless you absorb it. So if I tell you, don't put all your eggs in one basket. And you write it down, okay, don't put all my eggs in one basket. But if it doesn't get in your bones, it's not going to change your life. And the power of your ideas is that they get in your bones. The way you write, the use of metaphor, the use of humor, the use of characters. And you go deeper and deeper into these ideas and they're very deep.

B (53:29)

No, both your criticism and your answer confirm one thing to me is that what I'm saying is not wrong.

A (53:37)

That's a good, that's a plus.

B (53:38)

Exactly. The point is that when people tell me what you're saying is not new, all right, and they find conflicting predecessors, okay? It makes me smile because effectively what I'm saying is exactly opposite of what they considered was not new. And let me explain. Yeah, Traditionally we had put the most trust in small probabilities and the most risk in small probabilities. And I'm trying to stand this argument completely on its head, that this is where we don't understand anything. And it was never written before that smart probabilities are completely uncomputable, you see, in proportion to how small they are, in inverse proportion to P, the probability itself. And this is what people are not getting. But the fact that they're saying that it's not new means that they're agreeing with me, you see?

A (54:37)

Right.

B (54:38)

So what I'm proposing here is a system and it took me a long time to develop it. I know I'm saying the same thing. I hope I'm saying the same thing because I'm not. As I said in the introduction, I'm not writing close ended books on closed topic with an expiration date. I'm going deeper and deeper into the central element of daily life, of life. What do you do when you don't know what's going on? Okay, that's a great way to approach we face what do we do? A government, an individual, a corporation, a dentist and a. What do you do when you don't know what's going on? This is the most important question that I am obsessed with, okay? And I'm trying to answer it now. The fact that the best compliment I can hear, ever hear when someone tells me is not new because I know it has not been written elsewhere, you see, or maybe some portions of the derivation exist elsewhere. But this notion that the smaller the probability, the less we know what's going on and is exactly in reverse of the common understanding of such a problem.

A (55:47)

And that's because. Because I would have thought because of.

B (55:52)

Convexity effect, because most probability is very convex to error, you see?

A (55:55)

Meaning the consequences are so different.

B (55:57)

No, no, no, it's a probability itself. Okay, take the Gaussian distribution, okay? And actually in a separate paper, I finally proved something that stayed with me for years. Take a very thin tailed distribution, such as a Gaussian thin tailed. Yeah, it's a normal distribution, standard one. Okay? You have two inputs, one of which is standard deviation. Standard deviation is pretty much your error. Okay?

A (56:23)

Right.

B (56:24)

Now if you take a remote event, say 6, 7, 8 sigmas, you increase standard deviation away from the mean, you increase the sigma by 10%, the probability of that is multiplied by several thousand, several million, Several billion. Several, you know, billion billions or several trillions. Okay, okay. So what you have with, you have non linearity of remote events to sigma. So the standard deviation of the distribution.

A (57:04)

Yes.

B (57:04)

And that in fact, if you have uncertainty about the smallest uncertainty you have in the estimation of the standard deviation, the higher the small probability becomes and at the same time, the bigger the mistake you're going to have about the small probability. So in other words, most of the uncertainty in parameterizing a model goes to the tails. So you take an event like Fukushima, you see, where they said, well, it should happen every million years, your perturbate probabilities a little bit and one in a million becomes one in 30, or.

A (57:42)

The financial crisis or anything.

B (57:44)

So what I meant is you can take. So what I managed to derive is the following. If anything, any small probability, all right, is derived with an error rate. You agree you have an error rate because only God doesn't have an error rate. But then God doesn't have probabilities. All you have an error rate. And if that error rate has an error rate, okay, yeah. And if this in turn has an error rate, you continue, then you end up with power loss. Depends on the regime, of course, depends on how big the error of the error of the error is going to be.

A (58:24)

And a power law is a very fat tail.

B (58:26)

Very fat tail. And of course hard to parameterize. And that was how, I mean, you can derive power law tails just from counterfactuals. But what is central here, what I'm saying that is central in my work is that you can have certainties. You can, you're not never going to get in big trouble in the body of the distribution where you're likely to get in trouble is in the tails.

A (58:54)

True.

B (58:55)

And the benefits of being right in the tails are very small. If small imprecision multiplies the probability of a 10 Sigma event by several trillion. You know, you shouldn't be talking about 10 Sigma events.

A (59:11)

But I want to come back to the way you formulated a minute ago, because I think it's very deep and it's very important. You said, what do you do when you don't know what's going on? And I would add, which I think comes right out of your book, and most of the time you don't know what's going on. It's not like this is a special case. I think about it a lot with economic policy, because when I suggest that maybe we should do nothing or the government should get small or we should reduce debt across the board, people say, how can you do that? How can you see you've got to have some positive. The reason say Hayek doesn't matter. I don't think it's a fair criticism of Hayek, but people say, well, he didn't want to do anything. And my one counter is, but you don't know what you're doing. You have no idea what you're doing, and you claim you have a scientific basis for it.

B (60:00)

I see. I'm bringing in some more solutions here based on this convexity effect, okay? It's not all pessimistic. I know, for example, from convexity effects, okay, That I pretty much can map the extent of the unpredictability. Let me give an example. Okay. Typically, you know, a big convexity effect or fragility, negative convexity effect isn't traffic.

A (60:27)

Yeah.

B (60:27)

You put 80,000 cars on the streets, you have no traffic. You move 90,000. Now, traffic time goes up 10%. 90,000 cars, okay? You go to 100,000 cars and traffic time doubles. Yeah, exactly.

A (60:45)

And those are those little perturbations that each person struggling to keep up with the person in front of them, and that slows the person behind them down. And congestion is very nonlinear.

B (60:53)

Okay? So we have an idea. You can apply the same to size of corporations. Nature applies it to size of animals. Anything because of an elephant is speculative. Because there are negative convexity effects, you can pretty much, you can use it for speed. It's the same thing with speed driving. We actually do it. We limit speed to 55 miles per hour because accidents at 55 miles per hour aren't, you know, tenths as dangerous as accidents that take place at 100 miles per hour. You see? So we can do things. We can do things using this concept of convexity effect in other areas, okay? And how much redundancies do you need? How many mean deviations you need to be away from your accelerated harm. Heathrow, for example, those who built Heathrow airport. Okay. Didn't realize that the Smallest perturbation causes 4, 5, 6 hour delays backlog, which means that you have to reduce it by a certain amount. And actually I've been talking a lot to the Cameron administration to start using these methods to control size.

A (62:03)

So the analog in the financial system would be limiting. Would you favor limiting the size of banks or limiting the size of leverage? Or both or neither.

B (62:12)

I mean, I don't know if we can limit a society. You know, what happens is that size companies destroy themselves automatically of size unless we save them. Exactly. So we should not save them.

A (62:24)

I agree.

B (62:24)

And we should have a pact. And what I proposed to the Cameron administration and they like the idea. I don't know if they.

A (62:32)

On paper. Yeah, on paper. Yeah, go ahead.

B (62:34)

No, no, they like it. They are. I mean, if they called me to go there visibly because, because they want to really to do something. They want to go after size. Size is their big enemy. And before that they had romantic arguments about small is beautiful before these convexity effects. And I said, okay, it's very simple. You take a company, you certify whether if this company fails, you can easily. You don't know if it's going to fail, but you know, should it fail. Okay. The taxpayer has to bail it out. Yes. No. If you think the taxpayer would need to bail it out, if it fails, then automatically, automatically, the employees can no longer get bonuses. Effectively, they are de facto potential civil servants. And you can't play the long option game at the expense of taxpayers. Remember, my ethics problem is someone who owns the option at the expense of taxpayer, someone else.

A (63:30)

Right.

B (63:30)

You see, that would automatically force companies to be a such size that they won't be bailed out.

A (63:40)

Yeah.

B (63:40)

It's a very nice path to make with a company. You say you could do whatever you want, you know, you can pay each other as much as you want. We don't care. Provided. Okay. We don't deem that you are to be bailed out. Now, of course it's a gray area. There are gray areas for a lot of companies. We know it's very visible. We know, we know it's Detroit. We, we know we're going to bail them out. Therefore they're civil servants.

A (64:05)

Yeah. Okay.

B (64:06)

And by forcing them by now, by putting caps on how much banks can pay in bonuses, people are moving to hedge funds. The risk is flowing to the hedge funds and these are not to be bailed out.

A (64:18)

Great. Yeah, let them go.

B (64:19)

Yeah, exactly. So I'm not asking to regulate society. I mean, the government can use something to protect citizens from large corporations not exacting a rent directly in proportion to their size.

A (64:34)

Yeah, that's an interesting way to give take. It's a way to limit their size organically, in theory at least. It's a way to discourage them from growing because they realize if they do, they'll lose their opportunities for the upside.

B (64:47)

Exactly. They no longer can use the option, the free option on society or do what I call it. Bob Rubin. Bob Rubin had $120 million in bonuses retroactively financed by the taxpayer.

A (65:01)

Yeah, I know.

B (65:02)

Yeah. We have to eliminate the Balbooben problem.

A (65:04)

It's very depressing. Yeah, well, you know, when you're talking about modernity, which is we didn't talk very much today, but your insights into our culture and, and the clamor by experts for solutions that they claim are scientific and it reminds me of the Second Coming by Yates where he says the best lack all conviction, while the worst are full of passionate intensity. And it saddens me how overconfident so many people are who have no grounds for it and how cautious or lacking in conviction of the people who really understand the limits of our knowledge. So.

B (65:54)

But you see, at some point things can change because you can have. We think that systems can survive for a long time while being weak like that. They can't. Fragility will get you eventually, for one thing. Let me. Can I mention something to have time to talk about modernity?

A (66:16)

Go ahead.

B (66:17)

Modernity. To me I lump modernity with a lot of things. The rise of a nation state, that's the first thing. Top down government. In the past we had some top down governments, but the government did not have the means to really run the place. France even under Colbert could not reach provinces, only a few cities along the tax routes. You see, this is why France had 400 cheeses and about 72 dialects. Okay.

A (66:45)

Those are the good old days. Sorry, the good old days.

B (66:48)

Good old days. So modernity is the rise of a nation state. Militaristic nation state. Of course, of course. The rise of, you know, the expert, the predictive method, pseudoscience, the rise of social science, and of course the new skin in the game.

A (67:13)

All diseases, all. They're all dangerous.

B (67:19)

They're all dangerous. And of course the bailouts. And of course the thing will destroy itself.

A (67:26)

What will replace it?

B (67:29)

I see the future very positively. You'll have more and more artisans. You know, we at no point in time. You know, we've never been that rich yet. We've never been more in debt. So when dust settles, we'll have more robust systems. Robust systems more and more artisan in the sense that people really liking what they do. And that's sort of my definition of an artisan. It doesn't have much to do with scale. Again, when I talk about scale, scale is specific to the industry or specific. Specific to the type of function. See, you'll have the death of a nation state, which we're witnessing, rise of local government. And of course, the end, the utopia for me is what we're seeing start to see in Europe now. They're all talking about golden rules. And the golden rule is not Rabbi Hillel's golden Rule. The golden rule is no government deficit.

A (68:26)

Yeah, that's a good heuristic.

B (68:28)

Government deficit makes things a lot less fragile.

A (68:30)

It's a good heuristic.

B (68:32)

Yeah. So very simple heuristics, again, solutions can only come from very simple heuristics. That's what we've been doing now since civilization started. And of course, the codification that we have, the first, the earliest one that extant is Hammurabi's Law.

A (68:54)

Here's a little postscript that when we ended the interview, Nassim wanted to say something else about Seneca. Go ahead.

B (69:01)

Well, I mean, most people don't understand what Stoic is. And they think that a Stoic wants to sort of be robust. No positive nor negative emotions. Get rid of.

A (69:15)

Detachment from the world.

B (69:17)

Yeah, exactly. So in other words, become a vegetable. And that's the impression that for a long time, for about 2,000 years, we had a Stoic, mostly because nobody really read them. So people kept commenting on comments. But when I read the best expositors, the best two expositors, actually, Marcus Aurelius and Seneca, and probably also to some extent, Cicero, I realized these are not that type of people. Very different. And now recently I saw some papers confirming my idea that what Seneca was is about being long options. He wanted to keep the upside and not be hurt by the downside. That's it. It's just how to set up his method. Seneca was the wealthiest man in the world. He had 500 desks, okay, on which he wrote his letters talking about how good it was to be poor, okay? And people found inconsistency, but they didn't realize what Seneca said. He was not against wealth, you see, and he proved that effectively. That philosopher can have wealth and can be a philosopher. What he was about is dependence on wealth. He Wanted the upside of wealth without its downside. And what he would do is he had been a shipwreck before. He would fake like he's a shipwreck and travel like a shipwreck once in a while. And then he would go back to his villas and feel rich. He would write off every night before going to bed his entire wealth as a mental exercise. As a mental exercise and wakes up rich. So he kept the upside. In fact, what they had is. My summary of what the Stoics were about is as follows. I mean, there are people who really had, like Buddhist was an attitude, wanted to have the last word with fate. And my definition is, I said they're a stoic stage of someone who transforms fear into prudence, pain into information, mistakes into initiation, and desire into undertaking. So it's very different from the Buddhist idea of someone who is, you know, completely separated from worldly sentiments and possessions and thrills. It was very different. It's someone who wanted the upside without downside. And Seneca proved it.

A (71:56)

And the way you get there, Seneca is suggesting, is through mental exertion, but not through necessarily some of its action, obviously, but. But some of it is the way you look at your life and what you prepare yourself for and how you affect your expectations.

B (72:11)

Exactly. He understood the hedonic treadmill, you know, that Danny Kahneman rediscovered about 2,000 years later. He understood it very well. And he understood that wealth. He said, you're in debt when you have wealth, whether you are in debt from, you know, just debt from others or from fortune, you say? And he wanted to write off that fortune. And he wanted to remove his dependence on fate, on randomness. He wanted to have the last word with randomness, and he did.

A (72:47)

Not a bad goal. My guest today has been Nassim Taleb. Nassim is the author of the eventually to be published Antifragility. It is a. It's a book that bristles with ideas, and many of them, besides making you think, are actually helpful in everyday life and maybe helps you vote. Right. I'm looking forward to the final version of seb. Thanks for being part of Econ Talk.

B (73:12)

Oh, thank you. Thanks a lot for listening to me before the book's completed.

A (73:16)

Take care.

B (73:16)

Thanks. Thanks a lot.

A (73:24)

This is Econ Talk, part of the Library of Economics and Liberty. For more Econ Talk, go to econtalk.org where you can also comment on today's podcast and find links and readings related to today's conversation. The sound engineer for Econ Talk is Rich Goyet. I'm your host, Russ Roberts. Thanks for listening. Talk to you on Monday.

B (73:48)

Sat.