10x Core Concepts: 3. Fragility — Robustness — Antifragility
Avoid the messy middle. Separate work from fun. Embrace the volatility by having many many skills, friends, hobbies, customers, projects. Avoid the boring routine. Eat vegetarian for a day, skip lunch, introduce new positive habits and reduce the bad habits.
[Previous article: 10x Core Concepts: Growth mindset versus fixed mindset]
A growth mindset empowers us to be less fragile by taking on challenges and learning new things. If we have growth mindset we understand “the power of not yet” and know that the pain and frustration, we experience when we learn new things will gradually wear off, and we will become much faster and stronger in these new skills we painfully develop. But we need to understand the distinction between fragility, robustness and antifragility.
Probably you saw packages with label “Fragile! Handle with care!”. Imagine if you saw a package with a label “Antifragile, please mishandle.” Antifragility is a concept developed by Nassim Taleb and can be best illustrated with physical exercise such as weight lifting. If you apply reasonable stress to your muscles by exercising they become gradually stronger and bigger. If you don’t exercise or don’t move your muscles they become weaker and more fragile. So the stressors help us become stronger.
Antifragility is different from a mere robustness and is the real opposite of fragility. Robustness is merely in the middle of a scale from fragility to antifragility. Antifragility can prosper during volatile periods, robustness can merely withstand misfortune or volatility.
Imagine a writer who gets bad reviews, but people discuss his work and thus becomes more famous. He is under the stress of criticism and needs to endure it. But this negativity if it is not too strong and fatal, actually helps to spread the word about her book and makes her famous.
Taxi driver and a bank clerk
To repeat the main points: Nassim Taleb introduced the spectrum of fragility-robustness-antifragility. Antifragility is like weightlifting — your muscles grow under reasonable stress. If you avoid exercise and exposure to stressors, you become weak and fragile. But if you put too much stress you can damage your muscles. Moderation is the key. But don’t avoid the pressure, difficulty and stressful situations. Embrace the volatility in life.
We have already illustrated the point with a writer that gets under the stress for bad reviews but emerges stronger and more famous, because more people learn about his book as a result of the criticism.
But let’s take two quite different professions — taxi driver and a bank clerk. If you are employed as a bank clerk your monthly income is stable. You might get an annual bonus and your boss might review your income and raise it a bit every year. But if you work as a taxi driver, your income is much more volatile. The word volatile means there are much bigger differences in what you earn each day. One day you can earn twice or even four times as much as the previous day. But it also means that the day after you might earn again half of what you have earned today. This almost never happens to the bank clerk — he earns every month more or less the same. Maybe if he falls ill for a longer period his income might decrease a bit if the medical insurance doesn’t cover the whole salary.
But interestingly — a taxi driver is more antifragile, because he has many sources of income and not just one single employer. This is very important to understand because it is a general point — if a company has many customers and many projects it is less fragile than a company that has only one main customer. Imagine two design studious — one works for local small businesses and often the income is volatile — some months are hard, some people are late with payments, some month the company sees the number of jobs drop by half. The second design studio has a stable income and a much higher income than the first studio — but the big studio has one main customer a local bank. And this bank contributes a staggering 90% share to the monthly income of the company. The rest is made up by some small adhoc works for two other regular clients. Now you can see that if the big bank for some reason stops to cooperate with the design studio, they might collapse — because 90% of their income will be gone from one month to another.
So the moral of the story from the viewpoint of antifragility is:
- Limit the potential losses by not over-relying on a few big customers, and expand your possibilities by having the foot in the door of many projects.
- Don’t be a turkey that doesn’t realize the possibility of the Thanksgiving day.
- Always keep thinking about the unthinkable — what extreme event could happen and how you can protect yourself or use it as opportunity.
Antifragility in investing
Nassim Taleb gives examples of what he call the optionality strategy or the barbell strategy:
Invest 90% of your assets in an extra safe instruments and 10% in extra risky enterprises. This is the barbell strategy — as those investments are separated into two barbells of very unequal size.
When investing into risky enterprises (the much smaller barbell) separate the risk by investing into as many experienced teams as possible and still reasonable.
So use what he calls the “1/N strategy”, also called optionality strategy. Limit your losses by spreading investment into as many high-potential projects as possible and still reasonable. But don’t limit your payoff option. Leave the option of a big payoff — by e.g. investing into equity and not debt. This is what Teleb calls positive asymmetry.
This is optionality and antifragility. Some instruments introduce positive asymmetry, like equity investments. Some introduce negative asymmetry like debt.
This is the optionality strategy or barbell strategy proposed by Nassim Taleb, the author of the books Antifragile, Black Swan and A Skin in the Game — like a barbell with one big weight representing investment in extra safe things and one small weight representing the investment into many and diversified small things.
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Notes: Antifragility in innovation and revolutionizing systems
Use the strategy of “picking the low-hanging fruits first” for optimizing and reforming the current system.
But if you want to invest into “systems change” and revolutionizing the system, use the “1/N” or “hit-based” strategy of funding as many lean, local and small projects as possible.
This way you limit the risk of failure and increase the chance of success. Extreme events are rare. Maybe one in 100 projects will have an extremely positive outcome and an extreme payoff. Extreme events are impactful, but very rare. So you need to explore the possibility space well enough.
Reconciling technocrats with revolutionaries
For the best results you can use these two strategies at once, but keep them separate to avoid the messy middle of complexity. Like a barbell mentioned above. Invest 90% in optimizing the system and 10% in revolutionizing the system. But do it far away and on a separate location to avoid the refusal of the innovation by the immunity system of the establishment in your team, organization or country.
Imagine a landscape with two peaks — the metaphor from the first article — Growth versus Development. One is lower and one is higher. The low-hanging-fruit- first strategy will allow you to only reach to the local peak, that represents the local optimum.
But this is sub-optimal from global perspective of the whole landscape — because there is a higher peek — but you would need to go down the “valley of tears” first to reach it.
But if you combine low-hanging-fruit-first strategy with the hit-based strategy that — Taleb calls optionality or antifragility strategy — you let only small teams of creative freaks experience failures and a valley of tears in a separate location, while you optimize the rest of the organization and its cash cow.
Again we can see a certain parallel of two components that might look like they are in the conflict but resemble similar conflicts from previous articles — Growth versus Development and Growth Mindset versus Fixed Mindset.
At the end of this article we use the concept of antifragility and its practical application in hit-based strategy of investing into projects (what e.g. venture capital does) to show that it can be recombined with a conservative and a more technocratic approach of optimizing the current system by pursuing the low-hanging-fruit-first strategy.
There is a long standing debate and conflict between the reformers and the revolutionaries — the reformers are optimizing and picking the low hanging fruit first and the revolutionaries want a systems change — a complete overhaul of the old ways of doing things.
So the main question I am trying to answer here — is there a real conflict between reformers (those who optimize towards the current local optimum) and people who desire a more profound “systemic change”?
If we use the concept of antifragility and the practical application of the optionality strategy — we see that we can resolve this conflict with simple heuristics —the metaphor of a barbell with very unequal weights— invest 90% into something very safe (low hanging fruit picking — small reforms and nudges) and 10% into something very risky (but do it in a small region, remote location, and on periphery away from the center of the organization).
Because, for example Leery Keeley in his book 10 Types of Innovations or Salim Ismail in his book Exponential Organizations say that you might want to have innovative teams on the periphery — outside of the big organization not to cause the autoimmune reaction that might destroy the radical innovation in its beginnings.
Reconciling Zero to One with Antifragility
If you read the Zero to One book by Peter Thiel you can spot that he is very contrarian and counterintuitive — for example he says that competition is for losers and praises the monopolistic power. He says the monopolistic power can be achieved only through radically better technology. And technology is opposed to globalization. Because this technology represents a vertical improvement — zero to one — but globalization is optimizing around the current technology and breeds unhealthy race to the bottom competition and resentments — in zero to many (copycats, outsourcing where labor is cheaper).
Peter Thiel also gives practically the opposing advice to Nassim Taleb on investing not into as many projects — but focusing on only the one crazy idea that seems to be off and under-performing but thanks to exponential growth it will conquer the world. (Think small digital fabrication factories versus big just in time factories. This Local Motors versus General Motors).
But if we are familiar with the concept of fractals (self-similar objects on ever smaller level — parts of cauliflower that looks like the whole cauliflower) we can again resolve this problem easily: Use the fractal barbell strategy — if you are a super rich investor invest 100 millions like this: 90 millions into some cash-like equivalents (e.g. US Treasuries) and 10 million into venture capital. From that 10 million into VC, use again 9 million into your very crazy idea that you are so sure and convinced about — and that is currently being tried by e.g. only 3 startups in the world. So give those 3 startups 3 millions each, and the rest — one million go for the 1/N strategy — as many startups as possible to get the optionality — limiting the downside and maximizing the upside.
You can see that the fractality can go on still a few levels — e.g. investing 900,000 like 30x 30,000 seed funding money into 30 projects and keeping the last 100k for a student competition and supporting 1000 best projects with 100 euro each.
Well you can again see that I am in a speculative stage and try to connect these seemingly opposing strategies of Thiel and Taleb — and I am using a notion of fractality to achieve that.
We can see that something similar we can do also in the debate between the low-hanging fruit-first nudging technocrats versus the more revolutionary “we need systems change” types.
