When the variety or complexity of the environment exceeds the capacity of a system (natural or artificial) the environment will dominate and ultimately destroy that system. - Ross Ashby
Just because something is great today doesn’t mean it will be great tomorrow. It’s not always the best idea that wins, but often the one that can best deal with change. From natural selection to the big companies of old, who over time descend into obscurity. But what is it that allows something or someone to continue to be great? The things that go beyond great are anti-fragile.
Anti-fragility is a concept I first read about in Nassim Taleb’s book of the same name (the same Taleb who wrote Black Swan). In the opening part of the book, Taleb describes anti-fragility as:
Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors, and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it anti-fragile. Anti-fragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the anti-fragile gets better.
This is where the opening quote of this post comes in: being able to deal with the complexity of the environment you operate within. Job one is to deal with change. To be resilient. You can’t gain from disorder if you can’t even survive it. Many of you reading this will operate in a complex environment, accepting that the world around you is constantly changing and unpredictable. You can have the best plan in the world, and then you get punched in the face. But how do you actually become anti-fragile?
I believe there are two ways, from two different areas. The first is from Taleb himself, and the idea of the barbell. The barbell strategy pairs extreme safety with extreme risk-taking, evading moderate “middle” positions. Reid Hoffman, of Netflix fame, advocates for this under a different name with his ABZ strategy. Plan A is the core pursuit, and Plan Z is the safe fallback. Applying this to investments, your plan A is a relatively ‘safe’ investment. Something that you’d be confident in, say, bonds. Then the extreme risk-taking might be something like a leveraged ETF or a crypto investment. Something with a potentially huge upside, and because you only invest a small percentage of your wealth, you minimise your risk.
The second is Barry O’Reily’s idea of residuality. Particularly the idea of stressing the system. Barry comes from a software architecture perspective, but you can apply it anywhere. Say you’ve made your investment decision, you can stress that decision against a variety of different factors. What happens if the stock market crashes? What happens if the economy slows down? What happens if aliens descend upon Earth and take over the world? You can apply the stressor and then look at what the potential solution would be. This doesn’t necessarily mean you solve for every solution, but at least you understand the risks.
This is important for risks that are more systematic. The global food system, the global financial system, energy supply, etc. Stress testing your current approach against this can help you understand how you can prepare. Investing in solar power, battery storage, and an electric car might seem like an enormous investment. But in a not impossible future where the climate is unpredictable, rolling blackouts become normal, or a wannabe dictator decides on a whim that affects the global fossil fuel supply, having guaranteed self-sufficiency seems less expensive.
Think about anti-fragility, think about if you’re ready to deal with the complexity and unpredictability of the world around you. You won’t catch all the things that could go wrong, and you might not solve it all. But at least you are aware.
James