Basic concepts in Antifragility

Before I can write about "Antifragility" I have to share how people process information.

Stick-slip

Suppose you were to take a clipboard and hold it horizontally. Furthermore, suppose you were to put a small object on it...maybe a bottle cap or a hex-nut and then you were to slowly start to tilt the clipboard. 

The object on the board would not start to slide until some degree of incline was reached and then it will start to slowly slide. Contrary to expectations, the object will accelerate and slide off the edge of the clipboard since the dynamic, sliding friction is less than the static friction.

A similar phenomena takes place in the human brain as it processes data. It even has a name: Anchoring-and-adjustment. Our brains form a preliminary model or map of "reality" based on the earliest data we receive and then we make sometimes make adjustments in that model based on real-time data. The most common failure is to make too few adjustments and even then the adjustments are rarely as large as the data indicates they should be.

A pithier way to describe this is captured in the story of "boiling frogs".

There are reasons our minds are hard-wired this way. There are costs to changing direction. Investments were made in teaching people to do things in a certain way. Equipment on factory floors. The cost that the change might be in the wrong direction or some unanticipated interaction with other parts of the enterprise cause it to crash.

Consequently, small and boring bits of data are almost always overlooked and quickly forgotten. That bit about them being forgotten is important because in-total, the data can be totally clear and unambiguous but it is rarely perceived in-total because of the forgetting. The Titanic continues steaming toward the iceberg.

Profiting from stick-slip 

Nassim Taleb is a scholar, author and investor who made a career in studying how to profit from the consequences of this stick-slip phenomena. Moreover, he shares his insights in the books Black Swan and Antifragile.

To compress his message into something that will fit into this essay, he eschews the hedging practice of placing medium sized bets slightly to the upside and downside of the current condition. Rather, he places smaller bets on extremes along several axis of the current condition.

On a simple number line, if the current condition is 243 then most traders would buy options at 233 and 253 or roughly 5% away from where it is. Taleb proposes making bets at 100 and 500. Since those excursions seem so far into fantasy land, he can get thousand-to-one odds and doesn't have to win very many bets to make back his stake.

Professional traders scoff because they want to forget data like Boeing 737 planes falling out of the sky or when GE seemed to be an unbeatable behemoth.

What can we do as individuals?

If you are one of my readers, you are probably more aware of the fragility of the systems underpinning our way of life than the average CNN viewer.

You are also less certain that "society" will be able to reliably deliver the needs near the bottom of Maslow's Hierarchy. 

You probably have a more accurate appreciation for what an unwind might look like than the average CNN viewer. Rather than dropping back to 2009 level of technology, your vision of an unwind might look like an unwind to 1920 or 1880 level of technology. In that regard, you are way ahead of preparing for a hurricane or ice storm or rapid, civil decay than the average, sports-ball watching American.

The up-side bet 

That only looks at one side of our current conditions...but what if society and technology somehow manages to keep advancing. What will the challenges be if 80% of the people who made six-figure salaries become unemployed by AI? What if Green Energy becomes a more developed technology? 

For most of us, it will be early adoption of "smart sensors and cameras" for securities. The network of cameras will have some intelligence that will sort our deer and raccoons from human interlopers and will alarm accordingly.

 

A key problem with Green energy is the mismatch between peak generation and peak use. The much of the power generated between 10 AM and 2 PM is excess-of-need and in an economic sense "free" or perhaps even negatively prices since it can destabilize the grid. You could get paid to use it.

It will be early adoption of E-bikes and UTVs that can be charged using on-farm panels. In the winter it might be using peak "free" electricity at noon to heat a thermal battery in the middle of your living room or to make a lump of ice in the summer. 

A couple of bonus links

Image credit Art Ludwig

Slow Sand Filtration

Understanding water's fitness-for-use