Antifragile = Self-Organized Criticality

Farnam Street posted this very good piece today about Taleb’s Antifragile.

The post discusses in detail the definition of antifragile, and describes the continuum of fragile to robust to antifragile.  A fragile system is one that is damaged or destroyed by unexpected stress;  a highly ordered system that cannot tolerate randomness and volatility.  As we add complexity and order and remove randomness from systems, (like our education system, or our diets, or the financial system, or a bridge built out of matchsticks) then we are making those systems more fragile.  The next step along that curve is robust.  That would be a system that can tolerate or survive stresses, such as a system that includes redundancies, or a bridge built to double the expected load.  Then you get to antifragile.  An antifragile system not only tolerates stress and volatility, but it requires them.  This describes living systems, like how a human gains maturity, or evolution of species, or a bridge that is made out of living bones that heal thicker at each crack.

Another process that could be described as antifragile is self-organized criticality.  This post from Scientific American starts out by introducing the concept as a theory of how the brain works, but then goes on to detail all the other applications of the principle.  This idea of self-organized criticality is not new – it was first published in 1987.  The new part is that they have data now showing that our brains work this way, too.  They specifically use financial markets as an example in this article, and having tried to make a mathematical model of market data, I am certainly in agreement that power distribution is what applies (although, of course, not a static distribution – that is, not one you could actually use for anything).

So all of the manipulations (bailouts, QE, etc.) that are made in an effort to stabilize the economy, while they may temporarily seem to do so, will by these theories lead to a larger crash in the future.  This is Taleb’s point, and it is described by the scientists this way:

A complex system that hovers between “boring randomness and boring regularity” is surprisingly stable overall, said Olaf Sporns, a cognitive neuroscientist at Indiana University. “Boring is bad,” he said, at least for a critical system. In fact, “if you try to avoid ever sparking an avalanche, eventually when one does occur, it is likely to be really large,” said Raissa D’Souza, a complex systems scientist at the University of California, Davis, who simulated just such a generic system last year. “If you spark avalanches all the time, you’ve used up all the fuel, so to speak, and so there is no opportunity for large avalanches.”

So that leaves all of us real world (read: not TBTF) financial professionals wondering how to make our portfolios more antifragile, or at least more robust, as we can plainly see all the fragility being added to the system (not just by the central banks, but also by the TBTF moral hazard and complexity of the system, such as HFT).

If you are antifragile, and enjoy stress and variability, try these fun reads as well:  John Hussman, pick any one.  And Elaine Meinel Supkis.  Here’s her latest earthquake post.

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