LEARNING FROM FRAGILITY

But Can We Make Ourselves Vulnerable?

Five years ago, Nassim Nicholas Taleb captured our attention with his account of “black swans,” unpredictable events of extraordinary consequence. Within the year, the financial crisis both illustrated and vindicated his concept, and “black swans” entered our lexicon.

World War I is another good example of a major crisis that took everyone by surprise, as is 9/11 and, more recently, superstorm “Sandy.” Black swans are not always catastrophes, and he offers the example of the internet. It is only in retrospect that one can only see how such overwhelming events are looming, and only in retrospect we can see how everything has been changed as a result. Is it possible to prepare for them?

Being unexpected and overwhelming, black swans challenge the very idea of risk assessment. You can’t prepare for events you can’t anticipate, nor assess the extent of risks that are unprecedented. But now he has come up with some ideas about how to cope with them.

If black swans cannot be predicted, the key to survival is becoming more adaptive and resilient when they occur. Discomfort, stress and volatility make us more adaptive and stronger. He notes, we have been “obsessed with comfort and cosmetic stability . . . . but by making ourselves too comfortable and eliminating all volatility from our lives, we do to our bodies and souls what Mr. Greenspan did to the U.S. economy: We make them fragile. We must instead learn to gain from disorder.”

He has five recommendations to make us more “antifragile,” including keeping our organizations smaller, emphasizing entrepreneurship, making sure that those who manage organizations are directly affected by their success or failure. The underlying principle is expecting to make mistakes and learning from them rather than trying never to fail. Building more instability into our system will make us more resilient when the inevitable great upheaval arrives. (See “Learning to Love Volatility.”)

These are thoughtful suggestions, but what are the incentives for implementing them?

Financially, our businesses usually benefit from economies of scale. Being bigger usually means being able not only to cut costs but also to compete more effectively. That’s why we have banks that are “too big to fail.” The only way to right-size them now appears to be through government regulation, and they are proving highly resistant to any effort that threatens their power.

But there are psychological obstacles as well. No one wants to fail, even when the lessons of failure are valuable. Nassim Nicholas Taleb wants us to be exposed to greater risk, more vulnerable and smaller, but who wants those things for himself? And who will resist the temptation for greater security or more profit?

The benefit, of course, is that if we can impose greater insecurity on ourselves, we will become more secure in the long run, when it really matters. But the whole point of black swans is that they are out of sight, and out of sight usually means out of mind.