Category: Economics – Miscellaneous

Antifragile

The Book of the Week is “Antifragile, Things That Gain From Disorder” by Nassim Nicholas Taleb, published in 2012. In this repetitive ebook, Taleb reiterates a few of the concepts from his earlier book “The Black Swan” and again appears to derive pleasure from pointing out human fallibility. He writes that “Uncertainty, incomplete understanding, disorder, and volatility are members of the same close family.” He shows how people generate inaccurate predictions and draw the wrong conclusions through spurious causality, or “epiphenomena.”

Taleb discusses a state of being he calls “antifragility” (or more often, a lack thereof) in the realms of politics, economics, science, academia and medicine, taking swipes at all of them as he goes along. He gives tips on how systems and individuals can make themselves more antifragile (the opposite of fragile), a good thing. The author also provides real-life and theoretical scenarios that perpetuate fragility.  Humans appear not to be learning from past scenarios, as they continue to make the same mistakes over and over. One example of a real-life scenario includes the economic bailout of certain big companies, by the United States government (and by extension, American taxpayers) in 2008.

Fragility is vulnerability to negative occurrences. Antifragility is the ability to withstand negative occurrences due to various measures taken to reduce risks; this state of being actually benefits from volatility and randomness.

Humans tend to overestimate their ability to predict shocks and rare events (like revolutions, crises or budget deficits), and when the worst happens, it is worse than the previous occasion. Taleb writes that after havoc strikes, blame incorrectly gets assigned to one factor of the big picture. “The focus is wrong even if the logic is comforting.” People need to study the system and its fragility, not events.

One general example Taleb provides of spurious causality includes the questionable, widely-held assumption that academic research is the generator of wealth because so much research comes out of countries that are wealthy. Taleb thinks it is actually the other way around. “We have no evidence that academia helps science and technology, which in turn help practice.” One narrow instance of this was the building of the atomic bomb, in which there was directed research. But in that, there was selection bias and confirmation bias.

Another example that Taleb provides– a theoretical one– is when an Ivy League university scientist lectures a bird on how to fly. The bird takes flight. The scientist hastily writes books, articles and reports stating that the bird listened to him. The university is now an authority on aerial transportation by the avian species. It will implement further studies with funding by the government. Unfortunately, birds do not write books and papers, so we cannot get their side of the story.

The author advocates interventionism in particular areas and not others. He thinks the government should impose restrictions on the size, concentration and speed of entities including itself (obviously idealistic of him) because bigness increases fragility and the probability of disasters. He thinks less is more (do nothing or implement minimal intervention unless a medical condition is life-threatening) when it comes to medicine.

Taleb says education is useful in that it helps a family retain wealth insofar as its descendants use their educations to enter professions that were more lucrative than those of their ancestors. Almost all projects take longer and cost more when an element of uncertainty is added. “We have never had more data than we have now, yet have less predictability than ever.”

Read the book to learn more about: a) errors in human reasoning that aggravate adverse situations;  b) why fragility is increased with fiscal deficits and awarding of prizes in the fields of literature, finance, and economics; c) which actions are helpful in promoting antifragility and d) an inopportune event caused by Taleb’s own fallibility and his reasoning in dealing with it.

In sum, “The problem with people who do not incur harm [suffer no punishment for their influential opinion-making that causes economic collapse or a war] is that they can cherry-pick from statements they’ve made in the past, many of them contradictory, and end up convincing themselves of their intellectual lucidity on the way to the World Economic Forum at Davos.”

The Black Swan

The Book of the Week is “The Black Swan” by Nassim Nicholas Taleb, published in 2010. In this book, the author explains his theory about rare, unexpected events, “Black Swans”– unexpected by those affected, because human traits and uncertain situations cause people to draw the wrong conclusions, formulate the wrong predictions, and make the wrong decisions. “Black Swan events are largely caused by people using measures way over their heads, instilling false confidence based on bogus results.” The author applies his ideas mostly to “experts” who manipulate the financial markets.

While Taleb makes some good points, this blogger suspects that very few readers of this book will come away fully understanding what a Black Swan is. Taleb tries to provide several examples; his illustrations are unclear as to why one event is a Black Swan and why another is not.

One example consists of five trading managers at a European-owned financial institution who wrote a five-year plan. Having neglected to consider all possible adverse future events, they were done in by “the Black Swan of the Russian financial default of 1998 and the accompanying meltdown of the values of Latin American debt markets.” Yet, Taleb writes that the 2008 financial crisis was not a Black Swan. He says such a cluster screw-up will happen again. A Black Swan is a negative or more rarely, a positive occurrence that in general, has never happened before.

One human trait people have is that they are reluctant to attribute events to randomness. But Taleb thinks randomness plays a part in all sorts of events, including long winning streaks of investors. He even generated a computer simulation showing how it would be impossible not to have money managers who beat the market year after year– he says they did so simply by luck alone. Another reason these investors are overrated is that people hear more often about winners rather than losers.

Taleb writes, “We want to be told stories, and there is nothing wrong with that– except that we should check more thoroughly whether the story provides consequential distortions of reality… Just consider that the newspapers try to get impeccable facts, but weave them into a narrative in such a way as to convey the impression of causality (and knowledge).”

Burned Bridge

The Book of the Week is “Burned Bridge, How East and West Germans Made the Iron Curtain” by Edith Sheffer, published in 2011.

This book discusses the history of the splitting of Germany post-World War II, and its effects on Neustadt, a Western border city, and Sonneberg, an Eastern border city, both connected by Burned Bridge. Pursuant to agreements made at Yalta, “… on July 1, 1945, Soviet forces entered Sonneberg, and the U.S. Army withdrew into Neustadt… bighearted Americans distributing gum and chocolate from tanks with images of brutish Soviet solders in tattered horse-drawn wagons.”

In the late 1940’s, frequent border-crossers included black marketeers, undocumented workers, refugees and begging children. In both the East and West, border guards were easily bribed to accept fake travel permits. Families had been rent asunder by the creation of the artificial border.

In 1952, the East German government cracked down on border residents who had made, or were liable to make trouble– activists and frequent border-crossers who might spread the word to Easterners about the Western (capitalist) way of life– by forcing Easterners to move farther east, away from the border. Through the 1950’s, the East German government launched propaganda campaigns to lure former Easterners back to Sonneberg, offering residences, jobs, wages and farms superior to previous ones. Returnees exploited such opportunities, obtaining high-level education for their children as well, in the process. The physical Wall was erected in August 1961.

For about a decade after the war, West Germany flourished economically, after which various untoward events in the 1960’s and 1970’s slowed its growth. There occurred the scandalous Spiegel Affair, violence stemming from student and anti-nuclear protests, terror perpetrated by the Baader-Meinhof gang, oil shocks and anti-immigrant sentiments.

The late 1980’s saw a relaxation of westward travel. Nonetheless, the East German government was resistant to change, and continued to oppress its people through the fall of 1989. In November, dissatisfaction reached critical mass. “Most still recall exactly where they were and what they did when Burned Bridge opened, and cry with joy at the memory.” During reunification of East and West, people who were infrequent border-crossers experienced shock at the stark economic, cultural and social disparities between the two.

Crossing the River

The Book of the Week is “Crossing the River” by Victor Grossman, published in 2003.

This autobiography tells how an American defected to East Germany during the Korean War. A very unusual story, indeed. He was brainwashed by both his parents, intellectual Communists, in the 1930’s and 1940’s.

He tried to rationalize his penchant for suffering by saying that the cruel and unusual goings-on in the US actually provided a worse way for people to live, than the East Germans did. In the early 1950’s, the McCarthy era was in full swing, the US had ousted the leader of Guatemala in a bloody affair, and instigated another shameful coup in Iran; there was the ugliness at Peekskill, there was still segregation; besides, the Soviets had helped defeat Germany. Comrade Stalin was a god, to the Communists.

The author argues that in 1960, the quality of life wasn’t so bad in East Germany. Yes, there were severe food shortages, but everyone’s medical care was paid for, and everyone had a job or was provided with necessities for survival, and assistance for finding a job, according to his own need. Of course, the people also spent needless hours every day manually washing clothes and dishes, lighting a fire in the pot-bellied stove, and patiently waiting for unreliable public transportation, or hoofing it, because they couldn’t afford a car.

In the early 1960’s, the East Germans kept trying to attack the integrity of the Federal Republic (of West Germany) (with good reason) by publicizing the fact that a large number of ex-Nazis (who had committed unspeakable war crimes) were working in civil service– as judges, even(!) and in the West’s armed forces. It was somewhat alarming that so many Nazis were helping Germany to re-arm, and becoming a pivotal force in NATO.

In the late 1980s, the East German leaders staged a few media incidents, trying to continue to isolate the “German Democratic Republic” (the misnomer that was East Germany) clinging to power, believing that only they could be keepers of the flame. The East Germans, like the Chinese, were into self-criticism circles. They had “tutors”, who bullied doubters and discouraged free-thinkers, cutting them down with questions such as, “Are you questioning the collective judgment of experienced Marxist leaders, able to assess factors far better than any individual? Could you be more correct than they are?”

It was a traumatic time for the author when Khrushchev revealed Stalin’s crimes in the mid 1950’s. But the author continued to rationalize that his adopted homeland was still a better place to live than imperialist America. It’s an excellent book anyway.