Last week I finished the book “Antifragility: things that gain from disorder" by Nassim Nicholas Taleb (NNT). I came to a conclusion: NNT is an egotistical ass. This is why it irks me to no end that his narcissistic rant is going to make a home for itself in my top 10 books. Why? Because he makes a great point. Human beings are idiots when it comes to risk. We have no idea how to manage it. We see something uncertain and think to ourselves: "Hmmm… how can I control that?" Then we go about creating systems to make it all shiny and smooth. There is something in our nature forcing us to try and "fix" risk. That's not possible. The only thing we accomplish is to make it much worse when it happens. We need to take a cue from nature. I'm going to explore some of NNT's ideas and then explain how they apply to real estate.

I tried to fit this article into one post, but failed.  So, here is part 1 of…a number less than 10.

Antifragility: What Doesn’t Kill You…

When my cat, Barracuda, knocks over a vase on my dining room table, it shatters into a thousand pieces.  In other words, when you stress the vase it weakens and breaks.  Thus the vase is fragile.

What is the opposite of fragile?  Sturdy?  Robust?  No.  A sturdy vase  is not affected when it’s banged up.  That’s not the opposite of breaking/becoming weaker.

To be the opposite of fragile, the vase would have to get stronger when Barracuda topples it.

Sounds strange doesn’t it?  Roughing something up to make it stronger?

In English, we don’t even have a word to describer this concept.  So, NNT came up with the ever so clever “Antifragile.”

The surprising thing is more things are antifragile than fragile…unless humans have their way.

The Natural World is Antifragile

Natural processes are antifragile.

Everything fragile, or even strong, will be destroyed…It’s just a matter of time.

Nature as a whole endures.  If a species dies out, other species will fill in the gap.  If an asteroid wipes out all land life, marine life would evolve and inherit the Earth.

Saying we need to do x or y in order to “save the planet” is sheer arrogance.  What we mean is we want to save ourselves.  If the average temperature was 100 degrees warmer, life would continue.  Homo sapiens wouldn’t.  Nature couldn’t care less if humans continue to exist or not.

Not only is the natural process as a whole antifragile, but so are most natural creations.

Muscles – When you life a weight, you tear fibers in your muscles, which grow back stronger.

Immune Systems – When you catch a disease and survive, your immune system becomes more adapt at defending you from that disease.  If the disease kills you, you don’t pass your ineffective defenses to any offspring.

Evolution – Lions eat the slowest antelope, weakest elephants, and idiotic (or drunk) hunters.  Over time, all groups involved become faster, stronger, and/or smarter.

It ain’t pretty being antifragile.  It’s death and destruction at every turn, for the sake of the greater good.

Progress is Chaotic

For better or worse, human progress is antifragile.

In an ideal world, human advances would be some sort of smooth continual march towards greatness.  Every year we take last year’s accomplishments and improve on them.  We help each other out and sing kumbaya around the camp fire afterwards.

Not so much.

Progress comes from destruction and mayhem.  Innovation takes the people and things of today, spits on them, chucks them out the window, and does it better.

Let’s pick an industry at random: transportation.  My knowledge of this matter is limited, but I would trace the general timeline as: feet, boats, wheel/carts, horse, trains, cars, and airplanes.

I love fancy charts, so here is one showing what I’m talking about:

No, this isn’t to any scale. All I did was throw random numbers in Excel that felt good.

Each new disruptive technology has an exponential impact on growth.  Looks great doesn’t it?  We’re always improving.  That’s not the whole story.

Trains collapsed the covered wagon market.

Cars butchered the horses.

Airplanes decimated both the train and the car industries.

Every step of human progress, creates a huge wake of destruction.  Out with the old, in with the new.  If you and your family rely on the old…you’re going to have a bad time.

It doesn’t matter what topic you pick, the story is the same:

Medicine – human sacrifice, barbaric surgeries, bloodletting, starvation therapy, germs, anitibiotics, overmedication.

Astronomy – the sun is a god, earth is flat, earth is the center of the universe, sun is the center of the universe, the universe is always expanding.

Nutrition – hunter gatherers, farmers, orthodox diets, scurvy, understanding of vitamins and minerals, processed foods, fat is bad, the love of carbs, atkins diet, fat is good.

Real Estate – caves, thatch huts, clay houses, straw and wooden halls, limestone cottages, wooden multistory building, brick behemoths, iron high rises, steel and aluminum skyscrapers.

Information transfer – this one is too easy.

Try it for yourself.  Pick any topic you’re familiar with.  Anything at all.  How many advances can you list that shifted the entire industry?  How many people were hurt during these changes?

Well…sex is a counterexample, but the only person I know making charts about his sex life is this guy.

Why Humans are Idiots

The trouble with us humans is we’re too stupid, or maybe scared, to recognize the world isn’t safe and smooth.  We run from instability.  We use our big brains to create structures and systems designed to mask the underlying mayhem.  We fabricate a safety net where there is none.

And we’re good at it.

We construct dams to smooth out the rough waters.  The river becomes controllable but the water pressure on the other side of the wall builds.  When the dam collapses, and it always does, the destruction outstrips any harm a choppy river would ever have done.

How about some less rhetorical examples:

Salaries

This is lifted straight from the NNT’s book.

Let’s look at two workers: Joe, a taxi driver, and Bob, a gainfully employed accountant.  Here are their annual incomes for the last few years.

Both of their incomes average ~30k per year.  Which person would you rather be?  Bob, right?  He’s got a steady salary he can count on.

Wrong.

Bob has a high probability of his income going to NOTHING.  His company might downsize.  He might get a new boss who doesn’t like him.  There might be some new laws passed which make his skills obsolete.  The industry might shift.

And none of these events are in under his control.

Joe on the other hand might have some variance in his income, but the downside is limited.  He has many more sources of income, instead of a single one.  He is better able to adapt to changing circumstances.  He can see larger trends and prepare for events before they happen.

The yearly ups and downs for Joe means the risk of an unforseen, catastrophic event, is much lower than for Bob.

Five Year Projections

The best way of summing up a five year projection is “You’re right when it matters the least.”

To make a projection you have to start with historical data.  That assumes smoothness, which isn’t there.  Sure, some stock went up 5% the last 10 years.  What does that say about next year?  Does it go up 5%?  Maybe.

Remember, the quality  of horses improved every year for a long long time…until they were turned into glue to make way for cars.

When you try and guess the future, you’ve got a shot at being right if nothing significant happens.  When the next big thing comes along you’re going to be very very wrong.

Compounding the problem is guess (and it is a guess) gives us a false sense of security.  We make decisions assuming the projections reflect reality.  Then when some disruptive shift comes along, we’re doubly  screwed.

Electricity

I’m a technophile.  I love any and all labor saving machines.  Today, all of them rely on electricity.

Enter solar flares.

Within the last 200 years the sun has emitted solar flares strong enough to wipe electricity off the planet for an extended period of time.

This will happen again.  It’s not a matter of if, but when.  Human memory is short.  If something hasn’t happened recently, we tend to assume it won’t happen again.  The mayhem and deaths that will ensue will be extortionate.

Large Government

Nothing is forever…and that includes your government.  It could be this year or in 5000 years.  It might be because we overspend or because aliens attack.  I don’t know the details, but I can say with 100% certainty your government will cease to be.

People don’t think this way.  We don’t bake it into our decisions.  We don’t realize the larger the government becomes, the more we depend on it.

In America, we rely on the government for policing, foreign protection, retirement (via social security), infrastructure, farming (via subsidies), and soon healthcare.  What happens when all of that is swept away?  Again, notice I said when, not if.

A large government might make us feel warm and safe in the short term, but the more reliance we place on this single, fragile, entity, the more catastrophic a failure will be.

Remember what happened after the Roman Empire collapsed?  The good ol’ days of the Dark Ages?

Wrap It Up: We suck at understanding risk

What does this all boil down to?  Humans are idiots.

Or maybe we’re too smart for our own good.

We think we’re invincible and we create systems to make our lives easier and more stable.  We hide away from natural variation and delude ourselves that we’ve found a way to beat the system.

It just doesn’t work that way.  The smoother we make things in the short term, the more devastating the eventual backlash.

A saying I picked up from my trading days:

If you refuse to take a small loss, one day you’re going to take the mother of all losses.

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Embrace the chaos.

Stay tuned for next week…

This idea of antifragility, stress being good, and people not understanding risk can be applied to most subjects. However, this is a real estate blog, so I'll go there next week in part 2.

Photo Credit: Vincepal