Chinese minds move away from conservatism toward antifragility
By Andrew SHENGThis is much closer to ancient Chinese and Indian views that saw the world in constant change.
January 5, 2013, 12:06 am TWN
What has been missing so far has been a synthesis of the two divergent worldviews.
In his new book “Antifragility: How to live in a world we do not understand,” “Black Swan” author Nassim Taleb introduced option theory as a general tool to bridge dialectic thinking with mainstream bell curve statistics.
The normal “bell curve” distribution is a widely used statistical tool for decision making in mainstream social sciences.
Social scientists look for statistical significance in the high probability (95 percent) or “robust” zone of the bell curve, tending to ignore low probability events (2.5 percent each) in the long tails.
By ignoring the long tail events that occur rarely but have large impact when they occur, mainstream thinking like the economic profession missed systemic events like the 2008 financial crisis.
There are of course two long tails, one being the “bad” Black Swan events that create systemic damage when they occur.
The other is the upside or “good” long tail events. Nassim calls “antifragility” as good actions that compensate for “fragility,” the bad events.
Intuitively, Taleb has reframed Chinese philosophy in modern mathematics with a scientific explanation.
What he calls the central Triad of exposures — Fragile, Robustness and Antifragile — has the analogy in the Chinese trinity of Female (Ying), Golden Mean (中庸) and Male (Yang).
The Confucian concept of Golden Mean seeks to avoid extremes and take the safe middle path.
But Taleb's insight shows us why the Golden Mean gets people into trouble, because by playing safe, the mainstream ignores the uncertainty of Black Swan events that could eventually damage the system as a whole.
Prudence and conservatism through adopting the Golden Mean prevents the practitioner from adopting “antifragile or (good) high risk-high payoff” strategies that would compensate for the uncertain unknown bad Black Swan events. A Buddhist would immediately recognize the need to build up good deeds to compensate for the bad deeds that may befall oneself.
By not taking risks, Chinese dynasties that adopted Golden Mean strategies became closed societies that eventually imploded when disaster struck. On the other hand, in the run up to the Industrial Revolution, Western societies took large risks with high payoffs, in science, technology and even colonialism.
Western society compensated for fragility by taking antifragile measures.
No risk, no gain.
The easiest way to think about options and antifragile strategies is in terms of stock market investment.
Suppose you adopt a conservative strategy that follows what the market does on average (follow the index). If however the market suddenly drops by 30 percent, and your portfolio declines by 30 percent, you will never recover your capital if you continue to adopt a market-following Golden Mean strategy.
To recover or do better, you have to make small bets on risky shares that are “antifragile,” meaning that if they win, they win big.
Antifragility loves volatility.
Making small mistakes allows one to avoid making large mistakes. The more you try to be stable, the more unstable you become, which Keynesian disciple Hyman Minsky rediscovered as “stability creating instability.”
Taking non-linear options on high risk-high return ventures was exactly what Deng Xiaoping did in his opening up strategy.
He knew that the risks of failure were high (and unknown) but taking options by opening up new development zones and new policies created new payoffs and growth areas that were not imagined by the critics.
In 2013, Deng's successors may be making new, anti-fragile options.
Andrew Sheng is President of the Fung Global Institute.