Taleb, who spent 20 years as an options trader on Wall Street, wrote “The Black Swan” in 2007 about the huge influence of rare and unpredictable events and the human tendency to offer simplistic explanations for the events afterwards. This is, in hindsight, a possible explanation for the 2008 financial crisis.
Taleb opened his lecture with a question: “What is the opposite of fragile?”
After a few attempted answers from the audience, Taleb explained that there is no antonym for fragile in common English. He introduced the term “antifragile” as one of the terms he uses to view the stability of systems — financial, political or otherwise — the other most important term being “fragile.” Fragile systems, he explained, have a higher risk of “downside,” meaning that that the introduction of a new variable is more dangerous, while antifragile systems, by contrast, are more resilient.
His talk focused on the dichotomy between fragile and antifragile systems, especially with respect to the current financial situation, and he argued for a return to antifragile market systems. Such a change, he said, would require decentralization of the government and elimination of public deficits.
“Public debt is the mother of all fragility,” he said, explaining that it has a high risk of downside. “The deficit goes up a lot more if unemployment goes up 1 percent than it goes down when unemployment goes down 1 percent.”
He argued against bailing out failing companies on the grounds that it would produce a worse outcome later, and stressed instead the importance of venture capitalism as a principle of antifragile systems. He added that elements of randomness and disorder — including occasional failure — are necessary for constructing and maintaining a strong system.
“Eliminating randomness makes systems weaker,” he said. Taleb used the analogy of forest fires to illustrate this concept, explaining that sometimes it is better to let a small fire run itself out on its own to prevent catastrophic fires in the future.
Toward the end of his speech, Taleb discussed the loss of professional accountability in modern business, using the Code of Hammurabi to explain what he meant.
“If an architect builds a house, and the house collapses and kills the owner, then the architect will be put to death,” Taleb said of the code. Though an extreme example, the code nevertheless illustrates a system that requires “skin in the game,” in which professionals operate under conditions of personal financial risk. He called such a requirement the “best risk management rule ever.”
“The limited-liability company is not what Adam Smith had in mind,” he said of the current state of the marketplace. Taleb concluded by stressing the importance of reducing fragility by reducing debt
“There is a big myth about the role of debt,” he said. “This myth that we need debt to grow leads to a culture of debt.”
Taleb’s new book, “Antifragility: How to Live in a World We Don’t Understand,” will be released in October 2012.
Taleb spoke in Dodds Auditorium as part of the Wilson School’s “Economic Recovery: Perils, Politics and Possibilities” thematic lecture series.
Read More
Princeton launches ‘Stand Up’ website, alumni newsletter in response to federal attacks
Devon RudolphPrinceton University released a statement announcing a new initiative called “Stand Up,” reaffirming the University’s commitment to freedom of speech and academic research funding, while criticizing the new presidential administration’s federal funding cuts.
Princeton University released a statement announcing a new initiative called “Stand Up,” reaffirming the University’s commitment to freedom of speech and academic research funding, while criticizing the new presidential administration’s federal funding cuts.
May Day protest draws hundreds at Princeton in support of labor, immigration, and Palestine
Sena Chang and Luke GrippoProtesters organized by Resistencia en Acción in New Jersey gathered on May 1 to express concerns about U.S. immigration policies, the ongoing Israel-Palestine conflict, and labor rights issues.
Protesters organized by Resistencia en Acción in New Jersey gathered on May 1 to express concerns about U.S. immigration policies, the ongoing Israel-Palestine conflict, and labor rights issues.
84 acts, 15 porches, and 30-mile-an-hour winds: students and community enjoy Porchfest
Isabella RobertsDespite light rain and clouds during the day, Porchfest continued without interruption. Students, professors, Princeton locals, and others could all be seen enjoying the day’s performances all over town.
Despite light rain and clouds during the day, Porchfest continued without interruption. Students, professors, Princeton locals, and others could all be seen enjoying the day’s performances all over town.