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Making decisions in a disorderly and unpredictable future


21 July 2020

Nassim Nicholas Taleb wrote five bestsellers in the past two decades, one of which – 2007’s The Black Swan – propelled him to global fame. His magnum opus is a personal exploration into the nature and management of uncertainty, coincidence, risk and human decision-making. We present a brief introduction to the ideas of a man who is certain we live in an elusive world that we nevertheless believe we can understand.

Taleb had his international breakthrough in 2007 with his non-fiction book The Black Swan: The Impact of the Highly Improbable. Packed with original ideas, the book divides the world into two imaginary countries: Mediocristan and Extremistan. Mediocristan is a country marked by an absence of extreme events. It is an average, stable society ruled by theories, models and historical big data, which politicians, policymakers, economists and bankers draw on for their sophisticated forecasting and decision-making methods. If you have only ever seen white swans in the past, you will assume that all swans in the future will be white as well.

But Mediocristan happens to be quite detached from reality, since uncertainty and arbitrariness have essentially been ‘scrubbed away’, according to Taleb. The reality is that we live in Extremistan: a world in which a ‘black swan’ could appear out of the blue and upend the world as we know it. Taleb uses ‘black swans’ as a metaphor for unpredictable, high-impact events that no one – or virtually no one – saw coming and which can only be properly explained in hindsight. Black-swan events generally have a negative impact, creating devastating financial losses and large numbers of victims, as well as coming at a huge cost – the 9/11 attacks being one example. But there are also positive black-swan events, such as the rapid emergence of the internet around the turn of the last century.

Taleb argues that our attempts to gain control over the world by extrapolating historical averages to the future is pointless. The social, financial, political and economic reality is part of Extremistan, which therefore by definition grapples with uncertainty, variability, imperfection, gaps in knowledge, chaos, volatility, arbitrariness, stress, errors, and dispersion of outcomes. In fact, as Taleb shows, the course of the modern world is increasingly determined by these high-impact events, mainly through advances in technology, increasing complexity and economies of scale.

Thinking in terms of optionalities
In 2013, six years after the publication of The Black Swan, Taleb released a follow-up called Antifragile: Things That Gain from Disorder. This book investigates the most effective ways for humankind to deal with black swans – and even to benefit from these events. Dr Martin van Staveren, a lecturer in the Executive Master’s course in Risk Management at the University of Twente, believes ‘antifragility’ is one of the most remarkable and valuable concepts introduced in Taleb’s work. Whereas a porcelain teacup is ‘fragile’ (it will break as soon as you drop it on the floor) and a plastic travel cup is ‘sturdy’ (meaning it will remain intact if it’s dropped from a table), an ‘antifragile’ cup actually becomes stronger over time when exposed to shock. In other words: the more often you drop the cup, the more resistant it becomes.

The global aviation industry is an example of an antifragile system, because every plane crash is analysed and then used to further improve the system and air travel safety. The victims of airline accidents, then, contribute to the overall safety of other passengers. Human beings are also antifragile to some extent, as a common cold or a rigorous workout ultimately (within limits) makes us stronger, healthier and more resilient.

The essence of Taleb’s antifragile theory is to think in terms of optionalities, which is to say: keep as many irons in the fire as possible. It is wise to remember that a black-swan event could occur at any time. Taleb defines optionality as a scenario in which you have the option to make decisions in a disorderly and unpredictable future. This feels counterintuitive, because both individuals and organisations have the tendency to act based on the information available to them at a given time to be grasped, analysed and interpreted. But if you rely on this information for guidance, you expose yourself to risk when new information surfaces – for example, in the form of a black-swan event.

A common way of factoring in optionality is for companies to use multiple suppliers. If one supplier ceases to operate or is temporarily unable to supply due to unforeseen circumstances, you can switch to another supplier without going out of business. From an optionality point of view, it also makes more sense as an innovation strategy to experiment with different formats when testing new products and services rather than allocating all your resources toward a single project, no matter how impressive its potential might be. It is by diversifying into a range of – strategically chosen – products and services that you can promote long-term growth, while at the same time reducing your vulnerability to changing market conditions.

Reset of the global financial system
According to Nicky Rogge, a lecturer in Business Administration at the University of Leuven, the great paradox of our time is that the grand, complex, hi-tech systems we humans create are actually making us increasingly fragile, as opposed to more antifragile. Recall the collapse of a single US bank in 2008, which turned out to signal the start of a global financial crisis the consequences of which would be with us for many years, and which some experts believe has never really ended.

We will have to wait and see whether the outbreak of the coronavirus pandemic (which Taleb has explicitly stated is not a black-swan event) will lead to a reset of the global economic system, now that its fragility has once again been ruthlessly exposed. One example would be for companies to keep more stockpiles in the future, as opposed to squeezing the last drop of efficiency from supply chains, or by abandoning the notion that uniformity and large-scale production are the be-all and end-all, and transitioning to more flexible and diverse, small-scale systems instead. We also need to look more critically at what’s really going on rather than relying on theoretical models or meaningless ‘big data’. Taleb also teaches us that uncertainty and the shocks it brings along with it need not necessarily undermine us at all. We can come out stronger at the other end: if not always as individuals, then at least collectively. After all, we have been doing so for millions of years.

About Nassim Nicholas Taleb 
Nassim Nicholas Taleb (born 1960) is a Lebanese-American essayist, scientist, statistician and former options trader and risk analyst. He grew up in Amioun, North Lebanon, during the Lebanese civil war, and when he was 15 years old his affluent family lost all its wealth. These early experiences unmistakably informed his ideas about uncertainty, risks and opportunities. Educated in France and the United States, he worked for many years at various financial institutions before devoting himself full-time to research and writing about probability and risk, drawing insights from philosophy, mathematics and logic. He is currently Distinguished Professor of Risk Engineering at New York University.

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