Transcription
So with this rule, you can tell yourself the following. Why is social media successful? Because it's a destructive technology that removed the old, unnatural technology. The television, the television, you're sitting down, what on a one-way relationship with, with, you know, no discussion.
People are argumentative. Before that, what did they do? Use the existing business line you have to introduce other things. It's very hard. People don't realize how hard it is to switch business because you have a business plan. Once you have a business plan, you're married to that business plan. You're ashamed of changing course. People searching. I mean, Columbus was going to India. He discovered the Americas. They were still in denial, right? The Phoenicians had zero resources. They were the wealthiest people in the Mediterranean for a thousand years.
The whole idea is to be prepared, to have a system, to not have to worry about black swans, not to have to predict the environment, but be set up in a way to benefit from the unpredictability of the environment. And a lot of companies have this attribute, and a lot of systems have this attribute.
For 21 years, I was an option trader, and I picked up everything I know from option trading. And when you're an option trader, you don't know a lot of things. Honestly, your knowledge is very limited. You don't read the papers because it's useless. You discover quickly it's useless. You know one thing professionally: volatility. And you know one thing outside of that is alcohol.
So when I stopped trading, you know, I wanted to have a specialty. I could not specialize in alcohol because I wasn't good, you know, at it too much. Like my friends could drink a lot more than I did. So I focused on volatility, trying to model volatility mathematically. So I started trying to develop models of volatility, and it hit me that in the process, accidentally, that everything, all right, can be seen as how things respond to volatility. Everything. So the fragile, for example, like this coffee cup, made in China, but real, you know, the highest quality, does not like volatility. Everything fragile has this in common. This commonality.
In the process of understanding fragility, we option traders had a term for things that like volatility. We called it, you know, long gamma. And it was not in the literature. It was not in the vocabulary. Because when you ask people, "What's the opposite of fragile?" they tell you solid, robust, someone from New York or Brooklyn. All right? They, I mean, they don't give you the characterization I'm looking for. Because the opposite of a package on which is written, you know, "Please handle with care," it should be written, "Please mishandle." Okay, that's the exact opposite. You see, the opposite of fragile is not solid. It's not robust. It's not, I hate that term, resilient. It is something that likes disorder and volatility.
The Greeks had a concept of it. You know about the fragile. You're sitting down with a sword above your head, waiting for the sword to fall, and you can do absolutely nothing about it. Like the coffee cup, one day it's going to break. You can't do anything about it. Fragile companies, fragile bridges, one day will collapse. You can't do anything about it. Okay, that's a fragile. Okay, cannot handle a certain amount of disorder, unpredictability.
In the middle, the resilient, like a Phoenix. You shoot it, it comes back. Shoot it, doesn't degrade, doesn't improve. Like people from New York again. Okay. And to the right, you have Hydra. You cut one head. Guess what? Two grow back. So really, it feeds on attempts to harm it. Okay. So there are a lot of Hydra-like things in life. And let's look at how they react to volatility to see the Hydra attribute.
The fragile is like a bank. They make money. They make money. They make money. They make money. And then one day, you get a phone call. All right? They didn't make money. When they lose, they lose a lot. They lose more than they ever made before. Hedge funds, a lot of them have this attribute. Okay? Uh, companies after they become mature have this attribute. They make steady income, and then one day, you get a phone call, right? This is the fragile, and it doesn't like volatility. All the big variations of downside.
The robust, as I said, people from Brooklyn. Okay. No upside, but no downside. All right. And then I have actually a character of Fat Tony from Brooklyn and antifragile. And then you'll see exactly what I mean once you read about Fat Tony. Okay. And then the antifragile, most of the big shocks are to the upside. Okay. Think of a venture capital P&L. Okay. Long volatility, long optionality, right? So this is how it looks in time series space. They. And let's look at it in a different dimension. It's a little complicated to explain, but I've written about 200 technical pages on it. I still try, you know, I'm trying to figure out exactly. And Duridge had a conversation and told me it takes a lifetime for that. Is that if you like one of these, you like them all. And if you hate one of these, you hate them all. Okay? And this makes it easy. If you like time, you like volatility. If you don't like volatility, you don't like time. Time brings volatility.
But what they all have in common is that they have more upside than downside when they're antifragile. And the antifragile likes them all, up to a point, of course. And you have more downside than upside when you're fragile. And my body is fragile. It has one attribute. It doesn't like earthquakes. Okay? It doesn't like time. It doesn't become more accidents. So this is, you know, what I call the disorder brother. It's not a moving company. It's a, you know, characterization. And with this, we can do quite a bit. And I learned it from being an option trader.
If you don't like volatility, the market goes down 1%. Okay, you lose a million. The market goes down 5%, you lose 20 million, not five. You have an accelerated negative P&L. And this is how we can measure, you know, more downside than upside. This is how we can measure this asymmetry. This is how we can measure really the degree of fragility in a system.
Now, you know, as we say in America, when life gives you a lemon, you make lemonade. So you have two approaches in life. If you read too much of The Economist, The New York Times, all these as junk, all right, you have the idea that volatility is bad. But in fact, if you have the idea, "Hey, we're going to have high winds," what do you do? Do you necessarily have to go duck in your basement? Okay. With spam, some movies, you know, uh, candles, maybe guns. No. You know, if you hear you're going to have high winds, let's try to make some money out of it. Okay. So, hence, you can have, you can have windmills, build windmills, try to make money out of turmoil. My profession, incidentally, for 21 years was trying to benefit from turmoil. Okay. I mean, it's maybe not a very interesting profession, but you can translate it into real terms. Let's be set up in a way to benefit from disorder, bad events, from the bad, from the, you know, attempts by life to give you lemons.
So, but you say, "How?" Look at your bone. You know, we have all bones. Your bones improve if you shock them. And actually, not only that, but if you don't stress your bones, guess what happens? You lose in bone density. Actually, people who go to gyms don't stress their bones and they lose in bone density. The old-fashioned way of carrying water jugs on your head is still the best if you want to have a good bone structure. And actually, it even regulates the hormonal structure, even fertility. So it's not just, you know, uh, business life, it's your bone, it's your body. You have there's a gym here, I think. Okay.
Now let's look at the mechanism of overcompensation. A lot of things not only benefit from bad events but need bad events because they overcompensate by shooting higher, just like your bone gets stronger up to a point, of course. If I put 500 lb on my shoulder, you know, it'd be okay, my bones would get stronger. £5,000, you need another speaker. All right. Okay. Because. All right. So, you know what happens? It's the same thing with, you know. And now I looked at history and discovered one thing. I know a little bit of the Eastern Mediterranean seaboard. And then you look at the Phoenicians. The Phoenicians had zero resources. They were the wealthiest people in the Mediterranean for a thousand years. For a thousand years. Okay. They had absolutely zero, nothing, nothing, nothing to speak of. It so happened that during, after the Bronze Age, the island of Cyprus nearby had copper. They had no copper. They had no resources. So someone with his cousins went to get some copper. Guess what? When you go get copper from Cyprus, you need to build boats. No, you learn to navigate. You learn to go to Cyprus. So they got a little more copper, and in no time, they became a maritime network of buying copper from Cyprus, buying other things from the Criathos, buying other things from other people, and then, of course, they became the wealthiest nation on zero resources. Nothing. They had absolutely nothing. The Venetians, same story. The modern equivalent is Singapore. These guys have nothing. Look in reverse. Saudi Arabia, exact opposite. They have everything. And guess what? They're going nowhere. With all of that, they're going nowhere.
So here you see that overcompensation is a mechanism by which economies also work. You see stressors are good. And here's your industry post and pre-.com of 2000. Aha. Before 2000, everything was bad compared to what it is today. Everything improved today from that event. So really, we humans are a have a mechanism by which we overcompensate, and we can only act by overcompensating. Actually, your bones are not going to get strong by on their own.
So with this, we realize that companies not only need like volatility, but they need it. They need a certain dose, not too much, not too little. Which brings me to the concept of optionality again. I started with telling you my secret. I was an option trader. When I go to literary festivals, I don't tell them because they're associated with finance. For them, finance is a bad thing, people use, you know, to rip off people. No. It's interesting for me mathematically, and also as a way of viewing things in life. The attribute of an option, more upside than downside. You pay little, you get a lot. And actually, sometimes you pay nothing. Okay? And an option likes volatility. Why? Because I'd rather have a volatile environment. We have a lot more upside and a lot more downside. I'm not exposed to the downside. I get more upside, you see. And this is what we say called convex. So under uncertainty, you have less to lose. So you benefit from the positive side of uncertainty and not the negative side. The only problem is you've got to pay for it. Sometimes you don't have to pay for it.
So I look at the world with positive and negative optionality. Positive optionality, you have more upside than downside. The other one, you have more downside than upside. You have a curve like this. The best way to view it is this way. Okay? You see? So, accelerated profits. Let's look at it this way. In this dimension, this translates to this. If an event happens, GDP is down 1%. I lose a million. Okay? GDP is up 1%. I make 3 million. I am antifragile. A simple rule. It's a reverse. I am fragile. Okay. Simple. Okay. So this asymmetry explained your. If the market goes down 10%, I lose 10 million. The market is up 10%, I make 100 million. I am antifragile. Conversely, if the market goes down 10%, I lose 10 million. The market goes down another 10%, I lose 1 million. I'm also antifragile. You see nonlinearity shared by everything. The fragile has this nonlinearity. My body, if I fall 10 m, I'm harmed more than 10 times. If I fell 1 meter, I am fragile. Okay. And you can measure fragility that way.
Now, optionality means that you have the choice. You have the option. Okay. No obligation. Which means that you see different things in the environment, you can flip. And sure enough, you've heard of Nokia. But had I asked you that question 15 years ago, you would have said, "Oh, it's some small company that makes what? Boots for you know, because they have a very bad spring in Finland. I don't know if you've been to Finland in the spring. Don't. Okay. It's all mud, right? So that was our business. And then they switched to making, you know, what you know is commonly known as cell phones, the kind of thing that grandmothers have. And this, you know, my, you know, my mother uses because she doesn't want an iPhone. All right. But they didn't catch on. The second optionality, but good enough. They made enough money.
Another company, Tiffany. I don't know if you know Tiffany in America. It's a big company that makes luxury, that sells luxury stuff. Mostly if someone, if you're or your some of your friends get or your daughter getting married, you have a list there. But it all started with the following. The fellow was selling stationery, and people were showing up and saying, "Hey, you know, my daughter is getting married. I want this doctor and Mrs. Smith, whatever." Okay. So, what you make $20? Thought about it. Say, "Does your daughter like diamonds?" Say, "Yeah." Okay. No, we have some. And it all started that way.
Use the existing business line you have to introduce other things. It's very hard. People don't realize how hard it is to switch business because you have a business plan. Once you have a business plan, you're married to that business plan. You're ashamed of changing course. People searching. I mean, Columbus was going to India. He discovered the Americas. They still were in denial, right? That's not what they're looking for. People are ashamed. The boss says, "Hey, that's not what we're in for." You're going to see the story. Boeing origin, lumber company. They don't say it, but if you investigate, you realize the family was a lumber-making company getting a lot of orders for airplanes. And the son liked to fly. And sure enough, you know, became, you know, said there's more money in these flying things than lumber. And sure enough, they abandoned lumber because there's no more lumber in Boeing. Okay.
So there are businesses that are error-loving. A business that's error-loving is a business that has optionality, particularly with its own mistakes. I don't know if you've heard of that business. I'm sure you never heard of it, of something called Viagra. No. Okay. So Viagra was a u. It was not like the intention by in a business plan to improve the lives of 72-year-old men. That was not the idea. It was a what? What was Viagra? Blood pressure medicine. But they made a mistake. They mispredicted. It had a side effect. Out of the 100,000 drugs we have in the market today, all right, there are fewer than 200 that are there for what they were made for. The rest are there for the side effects. Maskin, you use today as a blood thinner, it's a side effect of its previous use as a fever reducer, sorry, of a painkiller, which was a side effect of a fever reducer. All right. So the philosophical stone is there are some businesses that gain from randomness. We know exactly what shape they have. It's not randomness. It's not luck. It's they have optionality where you can benefit from luck or not. You see? So what I call the philosopher's stones.
So we have this illusion that things grow with education, top-down techn. Education is not. We have this illusion that mathematics leads to science, leads to technology, leads to business. It's rather the opposite. You see tinkering, trial and error. You make small errors. You have upside. It's how things work. So that's tinkering. So most of what we know in the Western world comes from tinkering. Even though we may have a theory for it, the steam engine was invented by the Greeks, went nowhere. It was rediscovered by ignorant people. Ignorant, I mean, in the academic sense, who are tinkering, you see. And actually, you can figure out here what I call Roger be antifragile than smart. That it's much better to tinker and not know anything. All you know, if this is better, A is better than B, to keep it. It's called ratcheting up. Then have a huge IQ. Anytime you outperform the IQ with tinkering, you need a thousand IQ points to match someone who's an aggressive thinker.
So now, principle: never miss an opportunity. Never, never, never, never. They don't come, especially if you have optionality. Especially if it costs you very little to take to experiment with it. Comes the idea of a business plan. It's a prison. So a business plan should not be a prison. Or have a business plan, or if you want, but you know, try to have exit things from it. The other thing is optionality depends much more on the contract that you have than industry, like real estate, for example. You know, investors have a lot more optionality, and namely Donald Trump. The upside, you keep the losses, you give chemical bank. All right. Actually bankrupted Manny Hanny, manufacturers handover at the banks. They have no upside. They take all the risk, you know, for a little 400 basis points. So, and of course, entrepreneurial success is not the result of funding. Usually, funding is top-down. Funding comes later when people are already successful. Nor is it, when you look at the name of these companies, the result of education, formal education. But the education you get from talking to one another, you know, while eating the kish that they had last night and happy hour, that form of education works a lot better than sitting down in a classroom with a professor.
The best technology is the technology that doesn't look like technology, where they hide something. Steve Jobs understood, or Google, where you don't have the clutter or the cognitive load or the distraction of having a lot of side avenues, where they do all the thing to simplify, which costs a lot. So that's what I think is their secret, okay, on that aspect. In a few minutes, good technology is something that destroys bad previous technology. All right. Not something that brings something new, but something that makes the old technology disappear as a technology in the background. So there's sort of make you overcompensate because, and actually, if I, you know, that if I lowered my voice to the point of being hardly audible, you would actually get more of my lecture by overcompensating on your side. So there was a mechanism of overcompensation, tinkering, all the reasons why I was invited. But this one he missed in his explanation, which is a central one. So let me explain now, close on that Lindy effect about technology. What is this from? How old is this kitchen? 2,000 years old. Okay.
So, let me give you the rule. I was asked, I was asked by The Economist years ago, after The Black Swan, to predict the future. So they wrote to me and said, "Can you give me a list, you know, of?" No, no, actually they wrote to me saying, "We have President Obama, Prime Minister Cameron, all these people writing about the future. Can you give me a list of what's wrong with their forecast because we can't really, you say you can't forecast the future?" Sure enough, I didn't wait to get all their stuff. Within 20 minutes, I wrote him a letter very quickly saying, "This is what's going to happen." They said, "What are you, the author of Black Swan or some impostor, or were you lying before? You're you're lying now or vice versa?" Said, "No, no, it's very easy to predict." Said, "How?" Said, "Okay, you take the present as baseline, and 20 years from now, you remove anything that came last 20 years completely." Counterintuitive, yeah. It's called the Lindy effect, after a restaurant on Broadway. A restaurant near Broadway, very bad cheesecake, by the way, don't go. But it's called the Lindy law, where actors would would discover the rule. You take a Broadway show, if it's under one year old, it won't make a year. A two-year, two years to go. So life expectancy of technology increases with time. Okay. But the edge is, of course, technologies that are thousand years old, 2,000 years old. So it's a very, very counterintuitive law that what is new doesn't have much chance again because 99.9% of technologies fail, replaced by newer technologies. But the old is not replaced by newer technologies. It means it's resilient to that kind of thing. So you've got to learn from the old.
So my letter said, okay, instead of predicting the future by taking the present as baseline and adding all these kind of fancy stuff to the present, I take the present as baseline. Everything that's 20 years old or younger, remove it from the future. And effectively, the technique works. It is very predictive. And again, people told me, well, hey, you know what? At the time, people still use desktops. How many people use desktops now? The only reason you have a desktop is to train employees to make sure they're in the office, because the laptop, they're just the same. Even the laptop being replaced by tablets. And this rule is invariant to how you define technology. Tablet. Uh-huh. How old is a tablet? Depends how you look at it. It can be 4,000 years old as a tablet, but the modern tablet is a few years old. Which means that the tablet as a concept will be there 4,000 years from now, right? Or at least, you know, 20 years from now. And the tablet as modern technologies is going to disappear, replaced by some other technology. The definition is invariant to the way you define the technology. If you say car, if it's a box on wheels, 5,000 years. If it's a red convertible, 52 years or six, whatever. You see the idea?
So with this rule, you can tell yourself the following. Why is social media successful? Because it's a destructive technology that removed the old, unnatural technology. The television, the television, you're sitting down, what on a one-way relationship with, with, you know, no discussion. People are argumentative. Before that, what did they do in Vienna? They went to cafes in the evening. They aggregate, you know, they go to the agora. So social media allows people to communicate in a two-way relationship. This is why it's successful, you see, because it's destroying older technology, you see. So this is with this, I mean, we can forecast technologies based on a rule that if you want to be successful in technology, shoot for the old, okay, and make it look non-technological. And that's basically one of the reasons, okay?
So let me close and wrap up. Where's the sign that says stop? I like the stop sign. Always stop on a stop sign. So let me wrap up in this thing, and in the 10 seconds that I have left. The, so the whole idea here is that in a world with a lot of uncertainty, there exists a very rational and structured way to accept ignorance and go about it by loving, if you're set up in the right way. The more uncertainty in the environment, the richer you're going to get, and the more successful, the happier you're going to get. But it requires a rigorous approach to tinkering. Never miss an option, and make sure you always have in your business positive optionality. If you have that, you'll succeed for a long time. If you don't have it, sorry to say, but you're fragile, and you won't make it. Thank you for listening to me.