AN interview with author and thinker Nassim Nicholas Taleb is a somewhat nerve wracking affair. He famously reserves his scorn for certain professions - journalists, for instance, to which this writer belongs - as well as economists, bankers and academics. That is, anyone who has no "skin in the game"; opinion makers who prognosticate or make forecasts and are not held to account for their views. Those who invest on the views of this hapless group take on all the risk and downside.
On the opposite end are "heroes" who bear the disadvantages and risks for others' sake; they have "soul in the game". Entrepreneurs, soldiers and investigative journalists rank high in his world view. His model for "soul in the game" is his father. In his latest book Antifragile, he recounts an incident during the Lebanese civil war when a militiaman insulted his father, who refused to obey the soldier's orders. As his father drove away, he was shot in the back, and the bullet remained in his chest for the rest of his life. Mr Taleb writes: "This set the bar very high for me. Dignity is worth nothing unless you earn it, unless you are willing to pay the price for it."
Mr Taleb was in Singapore for about a week in September at the invitation of fund management group Amundi; he was a keynote speaker at its 25th anniversary celebration. He turns out to be unfailingly cordial in our conversation, except for flashes of annoyance at the camera's clicks and whirrs.
During his visit, he also spoke to government officials who were apparently keen to elicit his views on Singapore and its strategic direction. He is likely to have made them sit up, as he turns conventional wisdom on its head, particularly on the issue of education, highly prized in a city where good grades and degrees are seen as a passport to success.
Not so, says Mr Taleb. "What I'm saying is a bit controversial for you guys, given the respect you have for education. It's good to have a class of people who are educated. But education is the enemy of entrepreneurship. If you start having a high level of education, you start hiring people based on school success.
"School success is predictive of future school success. You hire an A student if you want them to take an exam, but you want other things like street smarts. This gets repressed if you emphasise too- much education." Over the past few months, there have been calls here for parents, students and employers to look beyond paper qualifications.
Mr Taleb has authored five books; he is best known for his second book The Black Swan: The Impact of the Highly Improbable, published in 2007 just before the financial crisis boiled over in 2008. It was hailed by some critics as prophetic; The Sunday Times in the UK called it one of the most influential books since World War II. Since then the term "black swan", which he uses to refer to a large, unexpected event that has profound impact and consequences, has become part of common language particularly in finance and risk discussions.
Survival of the fittest
His latest book Antifragile: Things That Gain from Disorder can be seen as a companion book to The Black Swan. It expands on insights on how to live in a "black swan" or unpredictable world. His definition of fragile is as you would expect - things that do not stand the test of time, that dislike stressors and volatility. A teacup, governments saddled with debt, banks deemed too big to fail, are all fragile.
On the other hand, 'antifragile', a term he coined, connotes more than strength, resilience or robustness. It refers to things that actually gain or benefit from volatility, stressors and disorder. Examples of this include city states, systems that encourage failure and entrepreneurs. Inherent in this is the belief in the winnowing process of evolution, that the fittest will survive, and mistakes and failures benefit everyone.
The big, obvious question is: Is Singapore antifragile? The answer isn't very straightforward. As a city-state it has qualities that make for antifragility, one of which is the absence of natural resources.
"Singapore has had advantages from the fact that it had no resources... If you look at the history of city states and all the successful merchant cities, you realise the following mechanisms. People in Tyre, Lebanon and Sidon initially had no resources. They needed to import copper, for instance, from Cyprus. Then they figured out that they can export it. So it's an over-compensating mechanism for not having resources. Exports are the biggest indicator of a lack of resources, like turning water into gold. If you have gold, you wouldn't do as well as if you had water all around you to travel.
"Having had difficulties makes you richer. There is something called the curse of having resources. Singapore was a maritime state; you didn't need infrastructure. You had the sea, a harbour, ships. Second, you need scale and the ability to use stressors. Third is that in the 1960s you had difficulties and you had to be motivated."
The challenge is the next generation, he says. "You have to make sure the next generation doesn't get too comfortable. Don't over-educate them. Push them harder. Don't be too nice to the next generation. Progress comes before education. The causality is inverse. If you increase education in a country, you lower the progress. It inhibits risk taking."
In Antifragility, he argues that the belief that university knowledge generates economic wealth stems more from superstition than empiricism. Empirical investigation, he writes, shows no evidence that raising the general level of education raises a country's income level.
"But we know the opposite is true, that wealth leads to the rise of education - that's not an optical illusion." He cites Taiwan, which in the 1960s had a much lower literacy rate than the Philippines and half the income per person. Today, it has 10 times the income.
Education, however, helps to preserve wealth. "You can't easily transmit wealth to children; there is variation, inflation. But education allows you to stabilise the fortunes. My ancestor made money in trading. He had the presence of mind to have a fund to educate his descendants to force them not to be traders. You stabilise and lower the variance of children with education.
"If you have a master's degree, you won't starve but you won't be phenomenal. Education is good within the family but on the level of the country, the effect dissipates. You need someone to feed the bureaucrats and magistrates.
"My father was a doctor, my grandfather a supreme court judge. They aren't producing... You need some element of education but like anything, too much is bad. You have to reserve education for those who aim to be scholars. Germany has the right balance. They worship professors but prefer the engineers."
In any case, he contends that education "removes entrepreneurs from the system and turns them into bureaucrats". "What's important isn't education; it's apprenticeship. Germany has a huge advantage over the rest of the world as it has a high rate of apprenticeship in its economy. Switzerland used to be the least educated in Europe. Now it's the second most educated; that's why it's going down."
To encourage "swashbucklers" and entrepreneurs, people have to be taught to take intelligent risks - something that universities don't teach. "Universities teach you not to take risks. Because if you make mistakes, you flunk the exam. But in life there is no such thing as a track record of exams. You start from zero. So you have to teach people to fail and take risks."
Paypal co-founder and billionaire Peter Thiel, he says, is a friend. Since 2010, Mr Thiel has been offering young, bright people fellowships - US$50,000 a year for two years - to pursue their projects of passion in diverse areas such as green energy and molecular biology. Fellows in the programme forgo or shelve a university degree.
If you are to have antifragile companies and entrepreneurs, you have to be open to competition and failure.
"You absolutely need failure for a system to work. The healthiest economy in producing new businesses is the US. We have the highest failure rate. The failure rate is the most predictive metric for economic health." In California, he adds, it is said that you have to fail seven times.
He sees technology as the most antifragile industry; it has the highest failure rate. "Remarkably the lowest failure rate is in - guess which one - banking. They don't fail."
He invokes once again the evolutionary mechanism. "Everytime you procreate you reproduce yourself. Our DNA has replication error... You have to have some fidelity in replication; you have some error but not too much. Too much and you won't retain the advantages. The same mechanism makes businesses work well."
Companies may grow large, and if they do they should not be allowed privileges, he says. "Look at the S&P500 today. How many were in the index 30 years ago and are still there today? You'll be shocked at the lack of privileges a company (in the US) has. Once a company gets big, anti-trust goes after it.
"When Microsoft became powerful, the state went after it, and Europe as well. That's a healthy mechanism. Big and powerful should not go together. Big will collapse by itself."
NASSIM NICHOLAS TALEB
Author, thinker, professor
PhD, University of Paris
MBA, The Wharton School, University of Pennsylvania
PROFESSIONAL CAREER
- 21 years as derivatives trader specialising in hedging nonlinear risks, and managing payoffs under complicated probability distributions
- Senior positions with major financial institutions: Credit Suisse First Boston, UBS, BNP-Paribas, Indosuez (now Calyon), Bankers Trust (now Deutsche Bank). Also worked as an independent pit trader and ran his own derivatives firm for 6 years
2006 Changed careers to become scholar and philosophical essayist
Since 2008 Distinguished Professor of Risk Engineering, New York University, Polytechnich Institute
PUBLICATIONS
- Dynamic Hedging: Managing Vanilla and Exotic Options (1997)
- The Incerto (4 volumes):
Fooled by Randomness (2001)
The Black Swan: The Impact of the Highly Improbable (2007)
The Bed of Procrustes (2010)
Antifragile: Things that Gain from Disorder (2012)
OTHER POSITIONS (NOT EXHAUSTIVE)
- International Monetary Fund, Scientific Adviser
- Centre d'Economie de la Sorbornne, University of Paris, External Professor since 2013
- Oxford University, Distinguished Research Scholar
