Nassim Taleb’s Incerto Series Notes Dump

Nassim Nicholas Taleb’s landmark Incerto series is an investigation of luck, uncertainty, probability, opacity, human error, risk, disorder, and decision-making in a world we don’t understand.

I find this personally very helpful as humans usually think linearly but most of the time that’s not what is happening. Excellent for poking holes at investment theories and the such. Here goes!

1) Introducing the Triad – Fragile , Robust , Antifragile .

Robust = Something like Nokia phone .

Antifragility  only works up to a certain point , or only subjective . A YouTuber appreciate bad comments but not so much until he gets jailed.

2) Naïve Interventionism [ Bear favors ]  . Do not think your intervention is good , it could be prevent something from being antifragile

Application : A kid growing needs to be face challenges growing up . A human body needs exposure to germs and bacteria

3) Concavity & Convexity – Detecting What is Fragile and Antifragile .

Concave function = More stress , worse outcome  ( For example car hitting something )

Convex function = More stress , better outcome  ( Lifting heavy is better than lifting light more reps , for muscle growth )

4) The Answer to the Black Swan Problem –

Black Swan Event ( unpredictable , and huge effect ) . Negative black swans causes a lot of problem . The way to deal is it to see if a system is exposed to negative black swan. Make predictions about it then make precautionary measures for it

Application : Using airplane weapons check before boarding.

2nd Rule : Good systems should have small errors independent from each other : Such as a portfolio of unrelated bets.

5) The barbell strategy – Small downside with large upside. 

Application : basically hyper conservative bets (and small % of hyper aggressive bets

6) Lindy Effect – The future life expectancy of something perishable , is proportional to their current age ( lindy effect is antifragile )

Application : Companies that have been profitable for many years should be valued than company that has been profitable for short period of time

7) Green Lumber fallacy – Humans care a lot about narratives (  People don’t trust someone who don’t know about the thing he is doing , yet reality is such that its not needed to be successful

Application : Do not show that u do not understand the asset if u want people to trust you
                      Do not

8) Less is more – Data is plentiful yet toxic in large quantities .  More data = less % in signal. Daily fluctuations in portfolio is 99% noise , 1% signal.

9) Via negativa – Subtraction is more robust than addition is for causality . Find out what the guy didn’t do wrong is easier than what he did right?

 ‘ No amount of observation of white swan can refute the inference about the color of  swans ; while a single black swan is sufficient to refuse that conclusion

Application : Remove the negative things instead of adding positive things ( inversion ? )

                        Focus : Saying no to the other hundred good ideas

                        Meditation : Exposing yourself to an unknown big downside , for sake of a limited upside , is not a good strategy . ( Taking medication to curb small pain when u don’t know the damages. )

10) Optionality and the potential pitfalls of wealth – When you gain a lot of wealth , you have more to gain then more to gain. Excess wealth makes you fragile. Wealth without optionality – is wealth not worthy of pursuing ( Becoming a superstar ? )

Greed is antifragile to income

Requirements of black swan : An outlier , An extreme impact , Explainable only after the fact.

Examples : 9/11 , world war 1

It is only a Black Swan if you are uninformed.

Grey Swans = KNOWN unknowns .

Takeaway 2 : Implications of black swan blindness

– Error of confirmation -> Example : Many billionaires are sch dropouts , so dropout from school.  ( its better to use inversion or via negativa , than to see what they DID ; dropout )

– Narrative fallacy , availability heuristics

– We are not programmed for black swans – Humans usually think linearly , in terms of effort and reward . But usually it mostly happens non linearly.

– The distortion of silent evidence. We have evidence from people who succeeded in X because they were able to spread it , but not from those who failed.  ( Again , inversion probably belter here )

– Tunneling – We focus too much on what we know and not what we don’t know.

Takeaway 3 :

Mediocristan vs Extremistan

‘ When sample size is large , no single instance can change the average of the total ‘ Esp true for height and weight.

The first 100 gives a good clue to the next 1000. Not effective in most real life applications due to insane outliers.

Extremistan – Black Swan introduced . Examples of sizes of planets , wealth , financial markets. The first 100 info is not so good to infer the next 1000

Practice mandelbrotian randomness especially when an event has not happened as the sample size is too small. 
Application : Crypto never dipped more than 40% , does not mean it would not do it , just lower percentage.

By doing this , we can turn these black swans into grey swans.

Takeaway 5 : How to act as an investor in environment of black swans

1) Hyper conservative and hyper aggressive approach

2) Speculative insured portfolio ( Highly speculative portfolio , but insured for losses more than X% . also diversify the high risk stuff ) 

Expose yourself to positive black swans , and lower your exposure to negative black swans.

If you don’t take risk , you should not make decisions

Risk = The upside PLUS the downside.  Application : Employees should have something to lose , not just losing from the vested shares.

1) Skin in the game is the ultimate BS detector.  The pilot takes risks in a flight rather than the banker selling Credit default swaps. . The risk should not be transferrable!

2) Three implications of skin in the game

a ) Allows the minority to rule over the majority : 
People who are most intolerant wins. Eg : Vegan daughter.

b) Makes you smarter

People who have skin in the game will just perform better.  -> It can make boring stuff seem interesting ; like reading financial statements

c) Turns employees into obedient dogs

3) Inequality vs Inequality

    People resent others who manages to make a lot of money without skin in the game -> Bankers , executives

People do not resent others with skin in the game ; like musicians , entrepreneurs

4) Ergodicity – a process that will always recur and achieve long run

Ensemble Probability vs ‘Time’ Probability .  6 people playing Russian roulette for money vs 1 person playing Russian roulette with 6 bullets for money .
Ergodicity helps prevent risk of ruin

Application : having a strategy that is ergodic

5) How to use skin in the game

Passive investor : Don’t tell me what you think ; tell me what’s in your port. Make sure your hedge manager have skin in the game

Active investor : Executives in the company should have skin in the game, if not they will skew to salary or short term payouts