This is the last post in the series of maxims. I leave the best or the most complicated to the last. Not really maxims but mental models. Here’s Nassim Taleb for you and Happy 2022!
1. F*** You Money – a sum large enough to get most, if not all, of the advantages of wealth (the most important one being independence and the ability to only occupy your mind with matters that interest you) but not its side effects, such as having to attend a black-tie charity event and being forced to listen to polite exposition of the details of a marble-rich house renovation. You want to have enough money to be free but not too much that you have to patronise others.
2. Fooled by Randomness – Risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance. Those stories you hear whereby a person betting the farm on one stock and made millions is more luck than skill although they will disagree.
3. Black swan – An unknown unknown. Rare events that is unpredictable beforehand but impactful when it happens. Covid is one example. I cringe whenever people predict possible black swan events. There’s no such thing as ‘predict the unpredictable’. It is no longer unpredictable if you can predict it.
4. Fat tails – We live in an extremistan society where things are non-linear and can get extreme. Our habit of bell-curving everything is inappropriate to model such things. The tails of the normal distribution are fatter than what the model suggests. Means that the shit that is not supposed to happen, happens more often than not. And the impact of that shit is many more times than the magnitude you expected.
5. Convexity vs Concavity – Relates to the non-linearity in Fat tails. There are two kinds of non-linear payoffs which is prevalent in many of our lives – career, business, investments etc. Avoid concave payoffs where you become the turkey. For example, if you only bang on someone else for the viability of your career, your livelihood can just end in one layoff. Convex payoffs can be something like you start a lot of side gigs and luck found you in one of them and you enjoy the upside.
6. Antifragile – Fragility loves stability and hate instability. Antifragility is the opposite. As we have discussed at length that the society we live in is extremistan and shit happens frequent enough. Adopting an antifragile setup would not only protect you during a storm but makes you more prosperous. Antifragile means positioning for the convex payoffs mentioned in #5.
7. Barbell strategy – If you put 90 percent of your funds in boring cash (assuming you are protected from inflation) or something called a “numeraire repository of value,” and 10 percent in very risky, maximally risky, securities, you cannot possibly lose more than 10 percent, while you are exposed to massive upside. Someone with 100 percent in so-called “medium” risk securities has a risk of total ruin from the miscomputation of risks. A barbell portfolio is antifragile, positioned for fat tail black swan events and benefit from a convex payoff.
8. Lindy Effect – For the perishable, every additional day in its life translates into a shorter additional life expectancy. For the nonperishable, every additional day may imply a longer life expectancy. A book that lasted for 100 years is expected to last for another 100 years. Basically it means some things are time tested and are better than those that have not been tested. Taleb reportedly don’t eat anything that has not existed for 100 years at least because we don’t know the real consequences. For example, no processed food. Lindy can indicate antifragility – it didn’t die despite subjected to numerous bad events in the past.
9. Ergodicity – Singapore’s median death age is 85.3. This is ergodic as the population would gravitate towards this stat. But this is not your death age. Your life is non-ergodic. If you eat badly and have poorer genes, you die earlier. Don’t anyhow project ergodic statistics to a non-ergodic situation. Historical returns from an investment is not your return going forward. Linking it to the person who bet all on one stock and made it – please don’t do it. It is a non-ergodic event.
10. Wittgenstein’s Ruler – Unless the source of a statement has extremely high qualifications, the statement will be more revealing of the author than the information intended by him. For example, every now and then you see a scathing comment by an anonymous person online. The comment tells you more about the person than the comment itself.
