While reading through Nassim Taleb’s applications of convexity, the planning fallacy, and Jensen’s inequality, I began to wonder why more people don’t take these concepts and actually put them to use. Why are people content to employ fragile trading strategies and on a larger scale, fragile life strategies?
Taleb introduces the concepts of linear vs nonlinear and convexity vs concavity in Book V of Antifragile. Some things, the fragile, break under stress. There are other things, the antifragile, that perform better under stress.
People constantly set themselves up to be brutally hurt by Black Swan events. It’s almost like these people are choosing to be fragile.
Why Don’t People Want To Become Antifragile?
If anyone in the world can order Taleb’s book from Amazon for less than $20, why aren’t more people interested in protecting themselves from future Black Swan events by becoming more antifragile? Even if they can’t afford the price of the book, there is an amazing amount of free information available on the internet. All anyone needs to access it is a free library card and a little bit of effort.
Ed Seykota famously said that “everyone gets what they really want out of the market.” His argument is that people ignore all of the available evidence that their trading system is flawed because they subconsciously want to fail. Is it then possible that people ignore antifragility because they want to be fragile?
This idea has a broader application than just trading systems. In all aspects of life, people are perfectly content to live in the bliss of their own ignorance.
Stockholm Syndrome
In a Facebook post this weekend, Michael Covel suggested that the definition for Stockholm Syndrome could be applied to buy and hold investors:
This same thinking can be applied to Taleb’s fragility. When presented with all of the evidence documenting how fragile their investments are, most people will still passionately defend their strategies. It is almost as if they have been brainwashed into believing that they deserve to suffer from the occasional Black Swan event.
Taleb takes this argument even deeper when he discusses fragility with respect to randomness.
Better Than Random
“The hidden harm of fragility is that you need to be much, much better than random in your prediction and know where you are going, just to offset the negative effect.” – Taleb
Taleb points out that in order to successfully trade a fragile strategy, you have to perform dramatically better than random. You have to have a tremendous edge. You have to be brilliant.
While some people have proven that they do have such an edge, the majority of traders post results that are far worse than a completely random strategy. This leaves them completely vulnerable to the next Black Swan event. Yet they continue to trade this way.
Worse Than Random
“The hidden benefit of antifragility is that you can guess worse than random and still end up outperforming.” – Taleb
This is the strength of many systematic trend following strategies. In recent weeks, I have looked at the 83/17 Breakout System and the 10/100 SMA Long Only System. These two systems are profitable on 41.46% and 42.53% of their trades respectively, yet both systems are profitable overall.
The positive risk to reward ratio built into each system gives its returns the convexity that Taleb discusses. These systems are antifragile.
Capitalizing On The Trend
There are antifragile trading systems that are widely available for free on the internet, but people don’t take advantage of this. There are also more antifragile lifestyles available, but most people prefer to stick to the normal, fragile world they know that involves a 401k and keeping up with the Joneses.
While solving this global sociology problem is a little bigger than the scope of this post, our trading can benefit from recognizing its existence. Since trading is a zero sum game, our profits are someone else’s losses. By being aware of the fragile strategies most people employ, we can position ourselves to take advantage of the same Black Swan events that will ruin our fragile counterparts.
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