Antifragile: Things That Gain from Disorder (74 page)

I have witnessed even worse. A former client of mine, a rich fellow with what appeared to be a social mission, tried to pressure me to write a check to a candidate in an election on a platform of higher taxes. I resisted, on ethical grounds. But I thought that the fellow was heroic, for, should the candidate win, his own taxes would increase by a considerable amount. A year later I discovered that the client was being investigated for his involvement in a very large scheme to be shielded from taxes. He wanted to be sure that
others
paid more taxes.

I developed a friendship over the past few years with the activist Ralph Nader and saw contrasting attributes. Aside from an astonishing amount of personal courage and total indifference toward smear campaigns, he exhibits absolutely no divorce between what he preaches and his lifestyle, none. Just like saints who have soul in their game. The man is a secular saint.

There is a class of people who escape bureaucrato-journalistic “tawk”: those who have more than their skin in the game.
They have their soul in the game.

Consider prophets. Prophecy is a pledge of belief, little else. A prophet is not someone who first had an idea; he is the one to first believe in it—and take it to its conclusion.

Chapter 20
discussed prophecy, when done right, as subtraction, and detection of fragility. But if having skin in the game (and accepting downside) is what distinguishes the genuine thinker from ex post “tawk,” there is one step beyond needed to reach the rank of prophet. It
is a matter of commitment, or what philosophers call
doxastic commitment,
a type of belief-pledge that to Fat Tony and Nero needed to be translated into deeds (the reverse-Stiglitz).
Doxa
in Greek used to mean “belief,” but distinguished from “knowledge” (episteme); to see how it involves a commitment of sorts beyond just words, consider that in church Greek it took the meaning of
glorification
.

Incidentally, this notion also applies to all manner of ideas and theories: the main person behind a theory, the person to be called the originator, is someone who believed in it, in a doxastic way, with a costly commitment to take it to its natural conclusion; and not necessarily the first person to mention it over dessert wine or in a footnote.

Only he who has true beliefs will avoid eventually contradicting himself and falling into the errors of postdicting.

The stock market: the greatest, industrial-sized, transfer of antifragility in history—due to a vicious form of asymmetric skin in the game. I am not talking about investment here—but the current system of packaging investments into shares of “public” corporations, with managers allowed to game the system, and of course, getting more prestige than the real risk takers, the entrepreneurs.

A blatant manifestation of the agency problem is the following. There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives—something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors. I am concerned here with managers of businesses that are
not
owner-operated.

As I am writing these lines the United States stock market has cost retirees more than three trillion dollars in losses over the past dozen years compared to leaving money in government money market funds (I am being generous, the difference is even higher), while managers of the companies composing the stock market, thanks to the asymmetry of the stock option, are richer by close to four hundred billion dollars. They pulled a Thales on these poor savers. Even more outrageous is the fate of the banking industry: banks have lost more than they ever made in
their history, with their managers being paid billions in compensation—taxpayers take the downside, bankers get the upside. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rosé de Provence brand of summer wine on their yachts in St. Tropez.

The asymmetry is visibly present: volatility benefits managers since they only get one side of the payoffs. The main point (alas, missed by almost everyone) is that they stand to gain from volatility—the more variations, the more value to this asymmetry. Hence they are antifragile.

To see how transfer of antifragility works, consider two scenarios, in which the market does the same thing on average but following different paths.

Path 1: market goes up 50 percent, then goes back down to erase all gains.

Path 2: market does not move at all.

Visibly Path 1, the more volatile, is more profitable to the managers, who can cash in their stock options. So the more jagged the route, the better it is for them.

And of course society—here the retirees—has the exact opposite payoff since they finance bankers and chief executives. Retirees get less upside than downside. Society pays for the losses of the bankers, but gets no bonuses from them. If you don’t see this transfer of antifragility as theft, you certainly have a problem.

What is worse, this system is called “incentive-based” and supposed to correspond to capitalism. Supposedly managers’ interests are aligned with those of the shareholders. What incentive? There is upside and no downside, no disincentive at all.

Robert Rubin, former treasury secretary, earned $120 million from Citibank in bonuses over about a decade. The risks taken by the institution were hidden but the numbers looked good … until they didn’t look good (upon the turkey’s surprise). Citibank collapsed, but he kept his money—we taxpayers had to compensate him retrospectively since the government took over the banks’ losses and helped them stand on their feet. This type of payoff is very common, thousands of other executives had it.

This is the same story as the one of the architect hiding risks in the
basement for delayed collapse and cashing big checks while protected by the complexities of the legal system.

Some people suggest enforcing a “clawback provision” as a remedy, which consists of making people repay past bonuses in cases of subsequent failure. It would be done as follows: managers cannot cash their bonuses immediately, they can only do so three or five years later if there are no losses. But this does not solve the problem: the managers still have a net upside, and no net downside. At no point is their own net worth endangered. So the system still contains a high degree of optionality and transfer of fragility.

The same applies to the fund manager involved in managing a pension fund—he, too, has no downside.

But bankers used to be subjected to Hammurabi’s rule. The tradition in Catalonia was to behead bankers in front of their own banks (bankers tended to skip town before failure was apparent, but that was the fate of at least one banker, Francesco Castello, in 1360). In modern times, only the mafia executes these types of strategies to remove the free option. In 1980, the “Vatican banker” Roberto Calvi, the chief executive of Banco Ambrosiano that went bust, ran to take refuge in London. There, he supposedly committed suicide—as if Italy was no longer a good place for acts of drama such as taking one’s own life. It was recently discovered that it was not quite suicide; the mafia killed him for losing their money. The same fate befell the Las Vegas pioneer Bugsy Siegel, who ran an unprofitable casino in which the mafia had investments.

And in some countries such as Brazil, even today, top bankers are made unconditionally liable to the extent of their own assets.

Many right-wingers-in-love-with-large-corporations keep citing Adam Smith, famous patron saint of “capitalism,” a word he never uttered, without reading him, using his ideas in a self-serving selective manner—ideas that he most certainly did not endorse in the form they are presented.
⁴

In
Book IV
of
The Wealth of Nations,
Smith was extremely chary of the idea of giving someone upside without downside and had doubts about the limited liability of joint-stock companies (the ancestor of the modern limited liability corporation). He did not get the idea of transfer of antifragility, but he came close enough. And he detected—sort of—the problem that comes with managing other people’s business, the lack of a pilot on the plane:

Further, Smith is even suspicious of their economic performance as he writes: “Joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers.”

Let me make the point clearer: the version of “capitalism” or whatever economic system you need to have is with the minimum number of people in the left column of the Triad. Nobody realizes that the central problem of the Soviet system was that it put everyone in charge of economic life in that nasty fragilizing left column.

Have you noticed that while corporations sell you junk drinks, artisans sell you cheese and wine? And there is a transfer of antifragility from the small in favor of the large—until the large goes bust.

The problem of the commercial world is that it only works by addition (
via positiva
), not subtraction (
via negativa
): pharmaceutical companies don’t gain if you avoid sugar; the manufacturer of health club machines doesn’t benefit from your deciding to lift stones and walk on rocks (without a cell phone); your stockbroker doesn’t gain from your decision to limit your investments to what you see with your own eyes, say your cousin’s restaurant or an apartment building in your neighborhood; all these firms have to produce “growth in revenues” to satisfy the metric of some slow thinking or, at best, semi-slow thinking MBA analyst sitting in New York. Of course they will eventually self-destruct, but that’s another conversation.

Now consider companies like Coke or Pepsi, which I assume are, as the reader is poring over these lines, still in existence—which is unfortunate. What business are they in? Selling you sugary water or substitutes for sugar, putting into your body stuff that messes up your biological signaling system,
causing
diabetes and making diabetes vendors rich thanks to their compensatory drugs. Large corporations certainly can’t make money selling you tap water and cannot produce wine (wine seems to be the best argument in favor of the artisanal economy). But they dress their products up with a huge marketing apparatus, with images that fool the drinker and slogans such as “125 years of providing happiness” or some such. I fail to see why the arguments we’ve used against tobacco firms don’t apply—to some extent—to all other large companies that try to sell us things that may make us ill.

The historian Niall Ferguson and I once debated the chairperson of Pepsi-Cola as part of an event at the New York Public Library. It was a great lesson in antifragility, as neither Niall nor I cared about who she was (I did not even bother to know her name). Authors are antifragile. Both of us came totally unprepared (not even a single piece of paper) and she showed up with a staff of aides who, judging from their thick files, had probably studied us down to our shoe sizes (I saw in the speakers’ lounge an aide perusing a document with an ugly picture of yours truly in my pre-bone-obsession, pre-weight-lifting days). We could say anything we wanted with total impunity and she had to hew to her party line, lest the security analysts issue a bad report that would cause a drop of two dollars and thirty cents in the stock price before the year-end bonus. In addition, my experience of company executives, as evidenced by their appetite for spending thousands of hours in dull meetings or reading bad memos, is that they cannot possibly be remarkably bright. They are no entrepreneurs—just actors, slick actors (business schools are more like acting schools). Someone intelligent—or free—would likely implode under such a regimen. So Niall immediately detected her weak point and went straight for the jugular: her slogan was that she contributed to employment by having six hundred thousand persons on her staff. He immediately exposed her propaganda with the counterargument—actually developed by Marx and Engels—that large bureaucratic corporations seized control of the state just by being “big employers,” and can then extract benefits at the expense of small businesses. So a company that employs six hundred thousand persons is allowed
to wreck the health of citizens with impunity, and to benefit from the implied protection of bailouts (just like American car companies), whereas artisans like hairdressers and cobblers do not get such immunity.

A rule then hit me: with the exception of, say, drug dealers, small companies and artisans tend to sell us healthy products, ones that seem naturally and spontaneously needed; larger ones—including pharmaceutical giants—are likely to be in the business of producing wholesale iatrogenics, taking our money, and then, to add insult to injury, hijacking the state thanks to their army of lobbyists. Further, anything that requires marketing appears to carry such side effects. You certainly need an advertising apparatus to convince people that Coke brings them “happiness”—and it works.

There are, of course, exceptions: corporations with the soul of artisans, some with even the soul of artists. Rohan Silva once remarked that Steve Jobs wanted the inside of the Apple products to look aesthetically appealing, although they are designed to remain unseen by the customer. This is something only a true artisan would do—carpenters with personal pride feel fake when treating the inside of cabinets differently from the outside. Again, this is a form of redundancy, one with an aesthetic and ethical payoff. But Steve Jobs was one of the rare exceptions in the Highly Talked About Completely Misunderstood Said to Be Efficient Corporate Global Economy.