Hammurabi

HAMMURABI

Let us now work with the elements of Table 7 and bring the unifying foundational asymmetry (between upside and downside) into our central theme, ethics. Just as only business school professors and similar fragilistas separate robustness and growth, we cannot separate fragility and ethics.

Some people have options, or have optionality, at the expense of others. And the others don’t know it.

The effects of transfers of fragility are becoming more acute, as modernity is building up more and more people on the left column—inverse heroes, so to say. So many professions, most arising from modernity, are affected, becoming more antifragile at the expense of our fragility—tenured government employees, academic researchers, journalists (of the non-myth-busting variety), the medical establishment, Big Pharma, and many more. Now how do we solve the problem? As usual, with some great help from the ancients.

Hammurabi’s code—now about 3,800 years old—identifies the need to reestablish a symmetry of fragility, spelled out as follows:

If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death. If it causes the death of the son of the owner of the house, a son of that builder shall be put to death. If it causes the death of a slave of the owner of the house—he shall give to the owner of the house a slave of equal value.

It looks like they were much more advanced 3,800 years ago than we are today. The entire idea is that the builder knows more, a lot more, than any safety inspector, particularly about what lies hidden in the foundations—making it the best risk management rule ever, as the foundation, with delayed collapse, is the best place to hide risk. Hammurabi and his advisors understood small probabilities.

Now, clearly the object here is not to punish retrospectively, but to save lives by providing up-front disincentive in case of harm to others during the fulfillment of one’s profession.

These asymmetries are particularly severe when it comes to small-probability extreme events, that is, Black Swans—as these are the most misunderstood and their exposure is easiest to hide.

Fat Tony has two heuristics.

First, never get on a plane if the pilot is not on board.

Second, make sure there is also a copilot.

The first heuristic addresses the asymmetry in rewards and punishment, or transfer of fragility between individuals. Ralph Nader has a simple rule: people voting for war need to have at least one descendant (child or grandchild) exposed to combat. For the Romans, engineers needed to spend some time under the bridge they built—something that should be required of financial engineers today. The English went further and had the families of the engineers spend time with them under the bridge after it was built.

To me, every opinion maker needs to have “skin in the game” in the event of harm caused by reliance on his information or opinion (not having such persons as, say, the people who helped cause the criminal Iraq invasion come out of it completely unscathed). Further, anyone producing a forecast or making an economic analysis needs to have something to lose from it, given that others rely on those forecasts (to repeat, forecasts induce risk taking; they are more toxic to us than any other form of human pollution).

We can derive plenty of sub-heuristics from Fat Tony’s rules, particularly to mitigate the weaknesses of predictive systems. Predicting—any prediction—without skin in the game can be as dangerous for others as unmanned nuclear plants without the engineer sleeping on the premises. Pilots should be on the plane.

The second heuristic is that we need to build redundancy, a margin of safety, avoiding optimization, mitigating (even removing) asymmetries in our sensitivity to risk.