On the Irreversibility of Broken Packages

ON THE IRREVERSIBILITY OF BROKEN PACKAGES

The first step toward antifragility consists in first decreasing downside, rather than increasing upside; that is, by lowering exposure to negative Black Swans and letting natural antifragility work by itself.

Mitigating fragility is not an option but a requirement. It may sound obvious but the point seems to be missed. For fragility is very punishing, like a terminal disease. A package doesn’t break under adverse conditions, then manage to fix itself when proper conditions are restored. Fragility has a ratchetlike property, the irreversibility of damage. What matters is the route taken, the order of events, not just the destination—what scientists call a path-dependent property. Path dependence can be illustrated as follows: your experience in getting a kidney stone operation first and anesthesia later is different from having the procedures done in the opposite sequence. Or your enjoyment of a meal with coffee and dessert first and tomato soup last would not be the same as the inverse order. The consideration of path dependence makes our approach simple: it is easy to identify the fragile and put it in the left column of the Triad, regardless of upside potential—since the broken will tend to stay permanently broken.

This fragility that comes from path dependence is often ignored by businessmen who, trained in static thinking, tend to believe that generating profits is their principal mission, with survival and risk control something to perhaps consider—they miss the strong logical precedence of survival over success. To make profits and buy a BMW, it would be a good idea to, first, survive.

Notions such as speed and growth—anything related to movement—are empty and meaningless when presented without accounting for fragility. Consider that someone driving two hundred and fifty miles per hour in New York City is quite certain to never get anywhere—the effective speed will be exactly zero miles per hour. While it is obvious that one needs to focus on the effective, not the nominal, speed, something in the sociopolitical discourse masks such an elementary point.

Under path dependence, one can no longer separate growth in the economy from risks of recession, financial returns from risks of terminal losses, and “efficiency” from danger of accident. The notion of efficiency becomes quite meaningless on its own. If a gambler has a risk of terminal blowup (losing back everything), the “potential returns” of his strategy are totally inconsequential. A few years ago, a university fellow boasted to me that their endowment fund was earning 20 percent or so, not realizing that these returns were associated with fragilities that would easily turn into catastrophic losses—sure enough, a bad year wiped out all these returns and endangered the university.

In other words, if something is fragile, its risk of breaking makes anything you do to improve it or make it “efficient” inconsequential unless you first reduce that risk of breaking. As Publilius Syrus wrote, nothing can be done both hastily and safely—almost nothing.

As to growth in GDP (gross domestic product), it can be obtained very easily by loading future generations with debt—and the future economy may collapse upon the need to repay such debt. GDP growth, like cholesterol, seems to be a Procrustean bed reduction that has been used to game systems. So just as, for a plane that has a high risk of crashing, the notion of “speed” is irrelevant, since we know it may not get to its destination, economic growth with fragilities is not to be called growth, something that has not yet been understood by governments. Indeed, growth was very modest, less than 1 percent per head, throughout the golden years surrounding the Industrial Revolution, the period that propelled Europe into domination. But as low as it was, it was robust growth—unlike the current fools’ race of states shooting for growth like teenage drivers infatuated with speed.