Antifragile: How to Manage Uncertainty
Have you ever planned your day so thoroughly, only to be disturbed by an unforeseen circumstance? Or maybe you were convinced by an investment or business decision, but things turned out worse?
In life and business, we are tasked with weighing the probability of different outcomes and making choices based on incomplete information. Combined with our human biases and fallacies, we become blind to certain events that may have dire consequences.
This begs the question: how do we manage uncertainty? While we cannot prevent unfavourable events completely, we can employ strategies to protect ourselves and leverage the upside of uncertainty.
Uncertainty vs Risk
Let’s begin by addressing the difference between uncertainty and risk. It’s easy to confuse the two events, but there’s a critical distinction: uncertainty arises from unknown circumstances, whereas risk relates to events that we are aware of.
An instance of an unknown event is the emergence of Covid-19 that caused a global pandemic in early 2020 and disrupted markets around the world. Its occurrence was not predicted by many people and yet, the effects of the pandemic were catastrophic.
Dire, unpredictable events such as these are known as black swans. In The Black Swan: The Impact of the Highly Improbable, author Nassim Nicholas Taleb describes a black swan as an event with three attributes:
It carries an extreme impact
It’s an outlier, because nothing in the past can convincingly point to its possibility
It can be explained in hindsight as if it were predictable
Because of our blindspots and biases, we can easily fall victim to black swans. Try as we may, it’s not possible to forecast every single outcome. Thankfully, there’s a way for us to defend ourselves from unforeseen circumstances and even benefit from uncertainty—and that’s by adopting an antifragile life.
Becoming antifragile
Antifragility has a particular property to help us deal with the unknown and do things well without necessarily understanding them. That is, it loves randomness and it gets better with each shock.
Consider how evolution works: organisms with favourable traits for survival and reproduction will tend to have more offspring than their peers and over time, these populations become more adapted to their changing environments. Similarly, for ideas, improvements are made with every trial and iteration until a viable product is materialised.
In our day-to-day decision-making, we can use the three key principles listed below to help us adopt an antifragile way of living:
1. Redundancy
Redundancy is a mental approach whereby the failure of a single component does not detriment the entire system and render it non-functional. The idea is to have buffers to absorb shocks or options such that we have the flexibility to utilise another component should one fail.
In the realm of investing, we usually hear the phrase “don’t put your eggs in one basket”. We will do well to heed this advice as it prevents us from suffering insurmountable losses from a single asset by diversifying our investment portfolio.
2. Barbell strategy
The barbell strategy refers to balancing high-risk strategies with low-risk ones.
Using our investment example again, we can consider coupling our high-risk assets with low-risk holdings. That way, we can benefit from the upside of uncertainty should our high-risk assets provide us with high returns. On the other hand, if our high-risk investments turn south, it’s not a significant loss to our portfolio and we can continue investing in other assets.
3. Tinkering
The last principle is tinkering, which refers to adapting your strategy based on new information and feedback.
Think of Steve Jobs and the iPhone. By experimenting and taking small risks, he and his team made various enhancements along the way and eventually reaped the benefits of the iPhone by delivering to the world a groundbreaking innovation.
Final thoughts
In short, the goal of managing uncertainty and antifragility is to play the long game.
By integrating the three antifragile principles into our daily practice, we are more equipped to deal with uncertainty, mitigate unwanted losses and make confident decisions.
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Disclaimer: The investment examples above are not meant to be used as recommended strategies. Each person is advised to do their own research before investing.
Illustration by Viktoriya Belinio from Ouch!
