Nassim Nicholas Taleb (Scholar Investor) – How India Can Achieve Anti-fragile Growth (Dec 2019)
Chapters
Abstract
The Evolving Mindset of Indians: Embracing Risk-Taking and Active Participation for National Progress
The Changing Mindset of Indians:
Indian society has undergone a significant transformation in recent decades, moving from a passive mindset of optimism to a more proactive approach fueled by a desire for a better life. The balance of payment crisis and IMF conditions in the 1990s forced India to face competition and embrace uncertainty, challenging its traditional complacency.
The Impact of Economic Changes:
The economic changes of the 1990s brought about a paradigm shift in India’s mindset. The country had to adapt to a more competitive global market, which fostered a desire for progress and improvement among its citizens. However, a segment of the population remains stuck in a mindset of demanding solutions from the government and external factors, rather than taking personal responsibility for their own progress.
The Need for Active Citizenship:
In order for India to move forward as a nation, it is crucial for its citizens to actively participate in the process of development. This involves taking ownership of their actions and recognizing that progress is not solely dependent on government intervention. By embracing active participation, individuals can contribute to the overall growth and prosperity of the nation.
The Importance of Individual Action:
To move beyond the current state of affairs, it is essential for Indians to recognize the power of individual action. Instead of relying solely on external factors, citizens need to take responsibility for their own lives and actively pursue their goals. This shift in mindset is necessary for India to achieve its full potential and become a truly developed nation.
The Power of Tinkering and Trial and Error:
Practical experience and experimentation often lead to more effective results than solely relying on theoretical knowledge. Historically, significant advancements have been driven by individuals with hands-on experience rather than formal education.
Naseem Talib’s Expertise on Uncertainty:
The renowned expert on risk and uncertainty, Naseem Talib, will be addressing the audience to provide valuable insights on the importance of skin in the game and the expert crisis.
Talib’s Unique Background:
Talib’s diverse background sets him apart from other experts. He has successfully navigated the worlds of trading, academia, and authorship. This unique blend of practical experience and theoretical knowledge allows him to offer invaluable perspectives on the topics he addresses.
Talib’s Refusal to Be Typecast:
Naseem Talib defies conventional labels. He seamlessly integrates theory and practice, avoiding the trap of purely intellectual advice. His approach is grounded in real-world experiences, making his insights particularly relevant and applicable.
Critique of University Education:
Formal education can sometimes be a double-edged sword. While it provides knowledge and skills, it can also lead to a focus on irrelevant information and a neglect of practical skills. Education systems that emphasize theory and academic credentials may fail to prepare individuals for real-world challenges, creating a disconnect between education and the needs of society.
Skin in the Game: A Fundamental Principle:
“Skin in the game” is a fundamental principle that emphasizes the importance of personal risk and exposure to the consequences of one’s decisions. In fields where individuals have a stake in the outcome, such as plumbing and dentistry, incompetence is quickly punished by the market. This creates accountability and ensures a higher level of competence.
The Expert Crisis and Its Implications:
In contrast, fields where individuals lack skin in the game, such as economics and policymaking, are prone to poor decision-making with severe consequences. Experts in these fields are often judged by peers rather than by market forces or evolutionary pressures. This lack of accountability can lead to the rise of incompetent or irrelevant experts, eroding public trust in expertise.
Education: Its Role and Limitations:
Formal education can sometimes be a double-edged sword. While it provides knowledge and skills, it can also lead to a focus on irrelevant information and a neglect of practical skills. Education systems that emphasize theory and academic credentials may fail to prepare individuals for real-world challenges, creating a disconnect between education and the needs of society.
The Role of Culture in Innovation:
Societies that value and encourage tinkering, experimentation, and trial and error are more likely to drive innovation. Cultures that prioritize theoretical knowledge and formal education may stifle practical problem-solving and hands-on learning.
Incentivized Education:
The Indian educational system encourages students to pursue specific degrees and careers that lead to bureaucratic jobs, emphasizing stability and security. This system lacks incentives for risk-taking and innovation.
Education and Economic Development:
Economic development in countries like Korea and Switzerland occurred independently of high levels of education. Korea experienced economic growth followed by an increase in education, while Switzerland had low college graduates despite being the richest country in Europe.
The Decline of Evolutionary Pressures:
The rise of bureaucracy and government intervention has led to a decline in evolutionary pressures in many fields. This has created an environment where incompetent or irrelevant experts can thrive. The Brexit vote exemplifies this phenomenon, with voters rejecting the advice of experts who were perceived as out of touch with their concerns.
The Importance of Risk-Taking:
Risk-taking is essential for driving economic and social progress. Entrepreneurs who dare to venture into uncharted territories play a pivotal role in innovation and growth. In the past, individuals with little to lose were able to rise to prominence through their risk-taking and hard work. However, the growth of government and bureaucracy has made it more difficult for risk-takers to succeed, leading to a decline in dynamism and innovation.
Examples of Tinkering and Practical Knowledge:
Historical examples of architectural marvels built without formal geometry training demonstrate the power of practical knowledge. The longevity and resilience of Roman structures like the Pont du Gard highlight the effectiveness of traditional techniques.
Risk-Taking and the Election of Donald Trump:
In modern society, bureaucrats often survive their mistakes, while risk-takers are often admired and respected by the masses. Donald Trump’s perceived risk-taking, despite losing a billion dollars of his own money, made him appear genuine and relatable to voters. This highlights the importance of risk-taking in society and the need to encourage a culture of innovation and entrepreneurship.
Virtue and Risk-Taking: A True Perspective:
True virtue lies not in engaging in virtue signaling or joining NGOs, but in taking risks for the collective. Entrepreneurs who fail should not be dishonored; rather, a culture of success and risk-taking is needed. Failure is an inherent part of the risk-taking process, and it should be seen as a badge of honor rather than a stigma.
The Indian Cultural Bias Against Tinkering:
The traditional Indian caste system, with its emphasis on Brahminical knowledge, may contribute to a cultural bias against tinkering and practical skills. This bias can hinder the development of a culture of innovation and hinder economic growth. Encouraging tinkering and hands-on learning is essential for fostering a more innovative and entrepreneurial society.
The Importance of Trial and Error:
Uncertainty is best probed through trial and error, experimentation, and tinkering, not through studies and theories alone. Risk-takers who engage in trial and error are the ones who drive growth and progress. They explore uncertain environments, learn from mistakes, and ultimately contribute to the advancement of society.
Uncertainty and Intellect:
Humans are not adept at using intellect to probe uncertainty effectively. Trial and error through practical experiences often yield better results than intellectual analysis.
The Wheel:
The wheel, a seemingly simple invention, took thousands of years to be implemented on suitcases. This illustrates the limitations of intellect in recognizing and applying solutions.
Ancient Civilizations and the Wheel:
While ancient civilizations like the Sumerians and Egyptians used the wheel for various purposes, other civilizations like those in Central America did not utilize it despite its presence.
The Limits of Intellectual Reasoning:
Humans often struggle to recognize and utilize simple solutions, even when they are readily available. This limitation becomes even more pronounced in complex and uncertain situations. Our reliance on intellectual reasoning alone can hinder our ability to find practical solutions to real-world problems.
Drawbacks of Minority Protection Policies:
Nassim Nicholas Taleb discusses the drawbacks of minority protection policies, using the United States as an example. He argues that protecting minorities can lead to a stigma, where people are less likely to patronize businesses or hire individuals because they are perceived as having an unfair advantage.
The Value of Non-Charlatanic Books in Finance:
In the field of finance, non-charlatanic books focus on avoiding losses rather than promising unrealistic gains. A good trader’s goal is to minimize losses, not necessarily to maximize profits. This approach emphasizes risk management and capital preservation, which are essential for long-term success in the financial markets.
Skin in the Game: Practical Knowledge vs. Theoretical Knowledge:
Practical knowledge gained through experience (skin in the game) is often more valuable than theoretical knowledge acquired from books or research. The “green lumber” example illustrates this point. A trader made a fortune trading lumber despite not knowing that “green lumber” referred to freshly cut lumber, not painted lumber. This highlights the importance of real-world experience and the limitations of purely theoretical knowledge.
Overcompensation and the Absence of Overcompensation:
Overcompensation is a phenomenon in which a group that has been historically disadvantaged experiences a period of rapid growth and success. Overcompensation can be seen in countries that have a history of colonialism or oppression. In the absence of overcompensation, a group that has been historically disadvantaged may continue to struggle even if the broader society is prosperous.
Evolutionary Pressures and Valuable Knowledge:
Those who survive and thrive in a field often possess valuable knowledge that outsiders may not recognize. The example of a brain surgeon illustrates this. When choosing a brain surgeon, one might instinctively pick the doctor who looks the part (Harvard degrees, impeccable dress). However, under the principle of skin in the game, the surgeon who doesn’t look the part may actually be more skilled, as they had to overcome challenges to survive in the field.
Skin in the Game: Genuine Competence vs. Superficial Qualities:
People with real skin in the game, those who face the consequences of their decisions, tend to be more genuine and competent. Bureaucrats, lacking this skin in the game, often make poor decisions, selecting individuals based on superficial qualities rather than true merit. This can lead to the promotion of incompetence and the stifling of innovation.
Education: Its Overemphasis and Limitations:
Education is often overblown and overvalued, with a focus on credentials rather than practical skills. The correlation between higher levels of education and economic growth is not always causal. In fact, GDP drives education, not the other way around. This highlights the need for a more balanced approach to education, one that emphasizes practical skills and innovation.
Fostering a Culture of Tinkering:
To promote innovation and growth, societies need to shift their focus from solely valuing theoretical knowledge to also embracing practical skills and hands-on learning. This can be achieved through apprenticeship programs, vocational training, and educational reforms that emphasize the importance of practical experience.
Asymmetry and Optionality: Key Concepts in Business Success:
Asymmetry and optionality are key concepts in understanding how certain businesses succeed despite uncertainty. For example, the pharmaceutical industry has made vast profits by developing drugs with potential side benefits, even if their intended purpose fails. This approach allows businesses to explore uncertain environments and potentially reap significant rewards.
The Philosopher’s Stone: A Metaphor for Value Creation:
The philosopher’s stone is a metaphor for the ability to turn lead into gold, or to create value from uncertainty. A thought experiment involving two groups of people, chemists, and overweight individuals, illustrates how random experimentation can lead to unexpected discoveries and improvements. This highlights the importance of experimentation and risk-taking in driving innovation.
Tinkerers vs. Scholars: The Role of Practical Experience:
Trial and error, or “tinkering,” often leads to more innovation than formal education. Historically, advancements in technology and industries have been driven by tinkerers, not scholars. The Industrial Revolution and advancements in fields like pharma and architecture were initiated by tinkerers, not academics. This underscores the value of practical experience and hands-on learning in driving progress.
Techne vs. Episteme: The Balance Between Practical and Theoretical Knowledge:
Techne refers to practical knowledge gained through experience and experimentation. Episteme refers to theoretical knowledge acquired through formal education. Both techne and episteme are essential for societal growth, but techne is often neglected in favor of episteme. This imbalance can hinder innovation and economic progress.
The Importance of Apprenticeship: A Hands-On Approach to Learning:
Apprenticeship programs, common in countries like Germany and Switzerland, provide hands-on training and foster a culture of tinkering. These programs have contributed to the success of industries like manufacturing and construction. They offer a valuable alternative to traditional education, emphasizing practical skills and real-world experience.
Impact of Saudi Arabia on Religious Extremism:
Nassim Nicholas Taleb shares his observations on the rapid shift away from religious extremism in Tripoli, Lebanon, due to a lack of financial support from Saudi Arabia. This transformation highlights the significant influence of external funding in shaping political and social dynamics.
Encouraging Risk-Taking and Entrepreneurship in Young People:
Taleb emphasizes the importance of risk-taking and entrepreneurship for personal growth and societal progress. He suggests starting a business, particularly for those with supportive financial resources, as a means to foster self-reliance and contribute to the economy. Taleb also highlights the cultural shift in attitudes towards entrepreneurship, contrasting the disapproval of such ventures in traditional societies with the encouragement of lemonade stands in the US.
Corruption and Patronage:
Taleb differentiates between two forms of corruption: neutral corruption and patronage. Neutral corruption involves personal enrichment without significant negative impact on society, while patronage refers to bureaucratic obstructionism and rent-seeking behavior. Taleb argues that patronage, the creation of unnecessary obstacles and delays by bureaucrats, is often more harmful than corruption itself.
Divergence of Interests:
Opaque administrations, where bureaucrats have interests that differ from the general public, can be more dangerous than corruption. Bureaucrats can slow down progress and resist change, leading to public frustration.
Encouraging Calculated Risks:
To promote risk-taking, it is essential to make failure non-shameful and provide a safety net for those who fail. This can include generous employment benefits, future employment opportunities, and compensation for failure. Encouraging calculated risks early in life can lead to innovative ideas and successful ventures.
Protectionism and Globalization:
Growing protectionism is a response to the concentration of wealth and inequality resulting from free trade. Large corporations benefit disproportionately from globalization, leading to resentment among those who lose their jobs or identities. Globalization also leads to a concentration of income among a small number of individuals, exacerbating inequality.
Full-Hearted Effort vs. Giving Up:
Determining whether someone has genuinely tried and failed or given up prematurely can be challenging. Society should not judge success or failure, and failure should not carry a stigma.
Fail Early, Not Late:
As a risk manager, Taleb emphasizes the importance of failing early rather than late. This allows for learning from mistakes, adapting, and trying again.
Notes by: ChannelCapacity999