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For over a decade, David Tian, Ph.D., has helped hundreds of thousands of people from over 87 countries find happiness, success, and fulfillment in their social, professional, and love lives. His presentations – whether keynotes, seminars, or workshops – leave clients with insights into their behavior, psychology, and keys to their empowerment. His training methodologies are the result of over a decade of coaching and education of thousands of students around the world. Join him on the “DTPHD Podcast” as he explores deep questions of meaning, success, truth, love, and the good life. Subscribe now.
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HENRY CHONG is our special guest speaker on this episode. Henry is Director of Fusang Capital, a fund management company that manages the assets of multi-family offices. He is also a Director at the Portcullis Group, Asia’s biggest independent group of trust companies, providing comprehensive wealth administration to high-net-worth individuals, providing a one-stop shop for corporate, trustee, and fund administration services to individuals, family offices, philanthropies, private banks, and investment managers. Henry is a graduate of Oxford University with a B.A. (Hons) in Philosophy Politics & Economics and is a founder of the Oxford Economics Society. He also holds a M.Sc. in Behavioral Science from the London School of Economics and is a Fellow of the Royal Society of Arts (FRSC). He will be sharing with us from his deep insights in behavioral economics, finance, health, and psychology.
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Episode 17 Show Notes
02:29 This is what antifragility is
05:38 When does the Black Swan come into being?
09:28 What it means to grow out of chaos
14:00 Understanding Hemingway’s quote on the world breaking everyone
18:54 Is life antifragile?
24:20 The opposite of embracing chaos
28:05 Defining risk and uncertainty
33:40 The dumbbell approach to life
36:52 How to develop antifragility
39:26 How to survive the worst case scenario
47:34 This happens when you don’t take risks
50:32 Two principles you should go by in life
Dr. David Tian: Welcome to the DTPHD Podcast. I’m David Tian, your host, and I’m here with our guest, Henry Chong.
Henry Chong: Yes, hello.
Dr. David Tian: And for over the past 12 years now, I’ve been helping hundreds of thousands of people in over 87 countries attain success, happiness, and fulfilment in life and love, and there’s my spiel. Henry, introduce yourself.
Henry Chong: I am Henry Chong. I am the CEO of Fusang. We’re a private investment group and we’re doing lots of really interesting projects now including relating to technology like blockchain.
Dr. David Tian: Very cool. So, we are currently in Las Vegas.
Henry Chong: At the Trump Hotel.
Dr. David Tian: At the Trump Hotel of all places. Henry is based in Hong Kong and I am based in Singapore, and Bangkok, and Taiwan. We flew all the way out here, meet up here in Vegas.
Henry Chong: To do this podcast.
Dr. David Tian: Exactly, to do this podcast, also to do a mastermind summit and some other business conferences. So anyway, pretty cool here in Vegas. So, the topic that we’ve chosen for today is antifragility or how to be antifragile. I take this as inspired by the book by Nassim Nicholas Taleb called Antifragile. You have not yet read this, right?
Henry Chong: Only bits and pieces.
Dr. David Tian: Okay, cool. It’s a weighty tome. It’s pretty dense but it’s quite repetitive, so that helps in the recall of it, but it’s actually a really good book. This is my very first Taleb book. I have skimmed in the bookstore, scanning there, Black Swan and other books like his other books. Black Swan in particular I picked up the gist of it through the title and I was just sort of like, “Yes, there are such things, and yes, they suck.” There wasn’t a solution. And then Antifragile is his solution to the Black Swan issue or problem. So, Antifragile is, in my opinion, the culmination of his narrative, broadly speaking, of how things go wrong and how you can benefit from that. I found that there were quite a lot of applications to your personal life from the concept of antifragility.
So, let me just put it out there what antifragility is and then we just dive into it. So, this is by no means a review of the book, especially since Henry hasn’t read it and the fact that there are certain chapters I haven’t read yet. If you are watching this on the video, here’s what the book looks like. I’m holding it up. I got it here next to the mic. So, antifragility. So, it’s different from straight up resilience. I actually was reading this book while watching The Defenders, this Netflix TV show… Well, I watched it on Netflix, anyway. It’s a Marvel comic book based character story arc in New York City. The Defenders includes Daredevil, Iron Fist, Luke Cage, and Jessica Jones.
I’ve watched them all. I don’t know if I should be proud of that at all. Anyways, I thought the contrast between… I thought it was a good way to illustrate what the difference is between antifragile and resilient. So, Luke Cage is a character who has impenetrable skin, unbreakable skin. He can withstand a rocket launcher to his face and it would just bounce off him or something, but he might be knocked unconscious from the impact, but anyway, it wouldn’t penetrate his skin. So, there’s that, there’s Luke Cage. And then there’s a guy named Iron Fist which was… I wanted to hate it because it was cultural appropriation from way back, but it’s actually a pretty entertaining series. It’s always the case, like all this cultural appropriation I want to hate but I love like Dr. Strange…
Anyway, so Iron Fist was actually quite entertaining. And the story is, especially the beginning of the series, he’s not able to conjure up the chi of his iron fist. So, once he has his iron fist chi, the iron fist is like the force that can break anything. It’s interesting because Luke Cage’s face is the immovable force. So, what is that, like the..?
Henry Chong: The unstoppable force and the immovable object.
Dr. David Tian: Yeah, immovable object, right. So, that’s Luke Cage and then Iron Fist is the immovable… wait a minute. So, he’s got that fist and he can knock out Luke Cage from the impact. Anyway, Iron Fist in the early part of the series was able to conjure up his chi to make the Iron Fist only when the prison guards beat him up. So, he was saying earlier in the series, he gets stronger the more he gets hit. And because no one was hitting him, he wasn’t able to focus his chi. And the more you beat on him, the stronger he gets until he finally gets the chi of the iron fist and just wipes everybody out. And later on in the series, he gets better and better through meditation and other means of focusing his chi. We won’t go there.
That’s a good illustration of antifragile versus just super strong, and resilient, and can bounce back. So, Luke Cage is resilient. No matter what you throw at him, he can bounce back and it won’t harm him. That’s like the ideal resilient character. Iron Fist is the opposite. In that sense, he’s actually stronger because he gets stronger the more he gets hit. So, that’s antifragile. Of course, there’s fragile, so there are three grades. There’s fragile, resilient and antifragile. So, fragile is you get hit and you fall apart. That’s obviously bad if you want to be strong. But what’s not so intuitive is resilient and antifragile. And the more I talk about this with people, let’s see if you fall into this trap, Henry, you end up going back to resilience as the idea for antifragile but it’s not. They’re actually two different things.
In life, you can be resilient up to a certain point and that’s when you meet a black swan. So, you think you got it all covered because based on history, what you’ve seen before, you can meet it. Your weakness is what you’ve never seen and what you can never predict, black swan, that’ll wipe you out. And someone who is antifragile is basically, or something that’s antifragile, is something that will derive even more strength from the black swan. So, a black swan event won’t end them, it will actually make them stronger. Okay, so putting that out there, in our personal lives, we want to think about how to be not just resilient but antifragile.
And it gets really weird when you think about it that way, because then you’re basically asking yourself, “Okay, what’s the worst case scenario?” Whatever that is. How can I actually get stronger as a result? And one way of thinking… So, I started to ask myself this as I worked my way through the book, and the book is largely about societal-wide issues. He illustrates each of these principles he puts out there with personal examples, like examples on the individual level as well, which triggered my thinking about personal application. But a lot of the more serious parts are about the economy or history.
Anyway, in the individual level, let’s say maybe my business is going to fall apart and someone who is resilient would just be hoping that it wouldn’t and trying to save up enough money to withstand any kind of crash. So, that’s somebody who puts away 6 months or more of capital reserve or something like that. Eventually, they hit a black swan and they get wiped out largely because they didn’t see it coming. Antifragile means this: If you get wiped out, you actually prefer that which is weird. So I was thinking okay, if I get wiped out, what’s my plan B, and C, and D, and E? I’ve been doing this since I was in my 20s, so I always have a backup plan. I don’t know if this is just some conservative thinking in me.
So anyway, one of the backup plans is, I’ll just throw this out there, one that we just sort of brainstormed with my wife, we would go to Taiwan and teach English. That would pay a high hourly wage. And while we’re doing that, on the side, we’ll open up a gym or something. And while we do that, like a boutique gym, a small one, just like one of those boutique ones, and we’ll open up a smoothie stand along with it. And we’ll also have a yoga studio, and then maybe we’ll get a cryotherapy chamber. And we’re like, “Yeah, okay, this sounds great. We’ll add this. We’ll add that. Woah, this actually is a really good plan. Why don’t we just do this? Why do I have to do this other plan A?”
And then your plan B becomes your plan A so that when your plan A fails you’re like, that’s great, because I’ve always been wanting. So, I had that happen earlier in my life when I became a professor. That was always my plan A, and I became one. And then my backup which I never had to actually consider to be a backup was to do this dating coach thing that was working out pretty well. That was my fall-back. And I was forced to consider that because of the way I was being treated, and didn’t like it at the university, and the restrictions around the way Singapore deals with humanities and social sciences.
I was like, man, actually, the backup is more enticing than the current plan A, and then I switched. I kind of wish I switched earlier. So, now, that’s an example of what I think is an antifragile way of approach to these long-term plans; coming up with a plan B that actually is more enticing than the plan A, so that even if your current situation fails, and you got to go to your backup, you’re actually really happy about that. So, I’ll just throw this out there. I’ve been talking a lot. What are you thinking?
Henry Chong: I mean, not just I think antifragility in terms of growing from something breaking but also just being able to grow from chaos or disorder. So you see this in people like Sun Tzu. If you believe you are the superior strategist, then you should be willing to throw a battle into chaos. Most people assumed the opposite. They’re like a well-regimented army is one that is highly ordered, and is very disciplined, and follows orders, and in the heat of the battle will still be able to follow those orders. So, they’re resilient troop versus an army that has been where sort of command and control has been devolved many layers down. It could be more antifragile.
Stanley McChrystal wrote a really interesting book called Team of Teams and he talks about this. He talks about how when they first went into Afghanistan and Iraq, they put together what they call the joint task force. It was supposed to be a grouping of all of these most elite troops in the US Armed Forces and they were fighting against ISIS. And for a while, they were losing and they couldn’t understand why. They’re like, we’re the best trained, best resourced, best everything fighting force on the planet. How can it be that we’re losing against a ragtag bunch of soldiers?
What he came to realize is that their entire military structure was built on structure. It was built upon command and control. And all the technological advances that they had in terms of allowing the very brave guy at the top like Stanley McChrystal to directly give orders into the earpiece of a guy about to kick down the door was actually hurting them because it was impossible for them to adapt quickly enough in such a chaotic, fast-changing environment, versus ISIS which had no structure, really. It was just this network. There’s really no leader, it was just a general purpose and an outcome that they had, and each individual troop went off on its own, could actually adapt much, much quicker in such a chaotic environment and that’s why they were winning.
To the point where I think much later on in the war, they realized that, that ability to have command and control was actually hurting them and actually they shouldn’t do it at all. And even though Stanley McChrystal in theory could see any single troop on the frontline any time, he shouldn’t give any orders, he shouldn’t touch that, because that was actually detrimental. Instead, what was important was to make sure everyone knew the commander’s intents, the high-level purpose, and leave it up to the ground troops to figure out how to execute. That’s one really interesting example of how small, nimble forces, especially in a dynamic, chaotic environment can outperform the classical resilient forces.
We see this in startups, right? How is it possible that a small little scrappy startup out of a garage can beat an incumbent firm? And the core company’s incumbent because they are big and because in theory they have all the natural advantages. But in a fast-changing market, being able to find product market fit, being able to make sure you deliver the right product at the right time to the right people is actually far more important than all of those resources, and all of that, everything, that can actually make a firm fragile in a sense. You talked earlier about the difference between resilience and antifragility and the very, very fine line. I think that’s a very important point because, to a lot of people, they say, “Well, just increasing resilience, being able to better withstand chaos is not the same as growing from chaos.”
In nature, I think you actually see that things that are very resilient, if anything, when they hit the breaking point, tend to shatter more. So, we see this in material science. The harder, and hardness in engineering is a technical term, the harder material is, the more prone to shattering it is because it’s less malleable. And I think that how it talks a lot about this in terms of institutions where the harder you make an institution, the more resilient you make it, if it hits that tipping point, in many cases because of the way it’s designed to be resilient, when it breaks, it really breaks. It talks about the financial system, the whole Bretton Woods financial system we built up was exactly like that.
In many ways, people designed it with good intentions to be resilient, not realizing that that makes it, if it does break, prone to shattering. One last thing. It reminds me of this quote from Hemingway that people really like to quote on Instagram. I don’t think they get his full meaning, and it goes something like, “The world breaks everyone and afterward many are strong at the broken places.” And people like to use that as an example of why you should be resilient. “I’m going to a tough time, but hey look, here’s this great quote that just says that after it breaks, you’ll be stronger.” That’s not the full quote, that’s just the first half.
And then it goes on to say that, “But those that the world does not break, it kills”, whether it’s slowly or later. I guess his point was that everyone breaks somehow. And no matter how resilient or strong you think they are, you are, everyone has something, you may not even know it, but there’s something that will hit you that will break you. Maybe it’s losing an eye, or using a leg, or losing your wife, or something. I guess Hemingway’s point was that if you are just really strong and really resilient, the world will keep pushing until at some point it’ll kill you. What instead you need to realize is that everyone gets broken from time to time, and the key is to be antifragile, how you pick yourself up and rebuild from that and become stronger at the broken places.
And if you don’t know how to do that, the world will kill you. I think it’s a profound statement of the difference between resiliency and antifragility that, as you say, many people just sort of miss the point.
Dr. David Tian: Yeah. Oh man, that’s great. So yeah, that chapter was fascinating. And so, I wasn’t sure if you read that. I was like, “Man, how’d you know that?” The issue about chaos. Chaos is a big term now in masculinity studies because the chaos represents in Jungian archetype theory represents the feminine. The masculine comes and brings order to the chaos, I suppose like the way they talk about it in those big terms. That’s a masculine myth. It’s very appealing, order for uptight guys, which is like a natural — a lot of guys who are prospects or who contact me for help have trouble embracing the chaos. They get caught in the trap of trying to control the chaos.
That means it’s like trying to control a woman and saying no drama, that sort of thing. “Don’t give me any drama.” Instead of meeting her chaos with your presence and standing strong in the storm, it’s more of like, how do I contain the storm so it doesn’t storm? In other words, how do I make the feminine masculine so I can be comfortable with it? That’s sort of like, how can I make the feminine calm like me? That’s just like killing the feminine, actually, in the end. You’re killing the feminine energy in that person. It’s a really interesting point that chaos will break you.
So, the danger about coming up with backup plans is that you’re thinking, “I’m going to never be broken” and then life will challenge you. Shit’s going to happen. If you live long enough, something bad’s going to happen. And instead of saying, “This thing that I fear so much, let’s say it does happen. How can I feel the pain? How can I grow from this and become stronger?” This reminds me of that Nietzsche quote that people use all the time, “What doesn’t kill me makes me stronger”, something like that. I once saw a TV show, this kid was like, “That’s not true at all. I can think of lots of examples where something doesn’t kill you but it doesn’t make you stronger like cancer. You could lose a leg and you’re not any stronger.”
In the literal sense, right. But what Nietzsche I think was getting at was the antifragility idea where if… So, the black swan event will wipe you out. And if you survive, the only way to thrive is to look for a way for that to actually not just make you give up. If you do survive, you actually have become stronger because now you’ve gone through it. Now, you know that’s another data point.
Henry Chong: But also, cancer’s antifragile.
Dr. David Tian: That’s what I want to get to. A lot of the examples on chaos is at the systemic level. It’s like at the systems level, and this is a great point from the beginning of the book that kept coming up. Systems versus individuals. So, the higher up you go in the system, the more antifragile it becomes. So for instance, evolution, nature is antifragile up to a certain point. I mean, there are nature ending events. The planet is antifragile up to a certain point, maybe an asteroid big enough and it hits the Earth, or maybe the sun will implode, but generally speaking, life is antifragile, biological life on the Earth. So, the process of evolution is antifragile.
So, the more chaos gets thrown into it, the stronger the result becomes. So, that’s just the nature of survival of the fittest, natural selection. However, that’s no consolation to the person who got weeded out. So, here’s another example. Let’s say you are the general of an army and you think you’re super strong and you can meet this enemy. You didn’t know that you had this weakness on your left flank or whatever and you found out by engaging in battle with this smaller guerrilla force, and then you’re like, “Oh, shit. I saw that now.” You withdraw, and you recoup, and now you’re stronger, and you shore up that weakness, and you go back out there.
Now, you’ve responded to the challenge and you become stronger and you actually are thankful to those guerrillas for showing you that weakness, and now you’re stronger and you beat them up. However, that’s of no consolation to the soldiers who sacrificed their lives to discover that the left flank was weak. So, it’s sort of like evolution. Evolution doesn’t mind sacrificing individual beings. Well, evolution doesn’t have a mind, I guess, but it has to sacrifice the individual for the system to get stronger. That’s actually how society works. So, no matter what, there’s going to be the bottom 10% and they will be sacrificed for the strength and the continuation of the system.
Now, some systems are antifragile, some aren’t, some are fragile. The example you gave of Silicon Valley startups where there’s very little regulation and it’s more like evolution there, and it’s… So, it’s like the strongest survives, versus the big corporations where there’s lots of regulations, and lots of propping up and artificiality to it. That is no consolation to the startup that fails and the investors who lost all their money in that startup. So, at the individual level, you have to realize once you’re part of a bigger system that the system itself may not care for you, probably doesn’t care for you. So, you’ve got to care for yourself.
And you got to ensure your own survival. So, I’ll give you an example from my experience and then I’m going to move back to the chaos thing. A lot of guys who are struggling with women or their relationships bemoan the liberalization of feminism or the spread of radical feminism in the West. Now that women are now assertive, they are more masculine in their energy of taking whatever they can, and taking advantage of short-term mating strategies. The guys are like, “Oh, they’re all sluts. Look what’s happened. Screw it. I’m going to withdraw from the game.” The thing is though that the game doesn’t care. In fact, the game has already accounted for your withdrawal.
So, studies have shown, multiple DNA studies have shown that twice as many females, and probably more, the further back in time you go, it’s something like 17 females for every 1 male that’s contributed to the gene pool. But in recent times, recent as in a few hundred years back, we have two females for every male that’s contributed to the gene pool. That means for every two females that have had a baby, there’s been one male that sired, that contributed to that. That means that half the males that have been alive, more than half because if you could go far back in history enough, and the fact that as far as we can see in history, it’s been a 1:1 male-to-female ratio of babies that have been born, that half the males who have existed in human history, actually more than half, have not contributed to the gene pool. In other words, evolution has weeded them out.
And this has made the ensuing race of Homo sapiens stronger. And just looking in totality of evolution, stronger. So, the pandas should’ve been extinct by now but because of artificial means we’ve kept these cuddly, cute creatures alive and I’m very happy for that. But you know, they would be dead, too. But nature doesn’t care whether pandas are alive or not. And you might think, “Oh, that’s good” but then you’re the panda. And a lot of these guys are like, “I’m going to take myself out of commission and that’s a punishment to the system.” The system is happy about that. The system wants that. So, if you’re bitching and moaning about taking yourself out of the game as punitive measure to the society, society is happy for that. Other dudes are happy for that.
So then the remaining dudes should be applauding this because now there’s a lot less competition, there are more females for them. And especially if you’re open to that mating strategy of just casual sex everywhere, I mean, a lot of these guys are saying, “I’m going to get out of marriage and relationships.” That’s great, but a lot of women actually want that. So now we have, eventually, when the women figured this out, there’s going to be… The tides will turn. But then the guys who are there to sweep that up, they’re going to be there perfectly-positioned for this. But the system is antifragile; it’s already taken into account the fact that half the males will not actually contribute to the gene pool anyway.
So, this bitching and moaning about this and saying, “Well then, I’m out.” The system is happy for that. But also… So, going back to the earlier point about chaos is, the opposite of embracing the chaos is artificial order, and it might be top-down. Often, it’s top-down. And this was an interesting point that Taleb was making about society as political systems and economic systems that were too tightly regulated or just too regulated. And he would say something like, there’s a limit to which you want to have just free market completely. You set a lower limit at which the government steps in or some other rule setting thing comes in and says, “Okay, that’s enough. It’s too chaotic. It’s too much.” But beyond that, you just let it flourish.
So, embracing the chaos. So, you can think about, in your personal life… Well, let me just throw this out to you, Henry. How would you apply this idea of order, and chaos, and regulation, and so on to your personal life? How could you benefit from this person?
Henry Chong: Well, I think it’s really interesting that a lot of man-made systems are resilient or fragile whereas a lot of systems that arise in nature are antifragile, and I think it’s exactly what you said. That means systems evolve themselves. But even within evolution as a dynamic, the point is if you’re not antifragile, you get weeded out. And so, a lot of biological processes aren’t antifragile or at least should be. So, for example, we’re not designed to eat constantly at exactly the same interval. Our bodies are designed to intermittent fast from time to time. Why? The people whose bodies had to eat every 4 hours didn’t last very long in the savannas of Africa.
The people whose bodies were adapted to eat irregularly, you never know when the next meal is going to come, those are the genes that perpetuated. And so, over time, all of these biological systems became antifragile because the ones that weren’t disappeared. Our bodies, this is true for most things, we have these homeostatic processes that you need stresses from time to time. Exercise is obviously one of them. Yes, there’s a point at which too much is bad, but you need those periodic stressors to grow. I think it’s really interesting to think about why that’s the case. Why is it that these antifragile systems have, in nature, where things were allowed to evolve on their own, why have these things perpetuated?
And I think it’s exactly what you say, because of chaos. Chaos is a technical term in math. If you talk to a statistician, they would separate the world into two halves. One half is what they call random. And random, again, is a technical term. It really means, “I just cannot predict an output or an input. It’s completely random.” And then on the other side, you have determinism, where it’s very linear. Linear inputs, linear output. I can predict exactly what the output is, like 2 + 2 = 4 for a variety of reasons. But in between, you have what you call the edge of chaos, and these are chaotic systems. Again, that’s a very technical definition. And a chaotic system is one in which inputs lead to outputs very specifically. It’s not random. There is causality but it’s very, very difficult to predict the output from the input.
So, once I have the output, I can go backwards and see how it came to be, but I cannot predict in advance. The weather is a classic example where small changes to the input result in huge changes to the output, so much so that it’s almost impossible to predict the weather seven days out. Tomorrow, fine, seven days out, almost impossible. It’d probably be no better than chance. Most natural systems, most biological systems, are chaotic in nature in that we can see logically how outputs follow from inputs, but it doesn’t mean that we can predict.
Because of that, given that most systems in life, in the real world, are chaotic, it means that sooner or later, you will hit a situation in which you could not have predicted and you could not have foreseen. Again, statisticians separate into two kinds of what we call risk and uncertainty. Now, risk, again, in math is a very specific definition. It means that you can calculate the probability distribution. So, when I flip a coin, there is what a math person will call risk, 50-50 chance roughly of heads or tails. I know exactly the distribution. I can’t predict if it’s going to be heads or tails, but I can predict the probabilities. That’s risk.
And then you have what you call uncertainty or Knightian uncertainty after an economist who first popularized the idea, which just means that, “I don’t even know the probability distribution.” So again, imagine I’ve got two urns of black balls, red balls. If I know exactly how many balls are in each, I don’t know which ball I’m going to get when I put my hand to the urn, but I know roughly the percentage. But if I know that there’s a jar, an urn with red balls and black balls but I don’t know how many, I’m probably going to get one or the other. It’s impossible for me to make any useful statement about which one. That’s exactly what Taleb talks about in his early books about the black swan, where many of these things, even though we think we understand the probability distribution, we actually don’t and that’s why they’re so dangerous.
Because we don’t actually understand the probability distribution, it’s very difficult to prepare for it in a linear fashion because I just don’t know what’s going to happen. I don’t know if I’m going to get a red or a black ball. So, if I have a strategy that is dependent heavily on me picking directly a red or a black ball… You know what? I might be fine for a very, very long time and that’s why for years and years, it may seem like I’m okay until one day I hit that one scenario and it breaks me. That’s exactly how it works in a lot of financial markets.
During good years, it all seems fine. Everything seems great until that one scenario you couldn’t foresee happens and it all blows up. And we see this time and time again in all of these financial crises. Taleb’s point is that unless your strategy has a way of dealing with that, an outcome which you cannot foresee, unless your strategy at a very base layer is antifragile, sooner or later, inevitably, you will hit that scenario and everything will blow up. Again, in a long enough time frame like nature, sooner or later, your strategy is going to get weeded out. Your genes are going to get weeded out. And so, the question is, okay, if I’m playing a long gain, how do I make my strategies antifragile so that even if I need to forego short-term gains, long-term I’m set out to win.
I guess to give you a very specific example, investing in the financial market is I think a great example of this where there are lots of ways of optimizing a portfolio. There’s a lot of math theory around what people call things like ‘modern portfolio theory’ of how you exactly optimize what your portfolio allocation should be, but that all assumes that you can calculate the inputs and it assumes that you can calculate the future probability distribution. So, things like expected return and risk. Now, if you think you can calculate all of that, good for you.
But for a lot of people, all they do is they take historical returns and they extrapolate it into the future. And most of the time, that works fine because most of the time, tomorrow is the same as yesterday. That is how nature works most of the time, what you call heteroskedasticity. It’s not random. The future does depend on the past. The problem is not always. And every now and then, it looks very, very different. And if you have over-optimized and you walk too close to the edge, there’s no room for error, and you hit one of the scenarios, and boom, your portfolio blows up.
On the other hand, you have people like Taleb very specifically advocating the financial markets is, it’s often better long-term to not walk so close to the edge and not over-optimize, and go a bit below and have that margin of safety as Warren Buffett calls it because you never really know. And so, you better make sure that… If your portfolio has a margin of safety, when that scenario happens, whatever it may be, that black swan happens and you are in a position to benefit from this order, that’s not just the way in which you outperform, that is the only way in which you can survive long-term.
And just to finish off, Warren Buffet has this great quote I always like and he’s like, “I only invest in businesses that morons could run, because sooner or later they will.”
Dr. David Tian: Yeah. That was a quote I was just about to give. Yes, that’s right, Warren Buffet. Now, one of the examples along the same lines that Taleb gave, I think, was the Fukushima nuclear disaster. They’re still dealing with that now, and it may be forever. One of the problems was they didn’t consider the possibility that there could be something like a black swan event that blows out the whole thing. And unfortunately, they had so much of the nuclear reactors concentrated in one area. And what they’re now doing in Japan is they’re putting smaller reactors all over to spread out the risk, so to speak, but it was something that they just couldn’t foresee because they were looking at historical patterns.
That’s always going to leave you vulnerable to black swan issues or events. Now, one of the solutions, as you were getting to, was like a more balanced portfolio. So, if you’re thinking about in terms of investments, and he gave this interesting example of extremes. He calls it the dumbbell theory or dumbbell approach. And that is where at the extremes, the extremes are where you should live, and the middle is the most dangerous position. For instance, in a portfolio that’s balanced like this where 90% of the assets are in very safe, conservative markets or vehicles, and then you have 10% which you’ve decided you can risk and lose all of it, and that’s in super high risk but very high return…
Henry Chong: But not just high risk, high return, it should be asymmetric risk and return.
Dr. David Tian: Yes, the opposite.
Henry Chong: Ideally, you invest into these opportunities where maybe you lose all your money. So, I lose 1x or I make 10x. Those are the kind of things you want to invest in.
Dr. David Tian: Right, so you win no matter where it goes. That’s much safer, actually, than having a middle of the road like 80% safety. So, if the whole thing is like 50-50 or 80-20, you could get blown out. You could lose it all, and that’s actually what happened in ’08 where there’s all of these middle level risk portfolios where you think, “Okay, I kind of want to be in the middle.” A lot of people like safety in the middle. So, if they have a menu choice and they just had to choose, they’ll usually choose the middle option. It’s the safe option. And actually, that’s the most dangerous option in life because you’ll lose on a black swan event.
Whereas if you go and you play both ends, you’re going to win no matter what. So, this leads to the solution. So, we kind of have to get to the solution. So, we’re understanding the dangers of being just resilient or just strong, and you’re susceptible to black swan events and unpredictable outcomes or inputs. What’ll happen is if you play the extremes, you’re safer. But how can you just… So, how do you do that in your personal life besides just your portfolio?
So, he gives the example somewhere in the beginning of in Greco-Roman times, I can’t remember if it’s Greco or Roman, there’s a mother who suspected that her son was going to poison her. So, she instructed the pharmacist, the apothecary to give her small doses of the most popular poisons and give them to her over a period of time so that she became immune to them, just upped the dose each time, so that she was now immune to these poisons. And lo and behold, her son did try to poison her and she was not able to be poisoned, and she found out.
I don’t know what she did to the son, she punished him somehow, probably killed him. I think she felt so bad that she killed her son, she wanted to kill herself. She took the poison but the poison she can’t… So, she actually had to order one of her servants to chop off her head or something because now she can’t poison herself. So anyways, this is like the downside of being too antifragile. That’s actually one solution to developing antifragility in your life; thinking about what could be a black swan, wipe you out, event. “How can I take small enough doses of that over a long period of time that I can become antifragile to it, so that I can actually start to prepare for that eventuality in these minute amounts that I can handle?”
Because if you suddenly take on like, “Hey, I’m going to practice being stabbed.” That’s probably a bad idea, or “I’ll practice getting knocked out. Knock me out.” Not great. But if you practice conditioning yourself to being hit and then gradually build that up, you’ll become stronger and stronger with time, so that when you do get hit or knocked out with a very powerful blow, you’ll stand a much better chance. In fact, over time, you become antifragile. So, this is actually how inoculations worked, antibiotics work. So, they give you minute doses or small enough doses that you can handle and your system can come back. And what’ll happen is your system, your body says, “Oh damn, that was bad. Let me prepare for the next dosage” and you actually overcompensate. Your body overcompensates for it so you can handle a stronger dose.
So, as a product of evolution, you are already antifragile biologically. Over time, you’re the product of evolution which is in itself antifragile. So, you actually have built into you this ability to overcompensate for getting hit again with that same thing.
Henry Chong: You need a balance though between resilience and antifragility. It’s very difficult to be all antifragile at any given dimension for two reasons. One is just, it’s really hard. Not only is it hard, but again, I think people fall into the trap of saying things like… So, a vaccine, taking a vaccine is — the way the vaccine works is antifragile, but trying to get yourself inoculated against every possible disease is kind of falling back into the trap of trying to be resilient. And the whole point of this is that it is very, very difficult to ever predict everything. And so, you can never prepare for everything. And really, the question is, given that shit will come and it will hit you, how do you then recover from that? As opposed to, again, just being, how do I just prepare for everything? Because then you fall back into the trap of just being resilient.
So, I think the stoics used to talk a lot about this and say, “Look, you should try and prepare as best as you can for every scenario you can. But sooner or later, something will come that you just couldn’t have foreseen.” And the question is just, how do you pick yourself up from that? They talked about premeditation, about imagining the worst possible things that could happen to you as a way of making you more resilient, but recognizing that, again, there are always things that will break you. How do you pick yourself up from that? I think you need a balance. You want to try and be as resilient as you can in life while also recognizing that things will come.
It is very hard to be specific about those kind of scenarios and it’s more about just preparing yourself mentally, and if anything, sort of mentally shaping yourself to live in that mode to say, “Look, things will come that I can’t foresee. How do I grow from them?” And also, the other reason why I think you need a balance of both is that, again, maybe to come back to sort of the financial portfolio example, something that’s quite clear is exactly like Taleb says. If you have 90% of your portfolio is very safe, that’s resilient. And then you want a small portion of your portfolio that’s antifragile, that grows from it. You need both because with financial portfolio, I can diversify. So, I can say, “Alright, well, if I have these asymmetric bets where I have a 50% chance of losing all my money and a 50% chance of making 10x my money, that’s a really good bet to make if I can make a lot of them.”
If you can make 10 of those bets, you definitely do it. If you can make one of those bets, it’s not so clear. Then the answer is, it depends. Is this your last dollar? Are you betting your last dollar? Maybe not, right? But if you can diversify, great. The truth is in life, you can’t always diversify and there are many things that you do in which, again, you only get one at bat or at any given time, you’re doing it once. And again, the answer I think is not always so clear.
So for example, surgery is a really interesting example that I was talking about recently. I wrote this newsletter a while back about quantum Bayesianism which I will not get into now. But the point is that if a surgeon goes to you and says, “Alright, we’re going to do this surgery. It’s got a 95% chance of success and a 5% chance that it will leave you paralyzed for life.” Should you do it? You’re like, “Well, 95% sounds pretty great. I mean, as far as odds go, what more do you want?” The problem is, if you’re in that 5%, it’s no use telling you, “Don’t worry, I know you’re paralyzed, but hey, the surgery had a 95% chance of success so you shouldn’t feel bad.”
In that world in which you are paralyzed, you don’t care. Because as far as you’re concerned, looking back, you now had 100% chance, 100% you are paralyzed. And I call those frozen accidents, where it doesn’t really matter what the probability distribution is. If that thing happens to you, it’s happened. The chance probably is 1 and no amount of convincing you otherwise is going to make you feel any better. And that’s why I think you need that balance. That’s why in poker and investing, you always make sure that you never bet your last dollar. That even if you lose the hand, you still have the stack and you can still keep on going. You don’t bust out.
I think that… Again, trying to come back a bit, that’s what I mean by you need to be antifragile at the very base layer in terms of personality, in terms of mindset, in terms of overall strategy of how you make bets or you invest your portfolio. That has to be antifragile because it’s very difficult to do it specifically for anything. You need to do it in a holistic way.
Dr. David Tian: Yeah. Okay, so the surgery example is good, so let’s take that. There is a way to be… I mean, if it’s a black swan, if it ends your life and you’re not in the game anymore, well then, you can’t actually benefit from it, obviously. But there might be a way in which you could be antifragile for the surgery example. So, you have a 95% chance that it succeeds and that’s great, and then your 5% you die. So, if you took out a life insurance policy that then takes care of your family, and you’re a ghost. So like, you’re happier, a happy ghost, alright. Well, at least my family got taken care of. So, you’re antifragile in that sense because you didn’t have all that money and now they’re millionaires. I don’t know what company will insure you if you’re going through surgery, but whatever.
So, what I took from this lesson was actually, I’m pretty resilient in life and we’ve done a whole other podcast about the vantage point of trust or the trust vantage. So, where you’re kind of looking on the bright side of things. If it’s retrospective, so like the event has already happened and you got fucked over, and now you’re like, “How can I be antifragile with this event which I didn’t predict?” Which would make it a black swan, right? And you’re thinking, “Okay, how can I derive strength from this? How can I get stronger from this? What lessons are there to learn?” and so on. That’s the best you can do because the event already happened.
And now, you’re scrambling to get stronger as a result. What’s really genius is if you can start… Because you have time now where it’s, I’m assuming you haven’t hit a black swan yet, currently, you’re not dealing with one, but you can think of nightmare scenarios. And one at a time, so this is from the section on stoicism where Taleb says, “No stoic theorist has ever understood really stoicism, and I’ll tell you what real stoicism is.” So, one of the things — the main point he made there in that section was, as far as I can tell, was that the stoics were actually saying that you can run these thought experiments sort of like Ignatius or whatever, let’s stick with the stoics.
You run these thought experiments about: What would happen? What’s my worst nightmare and how can I benefit from that while also reaping all the rewards from things going according to plan? But things don’t go to plan in a really bad way. How can I still benefit from that? And you’re just running these thought experiments. And this might be a horrible way to live because you’re constantly going around right, “Okay, plan Z, how can plan Z be just as wonderful as plan A?”
I can see how some people would object to this. You’re constantly going around thinking about the worst case scenario. And when you do that, according to The Secret, you’ll be attracting it to yourself. I totally get that. Most of my life is like that. However, whenever you are overly optimistic about how things will go, you’re vulnerable and you’re just hoping to God you’re resilient… And most of my life is lived like that, and then something hits me that I totally don’t expect and then I have to look for a way to make myself stronger as a result. That’s where, that previous podcast on the vantage point of trust, where that’s actually happened. So, if you are antifragile or if you have an antifragile mindset and you’ve trained yourself to look forward how you can get stronger as a result of getting hit, you can develop this.
But I think one thing I’ve not been doing, not in any meaningful way, I guess I did this as an uptight teenager, is if all shit goes to hell… Actually, I didn’t do this very well. I just held that fear in my mind but I didn’t come up with a good plan. How can I be stronger? And so, that’s that 5%, 10%, 20% of your portfolio that you’re kind of hoping… Because if that goes bad, you’ll actually make more than you would’ve if the 90% worked out for you. So, that way, you play both sides. That’s like the worst villain. The villain who is playing the good guy and the bad guys, and either way, he wins. Win-win for him. That’s the guy you can’t beat because he’s going to be happy no matter what.
Actually, in terms of your own personal life, it’s a good idea to take out a life insurance policy if you’ve got dependents so that you’ll win no matter what in that sense. That might be a low-level win for you because you’re dead, but you’re getting something. I think a lot of people, they don’t bother taking out that sort of — life insurance is an easy example, but they don’t think about, “Okay, if I lose everything, if I get into a car accident, if this happens, how can I actually get stronger? If something bad happens to my mother, my kids, how can we actually get stronger as a result?” And why? Because people don’t like to think about these things. That’s one of the reasons why…
And so, a lot of people, they don’t take risks because they’re scared to risk that thing happening. So, they play the middle, and they’re middle class, middle income, middle everything, and they’re B students, and they’re not going to go all in on one. They’re not going to go to the extremes. So, there’s that. Think about thought experiments for the things that you’re really afraid of. And again, like this great saying from Tony Robbins, “Stress is the adult word for fear.” “Really stressed about it,” you’re just afraid of the outcome if it doesn’t happen.
Well, let’s face the damn thing that you’re afraid of, and think about how you can actually get stronger as a result, and you might like that and you might end up saying, “Woah, I kind of want that to happen.” So anyway, there’s that, thought experiments about the nightmare scenarios and then how to prepare to be stronger as a result. But also, playing the extremes means in your life, most people don’t play extremes in their life. So, examples of that, like from… A lot of guys listening to this are trying to get better in their dating and their relationships, and a lot of them suffer from playing middle. There’s nothing happening nice in the middle. So, you should be thinking in terms of, “How can I be risky?” And that’s very sexual, like the easy-going, adventurous guy who takes risks.
When you’re flirting, or you’re out at the bar, or you’re on a date, be a little bit more adventurous than you normally would be. Maybe you’d be “Do Not Enter” in some VIP area and you’re just like, “Yeah, let’s go.” And you go in there and you sneak in there, and it’s risky, and your heart’s racing, and she’s like, “Ah, we shouldn’t be here.” And you’re like, “Yeah, that’s why we’re here.” And you’re having fun. That’s one extreme of the bell end, of the dumbbell. And then the other extreme is, maybe at work or some other area, you’ve got some stability. So, you put away that six months of wages, emergency backup or whatever, or you’ve invested. You’re safe in that area but you’re risky in this other one.
One area in my life is I was in a safe career, trajectory of being a professor, then I unconsciously started dabbling in this other area, unconscious drives to have my sexual expression in that other area, and I was living that life that I just described to you. Conservative in one area, risky in another. Gary Vaynerchuk talks about this in terms of clouds and dirt, and in the middle is… Don’t bother with that. So, getting down into the nitty-gritty of understanding how Facebook ads work, for instance, if you’re running a small business, and then understanding up in the clouds of like the bigger picture strategy of thinking 10 years out, 20 years out, understanding brand and what that means. That’s where the magic is, at the dumbbell ends. A lot of people are in the middle. I think that’s just a bad idea.
Henry Chong: Yep. Well, we’re coming up on the hour. So, maybe I’ll just finish off with… There’s a really good friend of mine, and he always… We were classmates back at Oxford, and after three years of digging through all the analytic philosophy, and moral philosophy, and everything that there was, he’s like, “You know what? I think it all boils down to two simple principles,” which I actually personally really like. And he says, “One, minimize regret. Can’t go too far wrong whenever you’re trying to make a decision if you just say… What’s the best path to minimize regret?” Again, I don’t really know what the potential outcomes are, the distribution, but just how do I minimize regret? That’s one.
And the other thing is maximize serendipity. Again, who knows what’s going to happen? Put yourself into situations to maximize the potential of serendipity. Again, I think if you do those two things, almost like the two barbells, you’re really safe or minimize regret, and the sort of asymmetric risk reward of maximizing serendipity. You won’t go too far away.
Dr. David Tian: Yeah, nice. Great way to end. You always have great quotes, so that’s excellent. Alright, guys, thanks for, and ladies, thanks for listening, and we’re wrapping up here. Join the DTPHD podcast group. That’s where you can interact with us personally, ask us questions, and maybe we’ll do a whole podcast for you on that question. So, join the DTPHD podcast group. You can find the link in the description for this podcast. Also, you can find me at DavidTianPHD.com, and I got a whole series of masterclasses that are free. So, join that. Henry, how can they get in touch with you?
Henry Chong: You can find me on my website at HenryChong.com and I write a newsletter. Not monthly, because our company writes all kinds of other newsletters, but you can find that on my website as well.
Dr. David Tian: Awesome, right. HenryChong.com. We’ll link that in the description. I also got to link a couple of books mentioned. Alright, great, and we’ll linked the Antifragile. So, thanks for listening and we’ll see you in the next one. David Tian and Henry Chong, signing out.