Nassim Taleb on the Anti-Fragile Portfolio and the Benefits of Taking Risks

Nassim Taleb

If this year's Investment Management Consultants Association conference had a mascot, it would be the phoenix. The recurring theme was: As we recover from the most recent financial crisis, how we can we learn from the mistakes to best prepare for the future?

Nassim Taleb tackled this very question in his latest book, Antifragile: Things That Gain From Disorder, which built off his previous works and applies the lessons learned to today's biggest challenges. At the conference, Taleb examined how small doses of volatility can help systems handle larger disruptors in the future.

Taleb, a professor at NYU's Polytechnic Institute and former derivatives trader, shared his theories along with concrete examples and practical advice. He said that financial advisors can best prepare their clients for an uncertain future by balancing a portfolio with zero-risk, inflation-hedged investments and a diverse variety of high-risk, high-reward investments.

The opposite of fragile

In his first book, Fooled by Randomness, Taleb analyzed how humans are unable to appreciate the benefits of unpredictability and instead seek out stability, which is unproductive. Next, he explored how institutions are shaped by high-impact rare events (e.g., the recent collapse of the financial system's effects on the economy), in his book The Black Swan: The Impact of the Highly Improbable.

What makes something fragile? Taleb confessed to the audience that the answer eluded him throughout his 21-year career as an options trader. Then one morning as he drank his coffee, it dawned on him that the delicate porcelain cup in his hand was "like an option." What he meant was that both entities were ill-prepared for volatility. The options he was trading were as fragile as porcelain, ready to fall apart when first exposed to stress.