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January 2013

Dancing with Elephants: Antifragile

My most recent during travels last month was “Antifragile” by Nassim Taleb.  I am a real fan of Taleb’s writing having first read his second book “The Black Swan” and then going back and reading his first book “Fooled by Randomness”. Black swan

Taleb is by Wall Street standards a “Quant” but feels more like a philosopher.  His basic premise – based on probability theory and statistical facts – is that life is ruled by infrequent unpredictable large disruptive events (“Black Swans”).  Whether in the financial world – stock market crashes, financial crisis, real estate bubbles and so on that happen unpredictably but the fact they will happen again in the future is quite predictable.  Randomness also plays an outsize role in personal life from how you ended up in your first drop, to how you met your spouse, and how you came to live where you live today.  In Antifragile, Taleb goes beyond showing how people manage the small things but are caught by surprise and randomness when it comes to life’s most important choices – that there are some things that react positively to unpredictability.  The prime example is life and evolution.  Dramatic changes in an environment drive evolution of species – and rapid change making species stronger.  Lack of environmental change results in fragile organisms that more easily go extinct.  Antifragile systems are also characterized by having many small failures that enable the system to adjust without going through unpredictable but certain to happen massive disruptive events.  For example, large markets with many buyers and suppliers can see several buyers and sellers fail with little impact on the system as a whole – and in these many small failures strengthen the surviving market players.  We hear this almost daily in discussions about what to do about large banks that are deemed “too big to fail”.  A few large banks with a large percentage of the banking industry are fragile whereas hundreds or thousands of small banks are not.  

Business platforms and ecosystems – to some degree - is also an example of an Antifragile system.

It’s about Shared Risk and Diversity

Platform providers develop and nurture a community of innovators by providing innovators technology that reduces the cost and risk of innovation.  Innovators get to market faster and at a lower total investment by leveraging the platform provider.  The faster time to market and lower costs also gives the innovator greater flexibility to change the direction of their business and/or pursue new ideas.  The lower cost of starting and building a business based on someone else’s platform technology also makes it more feasible for an innovator to bootstrap their business and avoid the risks in giving away ownership/equity/control of their business.  Innovators are reducing financial and technical risk by being able to more quickly and cheaply get their app to customers by leveraging the platform provider.

The platform provider gets innovation driven by diversity based on their platform. As if you were playing roulette, instead of having to place a few product and technology bets, the platform provider uses an ecosystem to cover the whole table with bets of varying sizes.  The platform provider will have to share the value of success (customer’s money) with their partners – but that is part and parcel of the platform and ecosystem strategy.