Thursday, August 20, 2015

Your Personal Fragility Inventory Tool

In yet another great post, Gordon over at pointed to this article by our secret mentor (secret from him anyway) Taleb. This article was already on my radar (I Internet stalk Taleb) but the comments in Gordon's post really got me chewing on what Taleb is pointing out here. In the comments, weaver expressed an interest in using the Black Swan concept to apply at a personal level.

Of course I'm about that idea! This was going to be a response to his comment, but it got waaaay too long, so for weaver and anyone else whose interested, here's a tool for identifying how fragile your own situation is, based on Taleb's five criteria for determining the fragility of a political entity:

1. Centralized Decision Making
"The first marker of a fragile state is a concentrated decision-making system. On its face, centralization seems to make governments more efficient and thus more stable. But that stability is an illusion." ~ Taleb

How much of your own decision making comes from a small or centralized source?

Do you get your news from a single media source? 
From a single country? 
From a single location on the political spectrum?
At a single granularity (all national, all local, etc.)?

Household structure:
In your household are certain decisions made by a single person?
Does everyone in the household have input into key decisions?
Do you reach out to trusted mentors or advisers outside the household for input?
Are people in your household allowed to disagree and have separate spaces to express differences?
Are you allowed to disagree with yourself and apply your decisions differently in different situations?

Do you make decisions based on heuristics (rules or guidelines) without ever reevaluating the heuristic?
Do you have automated systems for decision making in place but never revisit those automated systems?

2. Lack of Economic Diversity
"The second soft spot is the absence of economic diversity. Economic concentration can be even more harmful than political centralization. Economists since David Ricardo have touted the gains in efficiency to be had if countries specialize in the sectors in which they hold a comparative advantage. But specialization makes a state more vulnerable in the face of random events." ~ibid

How much of your personal economy comes from a concentration of inputs? In order to see a Black Swan coming (be the Farmer, not the Turkey) you need to be looking with the widest eyes possible.

Is your career field growing or shrinking in general?
Can you apply your skills across a range of positions in different industries?
Does your career have multiple development paths?
Can your career be overly affected by outside events like currency changes or industry downturns?

Does your household have a single source of income?
Are there options to leverage other sources of income?
Can you reduce spending if needed and do you know how much (reducing spending is a form of income in terms of balance sheet)?

How localized is your economic situation?
How much of what you need is created or generated near you?
How much comes from far afield?
Is your career or job localized? Can you be replaced by someone in another country?

3. Debt and Excess Leverage
"The third source of fragility is also economic in nature: being highly indebted and highly leveraged. Debt is perhaps the single most critical source of fragility.
" ~ibid

How much debt do you have? This is an obvious one -- debt is bad. But assuming you have debt, you can still rank it's risk and severity.

Debt Load:
Do you have debt?
How much?
Can you pay it off, if so how long will it take?
If not, what does that mean?
Are you considering all your debt (annual contracts, future payments)?

Characteristics of Debt:
Is your debt collateralized (attached to a real asset like a house or car loan)?
Does the asset appreciate or depreciate over time (and how much time)?
What is/are your interest rate(s) and how are they calculated?
What is your real payoff amount?
What are your payment characteristics (how much principle, how big of a payment)?
What's the fee risk (what happens if you can't make a payment)?

Cash Flow:
What's the difference between your income and outgo (is it positive or negative)?
How much of your income is going to debt each month?
How much will have to go toward debt in order to pay it off in a year, five years, 10 years?
Do you have adequate cashflow for day to day needs? For moderate emergencies?
Are you protected against major emergencies (insurance)?

4. Change
"The fourth source of fragility is a lack of political variability. Contrary to conventional wisdom, genuinely stable countries experience moderate political changes, continually switching governments and reversing their political orientations." ~ibid

You don't necessarily express changing political variability, but you do have the opportunity to express variability in your life. Taleb talks about how variability in sleep patterns, exercise intensity, and diet are good for our biological systems.

Tolerance for Change:
How much change can your household tolerate?
Are habit-driven systems created for convenience fragile to any change?
Are you over efficient and lacking in redundancy?
Are the people in your household generally comfortable with change or uncomfortable?
Do you have outside dependencies (like medical restrictions) that limit the change you can tolerate?

Acceptance of Change:
Do you take advantage of options to do and experience different things?
Do you shake up your schedule and adjust to circumstances?
Do you try new things in the realm of diet, hobbies, exercise, entertainment?
Have you moved to a new location before?

5. Recovery from Recent Shocks
"The fifth marker of fragility takes the proposition that there is no stability without volatility a step further: it is the lack of a record of surviving big shocks. States that have experienced a worst-case scenario in the recent past (say, around the previous two decades) and recovered from it are likely to be more stable than those that haven’t. " ~ibid

Human lifespans are shorter than the life of a country, but a country's memory can be short because of the limitation of the human lifespan. The amount of shocks you've survived in, say, the last decade are a good indicator of your current stability.

Have you Survived Any of the Following:
Death in the family?
Major illness or accident?
Job or career loss?
Catastrophic economic downturn?
Car accident?
Unstable housing?
... and any others you can think of...

Survived means that you are back stronger, experiencing post-traumatic growth rather than stress. It doesn't mean that you are literally back to where you were before.

According to Taleb you can't tell whether a Black Swan is coming but you can tell how fragile you are to one. While I disagree that you can't see things coming, I agree that understanding your own fragility is extremely important for mitigation purposes.

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At August 21, 2015 at 4:36 PM , Anonymous Trey said...

Very cool post! Made it here from Rune Soup. :)

Thanks for breaking it down like this, it's very thought-provoking.

At August 21, 2015 at 7:45 PM , Blogger Ivy said...

Welcome! Glad to have you here. Taleb's work seems highly applicable to the personal (and magical) as well as the larger economic and political.

Though writing this up made me more cognizant of the weaknesses in my own household!

At August 22, 2015 at 12:44 AM , Blogger weaver said...

ivy, this is great stuff and exactly the kind of processing I was referring to - though I didn't break it down nearly so succinctly and I think what you have laid out here is extremely helpful. nice to become better acquainted with a fellow traveler (over on rune soup I am *always* nodding away at your comments) thanks :)

At August 22, 2015 at 7:02 PM , Blogger Ivy said...

Thank you! You comment about micro-level black swans really struck me as exactly the right way of putting it. And doing the inventory myself was a great exercise in self-reflection (and humility).

At August 26, 2015 at 8:16 PM , Blogger Satiricismus said...

'I Internet stalk Taleb' - That comment was good enough to move The Black Swan off the requests on hold at the library and into the active requests pile. Now I'm up to chapter four, and now there is a sense of 'then my mind split open', as the song says. I should have known that certain intellectual suspicions I hold could not be held by me alone. But, if you're not really listening, you're not hearing anything. You need to be tuned into the wavelength.

I know now that I am going to have to get a copy of Black Swan for my own. I should have read it years ago.

Interestingly enough, I picked up a copy of Taleb's The Bed of Procrustes for almost nothing at a fund raising sale about a month ago. That too gets moved from reserve list to the active.

Sometimes I find that a great book comes to me at the wrong time and something doesn't really click. Personal changes, the amalgamation of several several intuitions, and the work that you have been doing here have made it certain that the time is right for me to take this train of thought and see where I get off.

Thanks for the post making Taleb's observations personal and actionable. Thanks for the intellectual shake awake.

At August 27, 2015 at 12:06 AM , Blogger weaver said...

I've enjoyed taking it a step further and referenced your profile in my latest:

not so great at social media as I should be but I will be looking to connect with you in google and linked in, if that is ok.

At September 3, 2015 at 12:32 PM , Blogger Ivy said...

Note to self: learn more about superforecasting. Thanks!

At September 3, 2015 at 12:32 PM , Blogger Ivy said...

Thanks so much!


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