Sunday, November 29, 2015

Antifragility,Uber, and why licenses are bad for your survival


What is Antifragility?

If Antifragility could be explained in a sentence, Nassim Taleb probably would not have to write a book about it - a book which deserves to be read because it achieves what not many books do, namely, shifts your perspective on life while providing several hours of intellectual enjoyment. As with many other important things, antifragility is easy to define but difficult to explain.   In Talab’s words, “...the fragile wants tranquility, the antifragile grows from disorder, and the robust doesn’t care too much…the robust or resilient is neither harmed nor helped by volatility and disorder, while the antifragile benefits from them.”    I like to think about abstract ideas in practical terms, so  I think of antifragility as reaction to extreme temperature. Compare fragile glass that breaks from heat or freezing, robust ceramics that withstands both without changing, and antifragile carbon steel that hardens when heated and then cooled to become the famed Toledo steel.

Talab’s example: a tale of two brothers

Early in the book, Talab  illustrates antifragility in life by comparing two brothers. “John has been employed for twenty-five years as a clerk in the personnel department of a large bank, dealing with the relocation of employees around the globe. George is a taxi driver. John has a perfectly predictable income ...George, who lives on the same street as his brother, drives a black taxi— meaning he has a license for which he spent three years expanding his frontal lobes by memorizing streets and itineraries in Greater London, which gives him the right to pick up clients in the streets. ... Because of the variability of his income, he keeps moaning that he does not have the job security of his brother— but in fact this is an illusion, for he has a bit more. This is the central illusion in life: that randomness is risky, that it is a bad thing.
As in any tale worth its name, the unforeseen event intervenes.   The clerk loses his job when the bank crisis raises its ugly head, but the taxi driver is safe because his ups and downs taught him how to improve by constantly adapting to changed demands.  
Talab says that the clerk’s job is fragile because it is exposed to major disruptions in the bank industry.  The taxi driver’s job is antifragile because he is constantly challenged by small disruptions  to improve himself.
Talab leaves the two brothers at this point in their story, but life goes on, and here lies the catch. If you stop reading there, you can completely misunderstand Talab.  Antifragility is not about whether events happen - it is about its effect on you. “A Black Swan event and how it affects you— its impact on your finances, emotions, the destruction it will cause— are not the same “ting.”  ”  Real life event that happened after the book had been published shows the difference.

We are not afraid of a Big Bad Uber

Passing the tests, known as The London Knowledge, is the only way to become a London taxi driver.  Although London does not have the medallion system of large U.S. cities to limit the number of taxis, The Knowledge effectively limits the number of taxi drivers to people who can dedicate several years of their life to memorizing thousands of streets, places of interest, and routes, and passing a dozen of tests.  Now think about it:
  • GPS made the knowledge of streets and locations more than  obsolete because GPS is always up to date, or at least more up to date than The Knowledge.
  • Applications like Google Maps instantly recalculate the route if there is a traffic jam ahead. Using crowdsourced information from Waze, it knows the speed with which cars move along the entire route - something a taxi driver does not know.
  • Any teenager or his grandmother driving a GPS-equipped car know where the car is and what the next turn should be under normal traffic situation - without spending any time learning the route ahead of time.
In other words, GPS combined with Internet-connected phones and Google (or competitor’s) application makes The London Knowledge obsolete - and Uber, the ridesharing company, possible.  
Antifragility was published in 2012, the same year Uber expanded its service to London and disrupted brother George’s life.  Now every teenager and his granny, equipped with a GPS (sorry, sat nav - we are in London) and an Uber app, become potential competition to a taxi driver.
Does it mean that brother George the taxi driver  is just as fragile as brother John the clerk?  
Not at all. Both are vulnerable, but not in the same way and not to the same degree.  George has a fighting chance.

When you dam the river, the river changes its course (A Chinese proverb I just made up)

Brother John’s Black Swan event was not that rare - banks, as other companies, tend to collapse from time to time. Furthermore, even in good times they periodically acquire other banks, streamline workforce, rationalize headcount, outsource non-core functions, offshore, downsize, etc., resulting in overall decrease in back office - brother John’s -  jobs.   John’s fragility was both predictable and avoidable.  He  could pay attention to his surroundings  (he worked in HR, after all, and so knew which jobs were in demand and which were on a cutting block) and could acquire new skills to become more antifragile. His fragility was by choice.
Brother George’s story is different. He was reasonably antifragile, he did learn new skills and tactics, but he had one chink in his armor - a city government regulation, created in nineteenth century and rationalized by twentieth century absence of technology, was a determining factor in his industry even after the twenty first century made disrupting tools not only available, but also affordable.  George paid his dues to the system by passing the The Knowledge and expected it to protect him. Those who followed him into the profession  would have to pass the same tests. His reliance on the government in that respect made him fragile, and it nearly became his undoing.
History is chock-full of governments that stood like a rock while the river of life moved over, under, and around them, leaving those who relied on them high and dry, like sailors on  a beached ship after the flood had receded.  History is also  chock-full of government employees who lost their jobs (and sometimes their lives) when  government structures finally gave way.  Reliance on government stability is a major cause of instability.

Licenses: count the ways they fail you

London cabbies are not the only profession in danger of losing protection of omnipresent  anti-competitive licenses when disrupting technology moves in. Online applications that all but replaced licensed tourist agents, offshore businesses like medical tourism and remote X Ray readings  that erode medical business, AirBNB that disrupted hotel industry, and BonAppetour that disrupted Paris restaurants, make  mincemeat of local government protection by licenses.

Taxi Medallions: are they worth the tin they are made of?

London taxi drivers were undone by their reliance on The Knowledge, while their brethren on the other side of the pond, notorious for lack of streets and attractions knowledge, were undone by their reliance on  medallions - city regulations that limit the number of taxis.  Uber, Lyft, and their less known competitors moved in and restored the power of the free market.  Predictably, different legal challenges abound, but even if successful, they would  have the same shelf life as British Red Flag Act of 1865 which required all cars to travel at a maximum of 4 mph in the country and 2 mph in the city and a guy with a red flag walking in front.
The good thing is that George does not rely on his license as a sellable asset.  He is antifragile in this regard.  American taxi drivers that rely on medallions as a capital asset are not that lucky.  The price is coming down rapidly and drivers and investors who count on their values being protected by government regulations are not happy.

What the government approved, the government can revoke

Even if government regulation protects you now, it can change if the government’s interest changes.
Alexey Krylov,  a famous Russian mathematician, navy architect, and admiral, describes in his memoir how he negotiated the price of steel for rebuilding Russian Fleet after the Tsushima Battle with a steel syndicate that combined majority of private steel producers in the pre-Revolutionary Russia. The  quoted price was about 25% higher that the prices from the government-own mills that could not produce sufficient quantity of metal for the project. The syndicate's representative told Krylov that all its mills would quote the same high price,  because they had competitive advantage: “...we combine all private steel mills.”  In response, Krylov told him a story which comprised classical elements of a Russian business deal: family connection, vodka, taxes, Siberia,  government prosecution, fines and prison terms. He  finished with a veiled threat: “You can say that the government has approved your organization, but what the government approved, the government can revoke.”   In the following years, Russian government made many such changes, including revoking protection from mills, factories, and private ships, and then the Revolution of 1917 revoked the government.

How brother George can get back at Uber

Talab does not return to the tale of two brothers, but we can try writing the end ourselves.
What did brother George do when Uber disrupted his industry?  For him, it was a blow, but not a fatal one, such as a loss of a bank job was for a now unemployable brother John. George had experience dealing with disruptions. Like Toledo steel, he was hardened by previous fires.  After all, London taxi drivers who have The Knowledge also have more gray matter in their brain. While London cabbies were fighting an uphill battle against mini taxis and Uber, George sized the competition by trying Uber as a customer and figuring out its major advantages over his Black Cab business: ability to pay with a debit or credit card instead of cash and a availability of phone app to order a ride.  The first one, as a Yiddish proverb says, was an expense and so not a problem - joining half of other London taxis who did it before him, he promptly installed a card reader - something he was already thinking about. The second Uber advantage was more of a problem because Uber drivers were often minutes from the pickup point. George joined Gett and so also got an app.  It is still tough competition, but combined with his superior brain and twenty five years of experience driving on London streets, the new tools gave him an edge over moonlighting teenager and his granny - and incidentally, over other Black Cab drivers.  
All quotes from Antifragility are from  Taleb, Nassim Nicholas (2012-11-27). Antifragile: Things That Gain from Disorder (Incerto). Random House Publishing Group. Kindle Edition.