Browsing through my books during the holidays, I came across one on comparative Western and Chinese philosophy that had an old saying: "Every Chinese person is a Confucian when everything is going well; he is a Taoist when things are falling apart; and he is a Buddhist as he approaches death."
Chinese culture is like a pyramid of worldviews. The earliest was animism; the Book of Changes taught two sides to every story; Confucianism was about knowledge of self; Taoism about following the natural way; Legalism about ruthless pragmatism and order; Buddhism about letting it go. In the 20th century, China imported Western influences, from Marxism to science.
It is commonly believed that the Chinese think differently from Westerners. Western minds are considered logical and scientific, whereas the Chinese mind is supposed to be elliptical, contextual and therefore relational.
Chinese thinking tends to sees things within context and history, probably because the fount of its philosophy is the Book of Changes, which is dialectic in essence, seeing the world as emerging from the conflict and synthesis of opposites.
Western intellectual tradition stems primarily from Greek Aristotelian logic, which is linear and reduces complex ideas into principles that could explain and predict the future. Aristotelian logic prevailed in the West until the German philosopher Georg W.F. Hegel developed dialectics based on the concept that everything is composed of contradictions, with gradual changes becoming crises.
Karl Marx built on this, viewing historical change through class struggle and dialectic materialism, whereas Mao Zedong fused Marxism into Chinese agrarian reality to form a theory of revolutionary knowledge through practice.
In the 20th century, natural science began to evolve away from the social sciences, and quantum physics, quantum mathematics, biology and information theory began to explore ideas of change through the synthesis or erosion of opposites. This is much closer to the Chinese and Indian views of the world in constant change.
What has been missing so far has been a synthesis of the two divergent worldviews.
In his new book, Antifragile: How to live in a world we don't understand, Nassim Taleb, the author of The Black Swan, introduces option theory as a tool to bridge dialectic thinking with mainstream "bell curve" statistics. The bell curve distribution is a tool for decision-making in mainstream social science. Social scientists look for statistical significance in the high-probability (95 per cent) or "robust" zone of the bell curve, tending to ignore low-probability events (2.5 per cent each) in the long tails.
By ignoring the long-tail events that occur rarely but have a large impact, mainstream economic thinking misses systemic events - like the 2008 financial crisis. There are of course the "bad" Black Swan events that create systemic damage, but the upside is the "good" events that may compensate for the bad.
Intuitively, Taleb has reframed Chinese philosophy in modern mathematics. What he calls the "triad" of exposures - fragile, robust and anti-fragile - has an analogy in the Chinese trinity of female ( ying), golden mean and male ( yang).
The Confucian concept of golden mean seeks to take the safe middle path. But Taleb's insight shows why this approach runs into trouble, because it ignores the uncertainty of Black Swan events. Prudence prevents the practitioner from adopting "anti-fragile or (good) high-risk, high-pay-off" strategies that would compensate for the bad Black Swan events.
By not taking risks, Chinese dynasties became closed societies that imploded when disaster struck. In contrast, in the run-up to the Industrial Revolution, Western societies took large risks with high pay-offs in science and technology, and even through colonialism.
The easiest way to think about options and anti-fragile strategies is in stock market investment. Suppose you adopt a conservative strategy that follows what the market does on average. If the market suddenly drops 30 per cent, and your portfolio declines by 30 per cent, you will never recover your capital if you continue to follow a golden mean strategy. To recover or do better, you have to take small bets on risky shares that are anti-fragile, meaning that if they win, they win big.
"Anti-fragility" loves volatility. Making small mistakes will avert the occurrence of large mistakes. The more you try to be stable, the more unstable you become; as Keynesian disciple Hyman Minsky put it, stability creates instability.
Taking non-linear options on high-risk, high-return ventures was exactly what Deng Xiaoping did in his reform and opening up strategy. He knew that the risks of failure were high (and unknown), but he opted to open up new development zones, and the new policies created new pay-offs and growth areas that were not imagined by the critics.
In 2013, Deng's successors may be looking at new, anti-fragile options.
Andrew Sheng is president of the Fung Global Institute