Black Swans

Nassim Nicholas Taleb's 2007 book, "The Black Swan: The Impact of the Highly Improbable", argues that "...the world is governed not by the predictable and the average, but by the random, the unknowable, the unpredictable. Big events, discoveries, and unusual people can have big consequences. Change comes not uniformly but in unpredictable spurts."

Obviously, no organization can be fully prepared to deal with anything that might occur. Not enough time or resources. So what can we do to improve our chances of survival, or better yet, gain an advantage?

Robustness and Resilience

The size of hit that an organization can absorb without failing is a measure of its robustness. At what point does it lose its ability to respond and survive? Some organizations operate so close to the edge that almost anything will take them out. Others are strong enough that almost nothing can succeed in doing fatal damage. How robust is your organization?

Resilience is a measure of the ability to recover from a major hit. It requires a high degree of adaptability and flexibility.

The Keys to Survival and Success

Uncertainties can be classified in terms of their impact on your organization. The impact is most important; the cause itself may often not matter much.

Some uncertainties generate financial stress and crises. If borrowing costs double, for example, it may not matter which event or process caused it. To you, the issue would be what level and type of financial stress and crisis are we prepared to be able to handle today?

Unknowable black swan events cannot be addressed directly since we no idea of their nature or timing. What we can do is increase our organization's robustness and resilience.

We have to identify points of vulnerability and determine how much of an impact we can withstand. Where this brings bad news, we can formulate actions designed specifically to strengthen us in these areas. These are the principal goals of planning for major uncertainties.

 

Taleb on Black Swans

“Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not. Based on their empirical record, they do not know more about their subject matter than the general population, but they are much better at narrating – or worse, at smoking you with complicated mathematical models. They are also more likely to wear a tie.”

"What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."