Eating Black Swans one bite at a time

Nassim Nicolas Taleb's best-selling essay, The Black Swan: The Impact of the Highly Improbable (Random House, New York, 2007, 400 pages) is a huge feast for thought (hence the post title).  In this post, I'll explain Taleb's basic concept, give some examples, and then suggest some implications for business owners and executives.  I'd love to hear what implications you draw from Taleb's ideas.

Taleb's book is about uncertainty and prediction - what we can know and what we cannot know.  Whereas most of us view the world as following the bell curve, with results centered around an average and tailing off quickly above and below the average, Taleb thinks the world is dominated by extreme events that fall well away from average.  These events he calls Black Swans.

A Black Swan event has three characteristics:

1. It is an outlier - totally unpredictable based on previous experience.
2. The impact is extreme - well beyond "the norm."
3. After the fact, we invent "explanations" for the Black Swan that end up driving poor decisions.

Examples of Black Swans:

• Sales of the Harry Potter book series by J. K. Rowlings.
• 9/11.
• Hurricane Katrina's devastation of New Orleans, and the poor response afterward.
• Blog readership, where the curve is decidedly not bell shaped - a very few blogs account for the majority of blog readership and where the winners could not have been predicted ahead of time.
• Taleb offers a nice illustration of a Black Swan event.  Picture the turkey that spends three years of its life being fed all it wanted by the turkey farmer.  Nothing in its past would lead a turkey to expect the surprise that occurs one morning, when the farmer kills the turkey in order to sell it for Thanksgiving dinner.

Read the book if you would like a deeper understanding of this idea, and especially to understand Taleb's hypotheses for the causes of the Black Swan phenomenon.  In the balance of this post, I'll deal with implications for you and your business.

Implications

• The events that matter in your business (and your life) will be Black Swans - totally unpredictable and huge in their impact.  Don't try to get better at prediction. Instead, invest in preparedness.  Build your ability to deal with whatever comes.
• Think about the worst case, then imagine if things were ten times as bad as that.  Then figure out what you can do today to ensure your survival (or "thrival") if that worst case does actually occur.
• Use Potential Problem Analysis (PPA) - you may not identify the Black Swan that actually hits, but PPA will lift your general level of preparedness and vigilance.
• Black Swans can be good (Google) as well as bad (Enron).  Maximize your exposure to potentially good Black Swans.  Avoid exposure to potentially negative Black Swans.
• There are two kinds of experts - those who know "how," and those who know "what."  Trust those who know "how."  They are true experts.  Avoid those who know "what" - because they really know a lot less than they think they do.
• Study failure as well as success.  Taleb would suggest that we could find many leaders who acted just like Jack Welch.  Why did he succeed where others did not?  Probably luck.  Why didn't they succeed?  Probably luck.  But we'll never know, because nobody studies failed CEOs.
• Reward those who prevent problems from occurring - not just those who clean up after Black Swans.
• Ignore what the media says each night about stock market moves.  Taleb reports that the ten biggest days (over the last 50 years) account for half of the gains on the S&P 500.  What happens each day is just noise.
• Ignore predictions by "experts."  We can't predict the price of oil next month.  Why should we trust predictions about the Social Security System 50 years in the future.  Instead, think about and prepare for the possibility of a worst case outcome.

Have you read The Black Swan?  What implications did you draw from your reading?