Beware of Black Swans and Dead Elephants

20 Jan
January 20, 2016

In “The Black Swan: The Impact of the Highly Improbable,” author Nassim Nicholas Taleb contends that our belief in the predictability of events, based on what’s happened in the past, is so ingrained that we either overlook or can’t conceive of the fact that genuinely important events can’t always be predicted.

If, for example, as a life experience, you encounter one white swan, 10 white swans or 1,000 white swans, this does not in and of itself prove that all swans are white. But if in the course of encountering all these white swans, you come across one black swan, this definitely proves that not all swans are white.

Taleb argues that to rely on the observable—that which we’ve seen and experienced in the past—without acknowledging that there are black swans in life, is to ignore a very real risk.

Approaching this from a different point of view is Peter Bernstein, author of “Against the Gods: The Remarkable Story of Risk.” Bernstein cites the example of a Moscow statistician in World War II who declined to join other residents taking shelter in the subways as the Nazis were bombarding the city. With seven million residents, the statistician said, what were the odds of me getting hit by a bomb? Then one night seemingly out of the blue, his friends and neighbors found him alongside them in a fallout shelter during a night bombing. Why was he here now? Because, he said, there’s one elephant in the Moscow Zoo and last night they got the elephant. What are the odds?

What does this have to do with how you run your business? You might ask Tony Hayward, CEO of BP, or the investors who put all their money with Bernie Madoff, or the victims of Long-Term Capital Management, a hedge fund that collapsed spectacularly in the 1990s. Somehow they all failed to “imagine the unimaginable.”

As CEO of your business, have you ever asked yourself, What are the black swans and dead elephants I need to be thinking about? As I make major investment decisions, am I contemplating genuine risks or unconsciously avoiding them?

In my experience, business leaders generally fail to incorporate worst-case scenarios in their strategic planning process. After all, it’s in the entrepreneur’s nature to be an optimist and to cultivate a sense of invincibility—traits that are essential to business success—particularly when things are going well. However, to truly protect the assets you’re building, you should try to be acutely aware of both ordinary and out-size risks to your business. This needs to be part of the strategic planning process, so you have back-up scenarios or action plans in place in the event of disaster. Start with the worst possibility and work back to what’s within your control.

I think we can all agree that BP deliberately avoided contemplating the black swan and dead elephant, and the consequences have been catastrophic. The reality is, you need to be prepared for all manner of exigencies—from ensuring that your data is backed up offsite and having adequate insurance to simply keeping a defibrillator kit in your office.

Bottom line? It’s better to stay out of trouble than to get out of trouble.

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