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The Improbable Recurrence of “The Black Swan”

April 15, 2011

Nicholas Taleb’s 2007 book “The Black Swan: The Impact of the Highly Improbable” is continuing to find supporters in high places.  Having been the basis of Donald Rumsfeld’s infamous “unknown unknowns” speech, the concept has cropped up again in a recent speech by Dominique Strauss-Kahn, the head of the International Monetary Fund.  And again it seems the main lessons have been misunderstood.

Strauss-Kahn warned Washington students that “great uncertainty still prevails. Indeed, numerous black swans are now swimming in the global economic lake.”  Taleb argued that investors take too little account of unpredictable high-impact events.  But after noting the insight, Strauss-Kahn wandered off into more conventional forecasting territory, arguing that European countries need to do more to deal with their debt crises.

Instead of trying to build ever more sophisticated models which predict THE future, the key implication of the “black swan” concept is that the only thing we can predict is that the unpredictable will happen.  Furthermore, the increasingly electronically connectedness of the modern world magnifies the randomness and the scale and speed of its impacts.

Similarly, Tony Hayward, ex-boss of BP said, “BP was forced to make up its oil spill disaster response as it went along……..For BP this was the ultimate low-probability, high-impact event – a black swan. The whole industry had been lulled into a sense of false security after 20 years of drilling in deep water without a serious accident, till now”

But at SAMI we know that scenario analysis is a better way of dealing with such events.  Rather than finding the one solution, we help clients evaluate a wide range of events (and I’m pretty sure catastrophic failure would have been one of them).  They can then develop contingency plans for low-probability events which can be implemented immediately, rather than “making it up as it went along”.  As Gill Ringland, Oliver Sparrow and Patricia Lustig argue in their book,  “Beyond Crisis”, organisations can then also build ways of learning and direction setting which maintain responsiveness and flexibility.

Strauss-Kahn and Hayward need to be thinking less about the prevailing orthodoxy of the markets and industry, and more about planning for alternative futures.

Written by Huw Williams, Associate of SAMI Consulting

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