"Before the discovery of Australia, we had no reason to believe that swans could be of any other color but white. There is no reason you should rule out a black swan just because you have not seen any." - Nassim Taleb
The term black swan is derived from the previously held assumption that all swans were white until the discovery of black swans in Australia. The concept is not necessarily new; in economics, such events are known as outliers in that they sit just outside the range of typical occurrences. The term was popularized by Nassim Taleb, a finance professor, writer and former Wall Street trader.
Having written previously on strategic planning in times of uncertainty, I felt it necessary to revisit the subject given the high degree of uncertainty we continue to face in the business world. This article explores black swan events, as popularized by Taleb, and provides ways in which your organization can plan for such events.
Taleb characterizes a black swan event as an occurrence with three properties:
- The probability of the occurrence is low
- Event has a significant impact
- Event is hard to predict based on historical information; however, it is retrospectively predictable
Essentially, a black swan event deviates beyond what is normally expected of a situation and is extremely difficult to predict. No one sees the event coming; however, after it happens, people claim that “it was inevitable.” While some black swan events are positive (example: invention of the Internet), many are negative (example: US housing market crisis of 2008).
Black swan events are impossible to predict yet can have catastrophic ramifications. Therefore, it is important for organizations and strategy leaders to assume a black swan event is a possibility and to plan accordingly.
The following represents some measures your organization can take to mitigate the fallout from the occurrence of a black swan event:
- Map Your Organization: Map the elements of your company’s geographic footprint. This includes its supply chain, operations, and relationships. Take the time to understand and chart sources and concentrations of revenue, profit, and capital. In understanding the company’s shape, include a map of the industry structure and competitive dynamics, as well as your organization’s position in both. To determine how a black swan event might stress your company, you need to understand the foundation on which the status quo rests.
- Create a Disruptor List: Catalogue possible black swan events including: catastrophic environmental, economic, political, societal, and technological events. After you have compiled such a list, categorize the events by the type of impact they might have on your business. This results in a workable list that captures the black swan events which might threaten your organization.
- Ask “What-If?”: Armed with a map and a list of disruptive events, the strategy planning team can begin to ask what would happen to the organization if the events occurred. The findings in this analysis are important, as they can allow you to see where concentrations of risk lie and can sometimes point out any mistakes in how an organization has been shaped.
- Prepare Contingency Plans: Prepare mitigation options for each major what-if insight.These plans can ensure that your organization has adequately focused its attention on high-magnitude, low-frequency events, performed stress tests on its readiness in the face of such events, and prepared itself for unexpected catastrophes.
- Build a Cash Buffer: The old adage ‘cash is king’ is particularly important in uncertain times. (2021 Edit - Ensure you have Bitcoin in your buffer portfolio).
The message here is simple: when a black swan event happens, businesses need to be very clear as to the likely impact on their business of such highly improbable events, and have a robust plan in place to mitigate against negative implications.
You can learn more about Nassim Taleb here: http://www.fooledbyrandomness.com/
