The Black Swan
Before the discovery of Australia, people in the Old World believed that all swans were white. A common belief since it was confirmed by empirical evidence. The sight of a first black swan may have been interesting to a few ornithologists, however, it conveys our severe limitations to our learning from observations or experiences and displays the fragility of our knowledge.
In Disaster Management, Taleb describes a black swan as an event meeting 3 criteria:
1. It is an outlier, as it falls outside the realm of regular experiences.
2. It carries an extreme impact.
3. Human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
Despite planning, strategizing and preparing for the unknown, many organizations are still taken aback and lead to harsh consequences. The Black Swan is an event that changes an individual, a community and the world that watches it unfold. Anyone who may have witnessed the event will never look at the world the same again.
A number of Black Swans explain almost everything in the world, from the emergence of religions, to the dynamics of historical events, to elements of our own personal lives. Black Swans have been significantly increasing since the Industrial Revolution, merely because of our tendency to depend on the more complicated. The combination of low probability and high impact is what makes The Black Swan a great puzzle. Consider the limits of our imagination with the rise of Hitler and the subsequent war? The spread of the internet? Or the consequences of the rise of Islamic fundamentalism? 9/11? Fukushima?
Taleb argues the only way to manage these events is to become anti-fragile and robust. In order to become resilient to prediction errors and protected from such events, it is suggested that proactive research and knowledge be obtained from predictions to prevent or lessen the consequences.
A Black Swan event is an event that defies prediction and provides a shock factor that reverberates across the World, often times an unforeseen tragedy. The characteristics that follow a Black Swan are:
Emergency response and finding a solution to the disaster are completely different aspects to the problem. Often times it is not just responding to the issue, but rather finding ways to fix the problem at its core.
Causes of the problem may not always be obvious, therefore requiring further research and development to create a novel solution. The solution may not be clear at first and may require several attempts to come up with one best suitable for the organization.
Productivity within the organization may be hindered as employees may be distracted, concerned and uncertain within the work environment.
When a Black Swan occurs, the World never looks the same again. The 9/11 attack in 2001, the Lehman brothers bankruptcy in 2008, the BP oil spill that occurred in 2010 and the triple disaster of Fukushima in 2011 are no exception to Black Swan events. The question is, how can we overcome and possibly avoid these events from happening again?
Managing Black Swans
Looking at the pattern of events that occurred in the past, there is no way to determine whether a Black Swan will happen. Black Swans are usually outliers, meaning nothing in the past can point to its occurrence of it happening in the future. Human nature, however, has a tendency to create explanations for these events, making them explainable and predictable from happening again.
Research on different strategies regarding managing Black Swan events have predominated the Disaster Management industry, questioning the occurrence, the severity and the smaller warning signs that could eventually snowball into larger impact. Keith Dodson and Richard Westney provide the best way to determine the predictability of Black Swans in major industries, organizations or projects. “Aggressive ignorance” of major projects could be the reason why failures occur, especially if management is confident in data, methods and decision making processes that overlook the possibility of risk consideration. In fact, the more extensive and sophisticated the data and processes are, the more likely it is to miss things that are important. Dodson and Richard provide a 5 step process that assess and help project stakeholders to proactively manage Black Swan threats. The steps are:
Risk Framing [Hunting the Black Swan]: Risk Framing is performed early in the process. The objective is to provide an early indication of the nature and severity of project risks. Effective risk management requires executive or authoritative level of attention in order to assess the risks of outliers. Risk Framing begins with Risk Discovery, a process that requires checklists, research, interviews, and key knowledge holders to identify possible risks and required mitigation processes.
Risk Strategies [Caging the Black Swan]: By identifying and understanding potential threats and risks, managing them becomes easier. “Caging” the Black Swan refers to developing strategies that avoid the risk, mitigate impact, and provide the funding for risk coverage.
Risk Assessment [Understanding the Black Swan]: The objective of risk assessment is to provide a probabilistic analysis of capital cost and scheduling, reflecting both tactical and strategic risks.
Tactical Risks [Estimate, including contingency] + Strategic Risks [Risk Exposure] = Risk Conditioned Investment Value
Risk Brokering [Feeding the Caged Black Swan]: Independently allocating risks or risk cover.
Risk Validation [Taming the Black Swan]: During the last phase, Black Swan risks need to be managed in accordance to the plan, as well as in monitoring conditions in updating Risk Scenarios and Risk Exposure.
Other researchers believe that the nature of the Black Swan is so unpredictable that the only way to prepare for it is to prepare for the impact it may cause. The strategy mentions that the only way of dealing with a Black Swan is not just responding to the event effectively, but rather set the stage for the psychological impact of an event with overwhelming proportions, otherwise known as “survivor psychology”. To prepare for the event, it is important to recognize the extensiveness of the event and how devastating the impact can be. In addition to survivor psychology, the strategy includes:
Assembling a Black Swan Response Team
Establishing research and development as well as engineering perspectives
Improving risk agility
Life is full of uncertainties. Perhaps its time to divert our attention from the usual. If you want to get an idea on a friend’s temperament or ethics you need to look at him/her under severe circumstances, not under the regular glow of daily life. Similarly, we find ourselves understanding health substantially by examining what constitutes wild diseases and epidemics. The normal is often irrelevant, or rather, Great Intellectual Fraud.