Unthinkable Black Swan– Impact of Highly Improbable Freak Events on Business: Reality of Unknown-Unknowns…

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Black Swan is a metaphor that describes a highly improbable, unpredictable event… the low-probability, high-impact events that are impossible to forecast or anticipate, which when they do occur carry a massive impact. The metaphor is derived from the assumption that all swans are white, and as such a black swan is seen as being unthinkable-unexpected (but, in fact they do exist)… the event is impossible to predict even with the most detailed and carefully calculated probability models… The concept is not new, in economics these events are known as– outliers; they sit outside the range of typical occurrence. In the book ‘The Black Swan: The Impact of Highly Improbable’ by Nassim Nicholas Taleb says; it’s an event with the following three attributes: First, it’s an outlier–as it lies outside realm of regular expectations– since nothing in the past can convincingly point to its possibility. Second, it carries extreme impact within its actual occurrence. Third, in spite of outlier status– we concoct explanations for its occurrence, after the fact, making it explainable-predictable... Bottom line; we can’t know what we don’t know… while it may seem hard to operate in unknown-unknowns environment, acknowledging you don’t know everything, but it can actually be advantage over people who instead go through business confidently  knowing the wrong things… According to Sachin Patel; difference between embracing ignorance and holding misconceptions as a shield won’t prevent black swanslearn how to plan and turn some them into– ‘gray swans’, which aren’t nearly as damaging…

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A company’s greatest challenge is to develop strategies that are flexible enough to adapt to unforeseen circumstances– improbable events– while sustaining corporate goals and objectives… According to Geary W. Sikich; this requires rethinking of– contingency plans, competitive intelligence activities, cross-functional relationships both internally and externally…We must begin to rethink business operations and focus on– ‘strategy at the edge of chaos’… This is not a radically new concept in management thinking; rather it recognizes that while strategic concepts are the foundation of management theory, appropriate strategic actions-responses do not always happen fast enough… Markets are not in a static equilibrium; markets and organizations tend to be reactive, evolving, and difficult to predict and control… Unpredictability is the new normal, and it can be positive or negative… Never under-estimate the impact of change (we live in a rapidly changing, interconnected world), inflation (not just monetary inflation but the inflated impact of improbable events), opportunity (recognize the ‘white swans’– main stay of the business), and ultimately the customer (who is often overlooked in contingency plans– customers retention)… Biggest single threat to an enterprise is staying with a previously successful business model, too long and not being able to adapt to the fluidity of situations (i.e., disruptive events)… The logic in black swan makes ‘what you don’t know is far more relevant than what you do know’….

In the article Preparing For Black Swan Events by Matt Atkins writes: While we may think of black swans as rare events, looking back over decades we can see they occur with more frequency than we might imagine. In the first years of the twenty-first century, for instance, black swan events have reared their heads on a frighteningly regular basis… especially in this age of rapid globalization and advances in communications, which means that events in far-flung regions of the world now have much wider impact… According to Fox; while companies may not want to spend a lot of resources preparing for perceived once-in-a-lifetime black swan events, organizations are aware of the need to prepare for dynamic and emerging risks that could impact their strategic objectives in a catastrophic way. Those random, seemingly unpredictable, unconnected events, trends and signals are being more formally integrated into a strategic risk management approach. Despite the severity of these issues, however, some organizations still fail to pay adequate attention to possible risks. An awareness of the hazard of improbable pandemics events does not necessarily result in any contingency planning…

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According to Williams; survey by the global insurance broker ‘Willis’ found that only 5% of respondents felt that their Board of Directors pay significant attention to black swan risks. Yet at the same time over 30% thought their company was vulnerable to severe impact from these events. Economic constraints also make it difficult for organizations, and governments, to contemplate investing in changes required to increase resilience for an improbable event… which may require re-examination and significant adjustment to their fundamental business models. Perhaps the ambivalence of many Boards to seriously plan for these types of risks are two-fold; low probability of an event, and the uncertainty of action in response… Indeed, the prospect of contending with perils of a black swan event can easily lead to frightened paralysis. Tackling the issue as a monolithic menace is, perhaps, the error of many organizations. Bolstering existing risk mitigation techniques and weaving risk management strategies into the cultural fabric of the company can help scale down the magnitude of an event… establishing continuity plans, preparations for communications… will show their worth in the worst possible scenario, but also minimize the impact in lesser ‘grey swan’ events that are more likely to occur. Black swan events, though rare, are inevitable and within a globalized world almost everybody– countries, companies, communities… feels some impact when they strike…

In the article Corporate Governance, Ostrich and Black Swan by Ed Konczal writes:  Simply put, a black swan event is one that has a low chance of happening but if it does the impact can be catastrophic. Underpinning black swans are some interesting philosophical and psychological factors of human frailties. Why don’t we acknowledge the phenomenon of these events until after they occur? Part of the answer, according to Nassim Nicholas Taleb; human beings are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time-and-time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to– simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the ‘impossible’… The costs of black swans can be daunting; dealing with these events is extreme risk management. The Board of Directors is responsible for oversight and the strategic direction of the company— not execution. This means Board members should take on a devil’s advocate role by asking C-Level managers questions such as– Have you considered all financial, strategic, ethical and risk issues? What is worst that could go wrong and how will you manage outcomes? Directors should increase their focus on risk, and engage more in detailed appreciation and understanding of the risks in their company… Black swans do, and will always, exist. Therefore, we must be much more alert to the fact that, even at the extreme end of risk possibility, things do actually happen… Companies must at least consider the possibility of an improbable event – and avoid the ‘ostrich head in the sand’ syndrome…

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Human brains are wired for narrative, not statistical uncertainty. And so we tell ourselves simple stories to explain complex thing we don’t and, most importantly, can’t know… According to Peter Jewett; when do you stop questioning the ‘possible’ and just deal with the ‘probable’? Eventually you must say: Okay, we’ve hit the point where we can’t justify spending more resources on further precautions given likelihood of an event happening. What’s the cost benefit of devoting time to figuring out what the unknowns are? It’s a delicate balance… today we face asymmetric threats that can include the use of surprise in all of a company’s operational and strategic dimensions… use of products-services in ways unplanned by organizations and markets served, or the prospect of a competitor designing a strategy that fundamentally alters the market… Perhaps these unpredictable, possibly improbable events are black swan in nature… and unsettling in that people concentrate on what they know and can extrapolate, versus looking outside their own experiences to try to fathom the unfathomable…

Business leaders need to venture past the norm– far past the norm… There-in lies the rub; business is geared toward the definable… the manageable… the here-and-now. So how can a company survive a black swan event? According to Nancy Green; you can’t prepare for the event, but you can prepare for the impact… for that, companies need to step out of their day-to-day operations and think in terms of institutional readiness for the future… Scenario planning— the practice of outlining various scenarios that can affect a business through changes– environmental, cultural, government… being retooled to think in broad terms about catastrophic unthinkable events. While a company can’t develop scenarios for every conceivable occurrence, it can look at possible outcomes and response to improbable events… According to Nassim Nicholas Taleb; these events are extremely rare or, in other words, have negligible probability of occurrence. However, if they do happen, they have a disproportionately major impact… But the question remains; how can business predict events that have major impact but are fundamentally dissimilar to anything that happened before– there ‘unknown unknowns’… to cope with such possibilities, business  would do well to heed Taleb’s advice; if’ analysis… explore what would happen to the enterprise if one of these unpredictable events continue to be a ‘black box’ for most companies…

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