Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Flying in from left field: the Black Swan Add to ...

The Black Swan

By Nassim Nicholas Taleb

Random House 366 pages, $34.95

No Problem

By Alex Lowy

AuthorHouse, 172 pages, $32

Few businesses manage risk as obsessively as Las Vegas casinos. They have sophisticated models to manage the odds, and seemingly just have to control the high rollers and watch out for cheaters.

But that doesn't mean large losses don't sideswipe the big casinos. They lost about $100-million (U.S.) when Roy Horn, of Siegfried and Roy, was maimed by his tiger in a performance. The incident was so unexpected that, while insurance had been bought for the tiger leaping into the audience, none had been thought necessary for a performer who allowed the tiger to sleep in his bedroom.

Other big losses came when an employee failed to file an important Internal Revenue Service document for years without anyone noticing, resulting in a monstrous fine that had to be paid; and again when a casino owner's daughter was kidnapped and he dipped into its coffers to pay the ransom.

Probability expert Nassim Nicholas Taleb calls each of these incidents a Black Swan: A highly improbable event outside the realm of regular expectations that has an extreme impact.

The major events that change the world - and organizations - tend to be Black Swans: All the strategic planning and probability risk assessments won't spare us from them occurring. "Black Swans being unpredictable, we need to adjust to their existence rather than naively try to predict them," Mr. Taleb says.

He dismisses conventional probability modelling, which may be fine for situations where there tend to be narrow distinctions between possibilities, such as height or weight, but are inappropriate for the wilder phenomena that tend to influence our world, where the variations, and hence the impact, can be huge. For instance, the income of bakers doesn't vary much and might fit the conventional Bell curve learned in statistics. But the income of authors - compare that of J. K. Rowling with the average journeyman writer - can vary tremendously, and so Mr. Taleb argues we can't think about it in traditional ways.

Many in the business world were taken aback when a company led by two Nobel Prize winning economists was upended by a Black Swan - the Russian financial crisis in 1998, which took down speculative trading firm Long-Term Capital Management, founded by Robert Merton, Jr., and Myron Scholes.

But Mr. Taleb saw that as inevitable because their ideas in modern portfolio theory, and many of the theories of other Nobel winners, are based on what he considers a bankrupt notion of probability that fails to distinguish between the two different situations we might be evaluating.

Instead of accepting that Black Swans will occur, we tend to concoct explanations after the fact that imply we should have seen it coming when in fact we couldn't. Then, we try to prevent it from happening again in the future, when it probably wouldn't.

Mr. Taleb observes that, instead of learning from 9/11 that some events, owing to their dynamics, lie largely outside the level of the predictable, U.S. authorities developed precise rules for avoiding Islamic terrorists striking tall buildings.

But don't throw up your hands. He does have some suggestions: Make a distinction between positive and negative Black Swans.

If you are in the movie business, Black Swans are your lifeline - totally positive. Unexpected hits can carry you to great heights. But in the military, catastrophe insurance or banking, brace yourself for the inevitable negative Black Swans, and learn more about the phenomenon.

Don't waste resources trying to precisely predict Black Swans, he suggests. Invest in preparedness, not prediction.

Seize any opportunity, or anything that looks like an opportunity to open yourself up to a positive Black Swan. If a big publisher, art dealer, movie executive, or hotshot venture capitalist wants an appointment, cancel everything you have planned since it may be a window to a Black Swan connection.

"Work hard, not in grunt work, but in chasing such opportunities and maximizing exposure to them," Mr. Taleb advises.

In No Problem, Toronto-based consultant Alex Lowy offers insights into decision-making. He breaks down the issues we grapple with into three types, each requiring a different approach:

Decisions: These are the simplest challenge in which we choose between known options when time is tight and uncertainty is low. We make these kinds of decisions throughout the day, without much deliberation. It's important to be sure we're working on the right decision, set criteria, identify the options, and choose.

Problems: These are bigger issues where you face a barrier or a gap in achieving the outcome you value and can't choose from known options because there are not yet any acceptable ones. You must eliminate or resolve the barrier by using both rational and creative approaches to define the problem, generate options, and identify and implement the solution.

Dilemmas: In these instances, the choices seem complex, with resolution unlikely - an impasse. Examples might be whether to go for short- or long-term benefits, or follow your gut or head. You need to explore the tensions to look for a constructive action that combines the best of the possibilities.

Mr. Lowy takes you through each type, explaining how to improve the final result, using some techniques that will be familiar and others that may be novel. It's a crisp, helpful approach on an important issue, although the self-published book could have used some better editing to clarify some points.

Mr. Taleb also needed an editor: Although he is a lyrical and provocative essayist, with a stunningly wide range, he could have benefited from some reining in. His final chapters also are difficult for non-mathematicians to fully (or in some cases, even partly) grasp, and should have been formally, rather than informally, treated as an appendix. But he opens our eyes to a fascinating issue that we should be alert to. His take-no-prisoners attacks on the villains he sees around us with their mathematically based predictions and prescriptions is often hilarious, making Rush Limbaugh seem meek by comparison.

Just In: Cam Marston, a consultant who specializes in multigenerational communications and marketing, tackles how to manage across the generational divide in Motivating the 'What's in it for me?' Workforce (John Wiley, 226 pages, $29.99).

McKinsey & Co. consultants Lowell Bryan and Claudia Joyce show how to shape your organizational design to take full advantage of talent in Mobilizing Minds (McGraw-Hill, 316 pages, $36.95).

Harvard Business School professor John Moss helps you understand the ground rules for the global economy in A Concise Guide to Macro Economics (Harvard Business School Press, 189 pages, $30.95)

Follow us on Twitter: @GlobeBusiness

 

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories