Friday, September 27, 2013

Is it possible to prepare for and deal with Black Swans?

Dealing with low-probability, high-impact events that are impossible to forecast or predict is really tough.

According to Nassim Nicholas Taleb (HBR October 2009), managers make 6 common errors when confronting risk:
1.They try to anticipate extreme events.
2.They study the past for guidance.
3.They disregard advice about what not to do.
4.They use standard deviations to measure risk.
5.They fail to recognize that mathematical equivalents can be psychologically different.
6.They believe there's no room for redundancy when it comes to efficiency.

According to Taleb, banks have a tendency to sit on time bombs while convincing themselves that they are conservative and nonvolatile. Furthermore he blames the science of risk management for causing this behavior, and business schools and the financial economics establishment for having a vested interest in promoting risk management models and devaluing common sense.

On this page, you'll find a very good summary of Taleb's Black Swan Theory and a quite lively discussion forum too. Topics covered include:
- How Fragile is your Organization?
- How to Prepare for Black Swan Risks?
- Noise to Signal Ratio in Decision-making
- The Role of Statistics in Predicting Black Swans
- The Role of Entrepreneurs in Antifragility at Society Level
- The Role of Experts in Causing Black Swans
- Decision-making in Uncertain Circumstances
- Fat Tony and Dr. John ...
- Causes of Black Swan Risks
- How can Scenarios Help to Prepare for Black Swans?
- Building Robust Systems
- etc