Expect the Unexpected

There is a profound article in the April issue of Fortune Magazine (Wall Street Special Report) featuring an interview with Nassim Nicholas Taleb who previously authored Fooled by Randomness and is now releasing The Black Swan. While the interview focuses on economic black swans (unlikely but not impossible events like the bursting of the tech and sub-prime housing bubbles), his concepts are very applicable to workflow and business process fundamentals.

Expect Volatility

Taleb describes black swans as unexpected (seemingly unpredictable) events that have great consequences. He explains that some businesses are fairly insulated from these events while others (like banks) are constantly exposed to expansive and expensive risks. Some of these unexpected events are very positive and lead to breakthrough innovation or the opening of new markets while others are very negative (see Bear Sterns). He describes “gray swans” as those conditions that lead to fairly predictable outcomes and gives the example of a turkey having been fattened by the butcher for a year being surprised when the butcher shows up with an axe. Our organizations cannot afford to think that time-bombs aren’t volatile. Eventually, they blow up.

Models can be Part of the Problem

His approach is to think outside the model. We have to think in terms that escape logic where potentials exist beyond our own data. If we fail to consider far-flung possibilities, we are sitting ducks (or swans). Some people resist this kind of abstract thinking and want to rely entirely upon the data they have on-hand when considering risks. I happen to agree with Taleb that models predicated on what you know are inadequate where risk management is concerned. Sometimes, the catastrophe that hits us contradicts all of our best modeling.

Setting our Intentions

I believe some people fail to expect the unexpected because they don’t want to contradict their own motives. In the case of banks and the sub-prime market, greed was the motive that outweighed any consideration for the black swan that visited the housing market. In this case, frankly, everyone had all the data they needed to expect the outcome. We just preferred to avoid thinking about it and agreed to a model that selected for data that supported our hopes.

What to do?

I work with a client who failed to heed the possibility that their budget would disappear before they’d made decisions to act on a project. Subsequently, California discovered a $17 billion shortfall (hmmm) and they were forced to abandon their hopes. They have a hard time convincing me with “we never saw it coming.” Consequently, thousands of people won’t receive health care and their very valuable project will have to wait years.

You can mitigate the arrival of black swans in your business by thinking outside your data, outside your beliefs and outside your models. Let your imagination run a bit wild when you ask “what if…?” You can also conduct PEST analyses annually. Ask yourselves what Political, Economic, Societal and Technological influences are bearing on your work, customers, employees, partners and you stand a better chance being prepared rather paranoid.

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