How to Prepare for Black Swan Risks?

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How to Prepare for Black Swan Risks?
Jos Nieland, Teacher, Netherlands, SIG Leader
According to Nassim Taleb, we can not prevent Black Swan risks (= rare events with a high impact) from happening now and then. But we CAN prepare for them. How?
Taleb is giving the following ways to prepare for Black Swans (in fourth quadrant situations):
1. Avoid optimization - Forget economics and learn to love redundancy. Keep some buffers and slack.
2. Donít use statistics to try to predict complex, fourth quadrant payoffs. Statistics donít work here. Try not to be exposed to events in the fourth quadrant.
3. No bonus without malus - Beware of the moral hazard (agency) problem. People, banks and organizations should enjoy both the positive and negative consequences of their acts and decisions.
4. Be very careful with risk information - Donít trust scenario analysis and stress testing. There is always more randomness then we think. We just donít know. Be extremely careful with using and interpreting data and events from the past: the future is always less predictable and crazier than you think.
Do you agree? Any suggestions / additions to this list? Thanks--

Preparing for Black Swans: 5. Systems Thinking
Augusto Carreira, Partner, Portugal, Member
I agree. One way to handle the weaknesses of our human way of being and our psychological tendency to be irrational, is to train systems thinking or dynamics and be aware that all our decisions are based on our own mental models.
Our mental models are always biased (ones more than others probably) and training with systems dynamics simulators is a very good tool to minimize this inherent tendency which evolution put it in our "microcode".

Preparing for Black Swans: 6. Scenarios
Jim Burke, Manager, United States, Member
I enjoyed the book. Recognize that the list reflects tool misuse, e.g. scenarios are criticized, but scenarios are good ways to look at consequences.
Important to include non-experts in any forecast effort - experts tend to narrow and reject, and are often surprised.
Taleb also counsels "do not try to predict precise Black Swans... invest in preparedness, not in prediction". Thats' well said and games, scenarios, well-facilitated seminars and workshops, integrating design thinking and innovation can help organizations understand the areas of preparedness. Complement these with an early warning system and the potential to be ready, flexible and agile is increased.
Has anyone worked Black Swans and/or Cynefin?

Preparing for Black Swans by Scenario Modelling
John Spenceley
One of the advantages of scenario modelling as practiced by Shell is that it teaches flexibility in response rather than identifying all risks.
The same is probably true of military and civil disaster training.
The cost of setting up a risk response to all possible risks is probably uneconomic, hence the formation of limited liability companies and building portfolio agility.

7. Metaphors and 8. Stories
Jim Burke, Manager, United States, Member
Indeed, Taleb writes on page XXVII: "My best tool is a narrative."
A good scenario is just that, a narrative that helps prepare, offers explanations, to be sure, but better takes the reader or role player into different worlds. Taleb adds: "metaphors and stories are far more potent (alas) than ideas... Ideas come and go, stories stay."
Thus, scenarios often have metaphoric names and invite, rather than bound for explanation and prediction. And the best scenarios, to repeat, are good stories.

Black Swan Preparation: 9. Keep an Eye on Wild Cards
Prakash Deshpande, Professor, India, Member
Normally, our thinking is a conditioned response. Also in a management scenario, we are conditioned to respond to safest alternatives and the wild cards are forgotten.
If we would keep an eye on wild cards and make provisions for their appearances then that kind of contingency would keep oneself ready for facing Black Swan kind of occurrences. Nassim Taleb probably wants to suggest the same through his book.

Preparing for Black Swan: 10. Common Sense
Dilip Khanal, CEO, Nepal, Member
We all know the proverb: save for rainy days. In modern days, we need to plan for uncertainty.
It's true that we know very little but we have illusion that we know everything. In both cases, the message is to plan for something we don't know.
I would like to add one thing in nescionie's list. make room for common sense and do not over rely on your expertise.

Preparation for Black Swan Risks: 11. Training
Sripathy K.R, Management Consultant, India, Member
Most of the comments are very sensible, use common sense, keep an eye on wild card, invest in preparedness rather than prediction, do not use past trends to predict future.
I'd like to add to this list: Identify the critical talent pool in the organization and plan retaining them from now on. Train these talented people to face the Black Swan days, give them confidence, you are with them in the hard days, they will be with you.

12. Flexible Organization and 13. Lateral Thinking
Claudio Boffito, Professor, Italy, Member
A Black Swan is unpredictable by definition and may have disruptive effects. It cannot be tackled using conventional approaches but, therefore, may stimulate new skills and methodologies to survive and react.
This make me think that flexible and more adaptive organizations (organizational agility) have better chances to survive and, even, to grow. Also lateral thinking and other froms of creativity may be of some help preparing for BS's.

14. High Reliability Organization Thinking
Mike Olson, Consultant, United States, Member
Managing Black Swan risk could take a lesson from the principles of a high reliability organization, that has a focus on fostering mindfulness in the organization.
Mindfulness is composed of five attributes:
1) Preoccupation with failure,
2) Reluctance to readily accept simple, convenient explanations,
3) Sensitive to operations (needs, requirements, realities),
4) Committed to fostering resilience in organizational capabilities to deal with the unexpected, and
5) Ability to rapidly migrate decision-making to the front-line experts at times that call for it.
See ďManaging the UnexpectedĒ by Weick and Sutcliffe.
Of course, this prescription sounds more like routine risk management than Black Swan planning, yet these attributes are what was missing in both the Gulf of Mexico BP well (Deepwater Horizon, Macondo Prospect) blowout in 2010 and the Fukushima Tsunami nuclear plant disaster this year from my perspective.
I think many thought these disastrous events were 'Black Swan' examples.

15. Regulation and 16. Protection May Help
Jagdish B Acharya, Consultant, India, Premium Member
In the control of power grids, often various power plants are regulated with certain regulating rules. This leads to high reliability and up time.
However, there are some Black Swan events like cyclones, earth quakes, thunderstorms or lightening which are highly unpredictable in intensity, timing and impact. No regulating rules are put for such eventualities.
Rather protection mechanisms come into force to save the power plants. One can restart the plants, resynchronize them and make the system available soon by following this method.
The same analogy may be applied in management and instead of trying to find rules and optimizing, one should try to make the organzaition and its main systems robust and safe.

17. Diversification
KATHRYN STEINER, MBA, Entrepreneur, United States, Member
Diversification is also key to prepare for risky, unpredictable events... I believe that in finance and investments diversification is necessary, albeit carefully, after current sector analysis and research is completed.
The old adage don't put all your eggs in one basket is still valuable today. See also portfolio agility. Domestic and global trends should be studied and incorporated, with allocation of resources both human and financial, who possess the ability to assimilate data and respond as necessary. High risk events are difficult to determine, however, not understanding and analyzing current data is detrimental. I agree the past is an inconsistent predictor in the current age. Although, what has and hasn't worked in the past should be considered seriously prior to proceeding with a risk avoidance or minimization plan.

Preparing for Black Swan Risks: 18. Build Conflict Management Systems
Dr. Wilfried Kerntke, Director, Germany, Member
I'm agreeing in particularly with Mike Olson's and Augusto Carreira's ideas (suggesting systems thinking and mindful management).
I see an additional option in building high sensitivity conflict management systems that allow to react and to deal with the consequences of Black Swans. Conflict management systems - provided they are based on mindfulness plus systems thinking - can strengthen the resilience of the organization.
And they are good fun to work with, because they increase peoples awareness of being important for the organization.

Preparation Against the Impact of Black Swan Risk
Buba Bulus Ibrahim, Business Consultant, Nigeria, Member
A black swan just can't be managed. It needs carefully and strategically designed thinking system as Dr. Wilfried Kerntke puts it. Good knowledge of information management can help to reduce the effect or impact on the organisation.

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Jos Nieland

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