Black Swan Management

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  • Topic: Black swan theory, Risk management, Nassim Nicholas Taleb
  • Pages : 7 (2336 words )
  • Download(s) : 65
  • Published : February 21, 2013
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1.WHAT IS A BLACK SWAN EVENT?

It is clear that risk management is a highly important element in management today as it identifies and assesses risks and then applies resources to minimize (or maximize) and monitor the probability and impact of unfortunate events (or opportunities). This way, companies are able to cope with a lot of risky situations by predicting them and by setting aside the right resources to handle them. However not all risks and events can be predicted and these can have a huge impact. They are called Black Swans. Now where does the term Black Swan come from? People used to be convinced that all swans were white. This was empirically proven as no one had ever seen a black swan. But when someone did see a black swan, the belief of centuries that there weren’t any was immediately disproven. So a single observation can invalidate a general statement. A Black Swan has three features. For one, the event is a surprise. To the observer that is. The event doesn’t have to be unexpected for everyone to be a Black Swan but for the observer. For example, the attack on the World Trade Center was a Black Swan. It was unforeseen by the U.S. government as it had never happened to them before (not knowing that terrorist attacks have stained the history of other countries). Other experts however already warned that this situation might happen. Other examples are the rise of Hitler and the spread of the internet. Secondly, it has a major impact. And thirdly, after the event has occurred, people rationalize by hindsight that it could have been foreseen. So there is a retrospective predictability. Next to this people very often tend to act like these events just don’t exist, which is remarkable as all Black Swans combined have a much larger importance than regular occurrences. So what we do not know is far more relevant than what we do know. For this reason, Black Swan theory also asks the question: Why do people often only see the small, daily, normal things instead of the large significant event? So how does one cope with these Black Swans? People shouldn’t try to predict the events but rather create a form of shield against negative ones and to be able to profit from positive ones. Risk management should try to reduce the impact of threats we don’t understand. Regarding this, companies make a lot of mistakes. For one, they think they can manage the risks by predicting extreme events. However they are unpredictable and focusing on a few cases implies neglecting a lot of others. Also they think studying the past means predicting the future but a lot of past events don’t have any relation to future shocks. Furthermore, they don’t listen to advice about what they should not do. And fourth, we are all taught that efficiency doesn’t redundancy, for example, money that isn’t put to use. To put all money to use companies should borrow money, which creates debts and this makes a company fragile. However without debts, companies can deal with changes better. We have told what a Black Swan is and what companies should not do regarding them. In the next parts we can see what they should do then, clarified with a case.

2.HOW TO MANAGE BLACK SWAN EVENTS

As defined by Nassim Nicholas Taleb in his book - The Black Swan: The Impact of the Highly Improbable (Random House, 2007), a Black Swan event is “an outlier as it lies outside the realm of regular expectations because nothing in the past can convincingly point to its possibility” which is merely unpredictable and has substantial impact. Therefore, the question we have to face, when dealing with such unexpected catastrophes is more on how to anticipate before they happen and how to manage them when they occur than how to forecast their occurrence. Today, an increasingly globalized world can bring more risks for companies; negatively and significantly affect their clients, suppliers, partners, shareholders, employees and profitability. A catastrophe that happens in the United...
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