Sunday, 12 October 2014

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 “History is opaque. You see what comes out, not the script that produces events, the generator of events. There is a fundamental incompleteness in your grasp of such events, since you do not see what is inside the box, how the mechanisms work”. - Nassim Nicholas Taleb
In his acclaimed book Black Swan

Why-Black-Swans-are-Real-Challenge-for-Corporate-Strategy-V-K-Talithaya_Management-Masala
How do you strategize for what you do not see or even foresee? This is the question every corporate strategy group faces. How can we figure out properties of the infinite unknown, which is the future based on the finite known, the past? There are events that can happen apparently unconnected with the past. There is the celebrated example of the chicken story given by the eminent philosopher Bertrand Russell to explain the futility of induction (using known facts to foresee unknown future). His chicken story, as narrated by Taleb runs as follows: Consider a chicken that is fed everyday. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the chicken. It will incur a revision of belief, though rather it was too late. (Taleb uses Turkey instead of chicken)

That unforeseen event about which the chicken could hardly do anything is what Taleb calls the Black Swan. We believe swans are by definition white. Therefore, when an ornithologist spots a black bird exactly looking like a swan, it is a bolt from the blue, an event which does not fit into the existing definition of a swan. Because it is black, and since your definition of swan requires it to be white, you may like to call the Black Swan by some other name; but the fact remains, it is swan in all respects except its color! It is an occurrence totally unforeseen!

What is a Black Swan in the context of strategy planning in business organizations? Taleb explains it as follows:
It is an event with the following three attributes:
a.       It is an outlier as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
b.      It carries an extreme impact and
c.  In spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

Black Swans are not predictable. But human mind does not accept the fact of unpredictability. “The human mind suffers from three ailments as it comes into contact with history, what I call the triplet of opacity”. They are: 

  1. The illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize:
  2. The retrospective distortion, or how we can assess matters only after the fact, as if they were in a rearview mirror (history seems clearer and more organized in history books than in empirical reality); and
  3. The overvaluation of factual information and the handicap of authoritative and learned people , particularly when they create categories-when they “Platonify
Taleb calls our minds wonderful explanation machines. How can we know the future? Let us go back to Russell’s chicken. From its standpoint, the non-feeding on the Wednesday before Thanksgiving is a Black Swan. For the butcher, it is not, since for him its occurrence is not unexpected. “So you can see here that the Black Swan is a sucker’s problem”.

Does this mean that since most events which have lasting impact on organizations can hardly be predicted with any certainty, there is no need to strategize? If events are determined by randomness, do we only wait for lady luck to smile? Taleb makes the point clearly and convincingly that as, “a matter of fact, I suspect that the most successful businesses are precisely those that know how to work around inherent unpredictability and even exploit it”. He goes on to lay down a couple of principles to manage randomness, which he calls nudges.
  • Make a distinction between positive and negative contingencies.
  • Don’t look for the precise and the local.
  • Seize any opportunity, or anything that looks like an opportunity.
  • Don’t waste your time fighting forecasters.
Randomness may be bad; but it is not always so. Taleb believes that “Luck is far more egalitarian than even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair – people don’t choose their abilities, randomness has the beneficial effect of reshuffling society’s cards, knocking down the big guy”. In the world of randomness, while nobody is safe from extremes no body is threatened by complete extinction either. The vagaries of randomness ensure that “the people you meet on your way up, you will meet again on the way down”. Unlike management talk, he sounds philosophical when he says, “Our current environment allows the little guy to bide his time in the antechamber of success – as long as there is life, there is hope.”



By V.K.Talithaya (vktalithaya@managementmasala.com)
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On 10/12/2014

1 comment:

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