The secrets of your success

Black Swan Events

Winners are those who are prepared for Black Swan Events, have the courage to face them and try to exploit them. This is the central thesis of Wall Street iconoclast Nassim Nicholas Taleb.

But what is a ‘Black Swan’ and how does this affect you?

‘What I call a "Black Swan" is an exceptional unpredictable event that carries a huge impact.’

A current example of a Black Swan event is the run on the Northern Rock.
We don’t see these coming, because, by and large we don’t want to. Further, our brains are not set up to deal with probabilities, only survival.

Taleb argues very persuasively that we fail to comprehend what is actually happening in front of us. We prefer to simplify matters, and we tend to rationalise after the event. Very often, performance is driven by luck, but we prefer to believe our post rationalisation, that it is the result of our hard work and skills. And often what’s really hard, is dealing with uncertainty, simply not knowing. It is then that we, as leaders and decision makers tend to make the facts fit our theories.

In our culture we often only see what we want to, and that means seeing the winners. And after they have won, they will tell you that they did so through hard work, determination and skill. “Really”? asks Taleb. He points out that more often than not, when we succeed we put it down to skill, yet when we fail, it’s bad luck. Even here we often make the facts fit our assumptions.

So, he continues, we often mistake luck for skills, theory for reality, and prophecy for forecasts.

There are ways to guard against the worst effects of Black Swans, and make more effective decisions. These include thorough preparation, humility, the ability to listen, and to understand that luck and or other factors may have had a hand in our last quarter’s results.

We need to be very good at sorting the meaning out of the torrent of noise that bombards us constantly.

Taleb’s books are not light reading, but worth the effort, even if just to understand a little more about probability and its effects on business and the markets.

We suggest that a good place to start for those leaders that don’t, is to allow for a degree of ‘loyal opposition’. You may well be doing very well, but it just could be a lucky winning streak. Ask Alan Applegarth, Northern Rock’s CEO.

These “Black Swan” or “tail” events are not as rare as supposedly bright people imagine. Indeed, the lesson of the Goldman’s Sachs hedge fund managers who said that their funds had lost 23% of their value in August because they had been confronted by a once in 100,000 year event testifies to this (especially as this event looked suspiciously like the LTCM crisis of just 10 years earlier – when a Nobel Laureate and his colleagues similarly suffered what they described as a “six sigma” event).

The current events surrounding Northern Rock highlight how people can confuse the ability to make money in a situation where there is plentiful liquidity as skill – or a unique proposition. Real skill is demonstrated more crucially in difficult markets – and even then, if there are a large enough number of actors, then some of the winners in that situation may just be plain lucky!

Many of the current investment “fads” such as the resilience of China, the commodity “super-cycle”, or the ability of new derivatives to spread risk rather than to intensify it, have yet to confront the challenge of a U.S. recession and survive. Until recently, it has been easy to extrapolate the sweet spot in the investment cycle and claim that each successive high confirmed that the new thesis was intact.
We are looking for the Black Swans – the events that could unhinge such a benign view. Another 12 months of U.S. (and U.K?) weakness and it will be interesting to see how many of the current “consensus” investment views remain intact.

For more information on Economic Strategy and Black Swans, contact Ian Harnett, at Absolute Strategy Research. (IanH@absolute-strategy.com)

Or for more on Leadership and Coaching, contact Des Gould, at The Success Group.
07703 547 570
des@desgould.com