Beware of the Black Swan

Whatever your business, prepare for the unexpected

By Morf Morford
Tacoma Daily Index

You might consider a business to be like any other life form – a business, at its best, emerges, grows and, if the conditions are suitable, it reproduces and takes on new forms to suit ever-changing circumstances.

In business, as in life, unexpected things may happen – in fact that is one of the few guarantees of life; the unexpected is waiting for us – it may be catastrophic or the opportunity of a lifetime – but either way, we know for certain that some time, under some conditions, our carefully planned progress will be up-ended by some indefinable event.

Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader used the term black swan to describe these unforeseeable events.

Taleb wrote about the idea of a black swan event in a 2007 book prior to the events of the 2008 financial crisis. Taleb argued that because black swan events are impossible to predict due to their extreme rarity yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan accordingly.

“Planning accordingly” for an inherently unpredictable event is, to put it mildly, a challenge.

There’s an old saying that the military is always prepared for the previous war. In the business world it could be said that most businesses are prepared for the previous market, or even the previous downturn.

Taleb argues that if a broken system is allowed to fail, it actually strengthens it against the catastrophe of future black swan events. He also argued that conversely, a system that is propped up and insulated from risk ultimately becomes more vulnerable to catastrophic loss in the face of rare, unpredictable events.

In other words, the worst business philosophy is that any business is, or could be “too big to fail”.

In fact Taleb might argue that the bigger the business, the more likely the failure, and the more extreme – and long lasting that failure would be.

History is dense with examples of business and empires which imagined themselves “too big to fail” and found themselves lost in the dust of history.

Today’s corporate America is dominated by service companies, tech firms, and huge retailers which have thousands of locations and hundreds of thousands of workers. At the end of the decade following World War II, corporate America looked very different from it does now. In most of those years – until about 1970 – most of the largest corporations in the US built cars, supplied car parts, or provided fuel for America’s vehicles.

Among the ten largest employers in 1955 were GM, Chrysler, US Steel, Standard Oil of New Jersey, Amoco, Goodyear, and Firestone. None could have existed or been nearly as large as they were without the insatiable appetite for – and our love for – American-made cars.

Manufacturing of all kinds in 2020 is the lowest in many decades.

Fast forward to 2020 – or even 1990 – how many of those companies still exist or are even remotely recognized as leaders in their fields?

In 2010, four of the ten largest companies by total employees were Walmart, Target, Sears, and Kroger. Americans were drawn in huge numbers to retailers with low prices.

But how many of them are still thriving? Even with attractive pricing (and improved customer service), the “retail apocalypse” is upon us just ten years later.

This is the Sears store that used to be at the Tacoma Mall. The entire building has been demolished. Photo: Morf Morford

This is the Sears store that used to be at the Tacoma Mall. The entire building has been demolished. Photo: Morf Morford

Large enterprises collapse, usually without much warning – and often with little comprehension as to what happened or how it could have been dealt with.

In 2020 the dominant markets could be described as the FAANGs (Facebook, Amazon, Apple, Netflix and Google).

They too will not last forever, and their loss of market dominance will be the talk of the next generation of business.

We could all learn a lesson from Boeing – it just takes one (or two) unexpected events to undo generations of accomplishments.

Beware of the Black Swan

Taleb would use the term black swan to describe an event that 1) is beyond normal expectations that is so rare that even the possibility that it might occur is unknown, 2) has a catastrophic impact when it does occur, and 3) is explained in hindsight as if it were actually predictable.

These are the events, cleverly disguised as recessions or shifts in market forces that doom businesses or even entire industries.

For extremely rare events, Taleb argues that the standard tools of probability and prediction such as the normal distribution do not apply since they depend on large population and past sample sizes that are never available for rare events by definition. Extrapolating using statistics based on observations of past events is not helpful for predicting black swans, and might even make us more vulnerable to them.

In other words, “Past performance is no guarantee of future results”.

Or as Taleb might put it, you can’t go forward by looking backwards.

You may have read, or even made, projections for the future.

Whether it is flying cars or the promise of fax machines, the future is almost never what we expect it to be.

Our inability to predict black swans matters because those interruptions and upheavals can have such severe and long lasting consequences.

The last key aspect of a black swan is that as a historically important event, observers are eager to explain it after the fact and speculate as to how it could have been predicted. Such retrospective speculation however, does not actually help to predict black swans. It only “explains” the previous one – and not always to everyone’s satisfaction. How many “explanations” have you heard about the causes of the Great Recession of 2008?

I don’t know about you, but the “experts” who dissect and explain the Great Recession in excruciating – and usually contradictory – detail don’t exactly inspire my confidence in their prognostications for the future.

The next black swan will hit them as unexpectedly as the last one.

“Failure isn’t fatal, but failure to change might be” - John Wooden

Taleb describes in his book “Anti-Fragile” an anti-fragile business strategy as one that does not merely withstand a turbulent market but becomes more appealing and resourceful under challenging – if not potentially fatal conditions.

He urged readers to brace themselves for so-called black swan events, rather than try and predict when they may happen. That requires businesses, nations and individuals  to be more conservative in the goals they chase, stay (or get) out of debt, and always be on the lookout for that elusive – and potentially destructive black swan.