November/December 2008
THE BLACK SWAN: A TERRIFIC READ FOR EXECUTIVES
by
John S. McCallum
John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba. His column is a regular feature of Ivey Business Journal.
When this regular contributor recommends a certain book, executives can be assured that they will derive value from the book. Even if it is a black swan.
Time may be the most scarce executive resource of all, so when recommending books to executives, it is important to get it right. There is a lot of interesting material out there but not all that much has the kind of reward-to-time ratio that executives need in terms of information, ideas and insights.
The keys to being a good executive are judgement, wisdom and temperament. That is where reading should add serious value. In that light, I unreservedly recommend The Black Swan, by Nassim Nicholas Taleb (Random House, 2007).
What separates executives is the ability to make good decisions when the stakes are high and there is not nearly enough time or information to make decisions. The problem is always the same: A big decision must be made now, and the future, on which the decision depends, is somewhere between murky and unknown.
Enter Taleb with what can only be called a refreshingly different take on risk, randomness and decision-making. A read will add materially to the tool kit you bring to the executive function. At minimum, you will ask better questions as you sift through options in search of the clarity and confidence needed to choose wisely. This book is a cut above the average in terms of value added for executives. It is also superbly written, very entertaining and chock full of curious anecdotes and facts.
The “Black Swan” is a metaphor for the incredibly rare occurrence that really matters. An actual black swan in swanland is apparently a one-in-a-zillion occurrence. Taleb’s definition of a Black Swan (his capital letters) event is an outlier which has extreme impact and which, after the fact, we rationalize as an event that can be explained and predicted. To Taleb, “A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives”.
A Black Swan example is the September 11th, 2001 terrorist attack on New York City. The 9/11 Black Swan did not change everything but it sure changed a lot, and in big ways too: travel, security, Iraq, Afghanistan, etc. Taleb points out that World War I, World War II, the fall of the Soviet Union, the rise of Islamic fundamentalism and the market crash of 1987 all follow Black Swan dynamics. The Economist of August 9, 2008 had a cute take on black swans in a commentary on the credit crunch and central banks, “To borrow the title of a popular book: shoot black swans on sight.”
My goal here is to get executives to spend some time with Nassim Nicholas Taleb. Much like a trailer for a movie, I offer these few tidbits from Taleb, in the hope of tweaking executive interest.
First, Taleb points out that “Life is the cumulative effect of a handful of significant shocks” or Black Swans. Reminds me of that famous line in the critically acclaimed 2001 movie “Riding in Cars with Boys,” when Drew Barrymore’s character Beverly Donofrio says “One day can make your life; one day can ruin your life. All life is four or five big days that change everything”. Taleb asks us to consider those few days when we met our mate, chose our profession, were exiled from our country of origin or were suddenly enriched or impoverished, days which really do shape everything.
So it is with enterprises as it is with life. Not much happens from most days to most days but a few days can change everything: for example, the arrival of a new competitor, a change in your fundamental technology or a big change in your market. Andrew S. Grove of Intel fame calls such changes “inflection points” in his wonderful book Only the Paranoid Survive (Currency, 1996). For Grove, “An inflection point occurs when the old strategic picture dissolves and gives way to the new.” How executives respond at these transformational moments can make all the difference. You will be better equipped to tangle with them after a trip through Taleb. And Grove, too.
Second, Taleb develops a concept that executives would do well to apply to every major thing they do: “What you don’t know (can be) far more relevant than what you do know”. It is a natural human tendency to focus on what you know, but what you don’t know is what usually comes back to haunt you. Taleb ties this concept in with the expert: “The problem with experts is that they do not know what they do not know. Lack of knowledge and delusion about the quality of your knowledge come together – the same process that makes you know less also makes you satisfied with your knowledge.” Worth considering when retaining advisory and consulting help. Mark Twain has a good line that ties in: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”.
Third, executives will find Taleb’s development of the oft-overlooked but crucially important distinction between the value of doing something good and the value of preventing something bad very useful. Executives tend to be action-oriented people focused on visible achievement, but preventing something bad from happening, while hardly recognized and rewarded, can be just as important or even more important to enterprise success. Taleb calls them mistreated heroes: “Those who we do not know were heroes, who saved our lives, who helped us avoid disasters”.
Which of the following is treated better in an enterprise? The executive who took the enterprise into a bad investment but manages to make the best of it, or the executive who didn’t want to make the investment in the first place? The executive who makes a bad hire but rehabilitates the person at great cost and time or the executive who recommended against hiring the person? I note that World War II Canadian Prime Minister Mackenzie King said that “The real secret of political leadership is more in what is prevented than accomplished.”
Fourth, Taleb offers this: “If you want to get an idea of a friend’s temperament, ethics, and personal elegance, you need to look at him (her) under the tests of severe circumstances, not under the regular rosy glow of life…Indeed the normal is often irrelevant”. This is sure worth considering when it comes to personnel decisions, particularly hiring decisions. The standard interview/reference process leaves a lot to be desired in that it so struggles to escape “the normal.”
Fifth, Taleb says “Metaphors and stories are far more potent (alas) than ideas.” If there is one thing I have learned in 36 years of teaching MBAs, it is that they remember the stories most of all, and for many years. It is through metaphors and stories that we learn. Being an executive means, at heart, getting things done through other people; that is very close to the essence of teaching. Executives as teachers will get a lot of insight from Taleb’s story. To quote him, “This book is a story”.
Sixth, executives are in the risk business. Much of what they do involves projecting future possibilities, assessing probabilities and then making choices. Most of the things in the world that matter to executive decision-making are not described by the normally distributed bell or Gaussian curve, though they are such convenient constructs that executives can be forgiven for subconsciously slipping into assuming that they are so described.
Executives, especially finance and investment executives who have been so burned of late, should make Taleb’s discussion of the bell curve a must. Taleb: “Forget everything you heard in college statistics or probability theory. If you never took such a class, even better… You can skip (the chapter on the bell curve) if you belong to the category of fortunate people who do not know about the bell curve”. Taleb variously calls the bell curve “that great intellectual fraud”, “a monstrosity” and a “beast,” making me wish he would tell us what he really thinks of it. Taleb will make you wince the next time you use bell-curve assumptions to do anything, especially something in the realm of finance.
Finally, Taleb introduces us to two most engaging characters: Fat Tony and Dr. John. Fat Tony is a street-smart guy with a weight problem. Dr. John is a straight-laced former engineer who now works as an actuary. Taleb presents each with a question I have used in class for years: “Assume that a coin is fair, i.e., has an equal probability of coming up heads or tails when flipped. I flip it ninety-nine times and get heads each time. What are the odds of my getting tails on my next throw?” Dr. John says one-half since flips are independent. I have taught statistics and any answer but that gets a zero on the question. But listen to Fat Tony “You are either full of crap or a pure sucker to buy that ‘50 percent’ business. The coin gotta be loaded. It can’t be a fair game. (Translation: it is far more likely that your assumptions about the fairness are wrong than the coin delivering ninety-nine heads in ninety-nine throws.)” From there Taleb takes you through a valuable discussion of thinking within the box (Dr. John), outside the box (Fat Tony) and why straight-A students often don’t get nearly as far in life and business as those with much lower grades.
The Black Swan is made for executives. Pick it up! You will not regret it!
Reprint: 9B08TF09
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