I just came across this Booz & Co. white paper by Matthew Le Merle, a partner in the firm's San Francisco office. Titled "Are You Ready for a Black Swan? Stress-Testing the Enterprise with Disrupter Analysis," it expands on Nassim Nicholas Taleb's book, "The Black Swan," in which Taleb outlined the dreaded black-sawn event. In a nutshell, a black swan shocking and impactful, but — and this is a big but — it's rationalized after the fact. If we had known X,Y,Z, we could have seen it coming.
The general assumption is that black swans are rare. At one point in human history, people weren't sure black swans even existed. However, in terms of the Talebian metaphor, black swan events are supposed to be infrequent. But La Merle points out that, for various reasons, we could be looking at a future that features flocks of black swans:
Whether environmental, economic, political, societal, or technological in nature, individual Black Swan events are impossible to predict, but they regularly occur somewhere to someone. Some observers argue that the frequency of these events is increasing, others that global communication networks have simply made us more aware of them than in the past.
Le Merle doesn't try to explain why we might be seeing more black swans or sharing information on previous unknown or ignored black swans. His paper does attempt to provide a way for companies to prepare for black swans, which is a bit of paradoxical notion — the black swan arrived because you weren't getting ready for it — but at least it's an effort to move beyond Taleb's analysis.
It gets quite interesting when Le Merle proposes a "What If?" component to the process. Students of military history in particular will be familiar with these so-called "counterfactuals," in which an alternate historical scenario is explored. What if the Germans won World War I? What if the Union has lost at Gettysburg?
Le Merle flips the old-school "What if?" on its head, vectoring it not toward the past, but toward the future. Again, this isn't a new technique — futurists offer it to business clients as a way of exploring competitive threats. Le Merle's intellectual innovation is to mash up the "What if?" with an expanded view of how often black swan events occur. In fact, the residual black swan-ness of a black swan compels him to diminish the idea that they're now traveling in flocks:
The likelihood of occurrence is not a major concern here; these are, after all, Black Swans. Rather, the team needs to determine the relative impact and consequences of an event. In conducting disrupter analyses for companies, we often find surprising results at this stage. Revelations can include greater concentrations of risk than previously recognized, more severe and unexpected consequences, and, sometimes, seemingly obvious mistakes in how an enterprise has been shaped.
A greater concentration of risk than previously expected. This is where the paper gets into troubling territory. Risk concentration shouldn't be a revelation. Risk ought to be something that professionals can assess if not completely quantify. If the risk crosses a threshold, then they can abandon the project, trade, whatever. They shouldn't have so thoroughly botched the analysis that a black swan looms.
But...the black swans apparently do loom. When it comes to risk management, this in itself makes Booz & Co.'s "disrupter analysis" worthwhile.