Black swans, unknown unknowns, and wild cards
I’ve been wondering about Nassim Taleb’s theory of the ‘black swan’ since I read about it a few weeks ago. Taleb worked on Wall Street and wrote the well-regarded Fooled by Randomness a few years ago. Black Swan is a development of some of the ideas there. The book has sold well in the US and has been getting good coverage in the UK since recent publication here. If you’ve missed it, the black swan is a metaphor for the impact of new and hitherto unimagined information.
Why a black swan? Because until Europeans came across them in Australia, it had been possible to believe that all swans were white. But – and this has a ring of Karl Popper‘s theories about falsifiability about it – it only takes the sighting of one black swan to render false our previous understanding of the world.
Such metaphorical events – according to Taleb – have three characteristics:
- They are outside of our expectations; nothing that has happened in the past points to such a possibility
- They have a huge impact.
- Despite being unforeseeable – once a ‘black swan event’ has happened we are able to construct convincing explanations of why it has happened.
From a futures perspective, such phenomena have a familiar ring. They have similarities with wild cards (high impact low probability events), although generally these are imaginable (e.g. a cross-species virus causes millions of deaths worldwide) and a ‘black swan’ appears to be beyond imagination.
They also have similarities with the structures of what’s known and unknown – described as a tool by Sohail Inayatullah in his book Questioning the Future before Donald Rumsfeld made the phrase “unknown unknowns” both famous and misunderstood. Inayatullah even proposes ideas about how to gain an understanding of unknown unknowns. It is difficult but not impossible.
Taleb uses two countries (Mediocristam and Extremistan) to describe worlds in which on the one hand life follows the laws of probability, and on the other follows more fractal and unpredictable patterns.
And maybe this is why I’ve been wondering. From a futures perspective, trends analysis is the land of ‘mediocristan’, where you analyse plausible and likely outcomes, whereas the land of ‘extremistan’ is maybe the land of ‘emerging issues analysis’, where one explores the nature of the unexpected, the pockets of the future which are hidden in the present. At the same time, one of the purposes of scenarios work is to get to potential events which are concealed from our current view.
All of which raises further points. One is that some of Taleb’s view of the world seems unduly coloured by his financial markets’ background. He writes about the unpredictability of the publishing markets, but they are only unpredictable if you seek to make a bet on a specific title (and then not always: the next Steven King novel will sell well). Overall the distribution of book sales follows a pretty good probability curve. Likewise, even if a trend is likely, its timing is not.
The second is that businesses and business people tend to think of things as black swans because they don’t take a broad enough view of their overall operating environment. (The FMCG companies and obesity issues come to mind). There’s an interesting example in a recent McKinsey article, ostensibly about looking at the impact of trends on businesses, which demonstrates that when asked most managers are most interested in the trends which have previously most affected their businesses. I may write about this in the future, but this is, arguably, a rational approach in markets which don’t face significant disruption.
And the third point is about what we may or may not know. Obviously ’9/11′ is a black swan candidate, just as it’s often used as an example of a wild card. But most of the trends which led to that attack were visible, even down to the previous bombing attack on the World Trade Centre, a failed attempt by terrorists to crash a plane over Paris, the political and rhetorical response by militant Islamicists to the presence of US bases in Saudi Arabia, and so on. This doesn’t mean that ’9/11′ was inevitable, but it also means it wasn’t ‘highly improbable’.
There’s a related point here. From a futures’ perspective, getting something ‘right’ means that it seems to be happening, but the timing can be approximate. An acceptable range can be several years. From a trader’s point of view, the range needs to be no more than a few months if money is to be made on the unanticipated event.
Nonetheless, perhaps ‘black swans’ are just ‘blind spots’ for people who are less aware of their cultural biases and therefore haven’t looked for tools to help them look beyond them. If your response to a different possible future is to think immediately that ‘that is never going to happen’, you probably stumble across quite a lot of black swans in your life, without ever having to travel to Australia.