What do black swans have to do with risk?
Occasionally during risk workshops, someone (normally arms folded and wearing a smug expression) brings up the subject of black swans. “What about the black swans, though?” they will say. “What are we doing about them? Why aren’t we considering black swans?” This normally causes some discomfort in the room and the group moves on with the business of risk register completion with a general feeling of unease that they may be missing a trick.
So what actually is a 'black swan'? The term goes right back to the 2nd Century. There is a record of the Roman poet Juvenal referring to a black swan as something presumed not to exist. It was also a common phrase in 16th Century London used to refer to a statement or expression of impossibility, e.g. ”Cor blimey struth me ol’ china, that’s a real Black Swan”….or something like that.
During my Psychology studies it was used to explain the null hypothesis which goes like this. Hypothesis: All swans are white. For every hypothesis there is a null hypothesis in this case: Not all swans are white. The hypothesis will never be considered a truth. You may search the four corners of the earth and still not find a black swan but ‘all swans are white’ will still never be a truth. One day someone may find a black swan and on that day the null hypothesis is accepted and the hypothesis blown out of the water.
And guess what……black swans do in fact exist! In 1697 Dutch explorer Willem de Valmingh landed in Western Australia and discovered black swans.
Perhaps the most accepted definition of a black swan in common use today is that defined by Nassim Taleb which he described in his book The Black Swan (the impact of the highly improbable).
He states that a black swan is defined by three factors:
- An event that is impossible to predict
- It has major effect
- Seems obvious in hindsight
He gives examples such as:
- Attacks on the twin towers on Sept 11th, 2001
- The Wall Street Crash of 1929
- The coming of the internet (Black Swans can have a major positive effect)
Other examples might be:
- The ash cloud
- The printing press
Going back to the workshop attendee’s original question regarding including black swans in our project or program risk register, Taleb’s definition makes this impossible. It’s only if we were to relax his definition and re-write his first part to read ‘an event that is difficult to predict’, a stretch of imagination will likely bring about some very low probability, very high impact risks. Insurance is often a suitable mitigating option for this type of risk (although the value of insurance should be carefully considered compared with the risks involved) but what about the things for which insurance is not suitable? Terrorist attacks, political upheavals, major natural disasters. Our time should be spent considering risks that firstly, can be practically mitigated in some way and secondly, have a reasonable probability of occurring.
If you encounter the ‘Black Swan Expert’ in one of your risk sessions, respectfully ask that person for a list of black swans that complies with Taleb’s definition and tell them you will gladly include them in the risk register.