Friday, September 19, 2008

Lessons from the Black Swan

If you're like me, the events on Wall Street this past week took your breath away.

Once I steadied myself, I tried to ponder its full ramifications in the context of the future business outlook.

We're like that. We seek meaning from today so as to better understand tomorrow. As business people, we're always looking for that extra edge to capitalize on market opportunities and reduce our risk.

Well, get this. It's a fruitless exercise. At least if you subscribe to the wisdom of "The Black Swan: The Impact of the Highly Improbable," by Nassam Nicholas Taleb.

The bestseller’s main thesis is that accurate prediction is enormously difficult, rendering techniques used to manage risk flawed because none deals well with the "Black Swan" – a metaphor for high-impact, hard-to-predict, random events.

In many ways, this past week was a Black Swan event. A rare (we hope) confluence of negative developments that produced out-sized consequences. A perfect storm of things we once thought were impossible, but suddenly, shockingly, became all too real.

Taleb’s point is that we don’t plan for events we regard as rare and improbable. And yet, such events occur much more frequently than we dare think.

When a black swan catches us unaware, we simply may need to gulp and brace ourselves, as most of us did a week ago.

After all, most of us have come to believe there will never be another financial collapse like the one that led to the Great Depression. Ha! Still believe that?

Let’s just hope the events of the past week are as close as this generation ever gets to such a seminal event. Indeed, we can hope; but we’d be foolish to assume it won’t be worse next time. Black swans exist.

So, how can we apply the lessons of The Black Swan to our business?

· Adopt a more conservative investment strategy;

· Avoid placing big bets based on forecasts. How often do we hear of bellwether companies revising their earnings outlooks downward? It seems there’s more every week;

· Act like a Boy Scout, not a Pollyanna. Be prepared. The worst case scenario can, and often does, occur.

· Remember that a Black Swan event might change the rules of the game for your business, fundamentally altering your long-term strategy. Don't lull yourself into thinking that once you’ve weathered the storm, everything will soon revert to business as usual. For example, now that the government is so deeply invested in the banking, insurance and mortgage sectors, the markets have only just begun to gauge the long-term implications.

· Be alert to variances from your projected start and end points on a key project or business launch. Understand that others in your value chain, including suppliers and general contractors, are subject to variances of their own. Slower-paying receivables at one end of the chain can quickly cascade down the line, disrupting schedules and compromising your ability to meet your own deadlines.

· Make plans to attend GlassBuild America where the industry gathers Oct. 6-8 to network and buy and sell. Opportunities abound, now that the swan appears to have flown away. I promise!

By the way, if you're looking for a good read on the plane ride out to GlassBuild America, I recommend "The Black Swan." I’ve only scratched the surface of its powerful and provocative insights in this entry.

Looking for some normalcy amongst all the madness? Don't look toward Wrigley Field. The Cubs just might be headed to the World Series. Now there’s a black swan event if we ever saw one!


By David Walker, vice president, Association Services, National Glass Association

1 comment:

info said...

David, well said. I like the tone and words of the article. Now if you can just get the "take the job at a price below cost" glass shops to heed your advice.

Bill Evans