Black Swans, Turkeys and Snooker Balls

I hope that you had a wonderful Summer and are suitably refreshed, ready for the real work ahead?

I don’t know about you, but long breaks away from the office mean a few things for me?  My brain turns to mush, I can’t remember details of things that happened at work just two weeks ago – and I think on a completely different level: more clarity is brought to issues that I had struggled with.  I always try to read during the break, some light hearted books, some more challenging – this year I read a few books which the more I think about them, the more interesting they become.  There’s real value in turning the brain off but not turning it off if you get my meaning.

Some of what I’ve read will form the basis of topics I will be covering in my newsletters in coming months, here’s the first topic…of Black Swans, Turkeys and Snooker Balls…

Have you ever heard of a guy called Nassim Nicholas Taleb?  I hadn’t, but apparently he’s quite a famous fellow, here’s his Wikipedia page – http://bit.ly/1PZHLDu

You know what?  As I first started to write this, a fund with which he works flashed up the news that they had made a $1 billion profit in just a few days – http://on.wsj.com/1LHl3kN.  Yes, one billion dollars!  The fund bets on Black Swans.  And in doing so it made a packet while others were throwing themselves off bridges having lost a packet.

His book ‘The Black Swan: the Impact of the Highly Improbable’ really got me thinking.  Black Swan events – which he defines as those that (i) weren’t easily predictable beforehand; (ii) have a massive impact and (iii) after the event we try to retrospectively explain them almost as if we could or should have foreseen them – he says have a far bigger and longer impact than any number of day to day events, whether in our business or personal lives.

And you know, I think he could just be right…  He gives examples like meeting your partner; fresh career opportunities; mid life relationship break ups; new business partnerships; business and personal treachery; the emergence of religions, new technologies and global organisations like Google; and political events such as 9/11 and the First World War… the list goes on…

And I can see where he’s coming from because in my life there have been 3 big Black Swan events – (1) I met my wife in a club (long shut down, possibly as a salutary lesson to others?) in Dudley on a normal night out for the boys; (2) I moved into accountancy by chance after sitting having a casual 2 minute chat with my mate’s dad; (3) My career in Big City firms in Birmingham was brought to an abrupt halt and I moved in a different direction when I discovered my boss was a crook!  (no one likes the messenger bringing bad news!)

The point Taleb makes is that it is unexpected Black Swan events like these that push us all into major new, long term directions, the day to day stuff doesn’t really matter.  Sure sometimes these events can be catastrophic – the way some of us think these things only work, while we slowly build on the day to day  stuff – but occasionally, just occasionally, we can, like Taleb’s Fund, reap great rewards – as the Lottery says ‘you must be in it to win it’.  Some happen entirely by chance: some happen to us because by design, or not, we’ve exposed ourselves to them.  None we have any real control over – they can turn out good or bad, in fact some we expect to turn out good but turn out bad, and vice versa – we just have to go with what’s given us.

I’d never really had the opportunity to think of life, or business, in this way to any great depth, day to day stuff just gets in the way, so the book provided me with a good deal of comfort in my journey and in my position where I am right now – a combination of good and bad has led me to a position I rather like, but unfortunately I am also comfortable being in.  It’s also helped me in my approach to clients, I think – you see I often see people who struggle to get their head around what they believe is ‘failure’ – they struggle to accept that  ‘Sh1t happens’; they take things personally as if they alone were responsible for events, for the outcome; they can’t envisage themselves coming out the other side of something they consider to be bad, like formal insolvency, intact possibly even stronger – and part of my job is to reassure them, so the book was a help.

So where do turkeys come into this?

Well, imagine you’re a turkey…  you hatch and are almost immediately put into a safe, warm and dry environment, you’re fed and watered regularly by a friendly human, and over time you get to rather like where you are.  The more days that pass, the more comfort you get that your human carer will be there every morning to feed and water you, your health concerns will always be dealt with, you’ll remain safe from predators, you’ll stay warm and dry.

This goes on for several months.  With every day that passes, your confidence level grows, such that after nearly one hundred days, you’ve grown very used to being cared for.  Then suddenly on the morning of day 100, your human carer instead of bringing you food and water, takes you out and slaughters you!  Without any notice, you suffer a major reversal, a massive catastrophic event.  Up to then, the more time that passed, the more comfortable you had become, you ‘knew’ what was going to happen the next day.  The point is, without knowing it, the risk of something massively bad happening was actually getting higher even though you thought the risk was getting lower.  Put another way, you misunderstood the level of risk.  But your human carer didn’t, he knew the risk for you was growing…it was a matter of whose viewpoint was right – you the turkey turned out to be the sucker, or the carer, the man in the know.

I wonder if that is where we’re at right now with the global and UK economy and the banking system – for example where did the Chinese problem suddenly appear from causing massive write downs in asset values that Taleb’s fund profited massively from? – in these days of information overload and sophisticated risk management techniques, aren’t these things supposed to built into price or otherwise catered for?  We keep getting told the banking system is safer, but is it when nothing has really changed in the last 5 years?  We’re continually being reassured that our economy is one of the strongest in the Western World, but could this just be false ‘turkey carer reassurance’?

You see, many of us tend to see most of our life working around the mean on a bell curve – remember those at school? – we don’t cater for the low probability, high impact event.  Why if our risk managers and economists are that clever didn’t see the last crash coming?  Is it because they use simple, no longer relevant bell curve methodologies?  And if they didn’t see that crash, and nothing in their methods has really changed, what makes you think they will foresee the next crash?

This brings me nicely onto snooker balls.  Every generation considers themselves to be far smarter, far more in control of the world around them than their forefathers.  We’re suckered into thinking this we’re not stupid enough to make the same mistakes, we and our systems are a lot cleverer…

A book that I read some time ago ‘This Time is Different’ by Reinhart and Rogoff – charts 8 centuries of financial folly – (I’ve got a spare copy if anyone wants it) – it suggests that underneath it all, things don’t really change, the plot is the same, it’s just the characters and locations that are different.  In some ways nowadays I personally think we need to worry a lot more – because the world is far more complicated a place and interconnected than it’s ever been – and those connections are not always obvious so the trigger for and the outcome for an event, or series of events, are far more uncertain.  Taleb touches on this in his book too.  Think about it like this – you set up a snooker table with all the balls on marked spots at the other end of the table from the D.  Now take the cue, and with some force hit it at a ball.  Video it and take a photo of the final position when they come to a stop.

Now try to replicate it.

No matter how many times you try, you won’t do it… well not exactly, not even if you’re a professional snooker player.

Now imagine each of those balls is a country, each with several smaller balls around it representing what that country is about, and around them even smaller balls, and around them even smaller  – for example representing its economy, the major industries in it, and the major players in each industry; another major ball its government, another its financial sector, etc.

Each time you try and replicate the first strike the journey and eventual outcome will be different because the interconnections will play out differently – and that’s if you have the same trigger.

So how do people deal with this seemingly randomness?

Well, we ignore it, largely.  It’s too complicated for us to envisage, so instead we study the news using several sources; we meet like minded people within industry groups or places like the Chamber of Commerce: we sit with our accountants and plan for what we expect to happen based on the past: we like to think that information, knowledge, our skills and systems, the people we surround ourselves with, and moving with the herd will give us the forethought, control and safety we desire.  Like the turkey, we gain a great deal of false comfort – we focus on the day to day minutiae, we ignore the potential for the big unexpected event even though that might extinguish all the gains we’ve made, we gain comfort from sitting fairly and squarely in the middle of the herd.  Taleb even goes as far as saying that people in suits, in whom we all place our trust, are in today’s world in no better a position to assess risk than a taxi driver with no skills – he argues that we’re better sitting back from afar and thinking more.

The problem is while the past and present might be an indicator of what might happen in the future,  it might not be.  At best the future is nowhere near as certain as we’d like to think it is – you might have heard me say ‘where the hell did that come from?’ in response to an unexpected event, it happens a lot in  my business.  In fact if the future does happen according to or near to plan, it’s only for a period of time, and sooner or later it is likely to either massively reverse or accelerate, turning all the plans to dust.

What Taleb is saying is it’s very dangerous for people to gain comfort from the bell curve we’ve had drummed into us applies in many aspects of our lives and there are major weaknesses in the techniques risk managers, accountants, bankers, indeed many businesses use because they ignore the potential for far more devastating – or indeed far more beneficial – Black Swan events.  My own roll of the dice in maximising my exposure to a potentially massive beneficial Black Swan event is avoiding taking on ‘poor quality’ insolvency work in order to free up time to work in a fast paced IT business, which may, or indeed may not, go stratospheric.  I made a conscious choice, many don’t.

Here’s another point.  Adverse Black Swans – those which can hurt you – can happen very quickly, even instantaneously – this might be say because of the herd mentality ingrained in our society – like the sell-off of stocks recently when sellers stampeded even though nothing had really changed – there just had to be a trigger, almost any trigger would do.  However, beneficial Black Swans, like the growth of Google (and hopefully my IT business), often take place over a longer period of time, almost without being noticed, a combination of a slow build up of only very loosely connected events.

Ok, here are a few things to think about, possibly better done with a good bottle of red wine and in a quiet room:

  1. Why don’t you compile a list of where you might, on reflection, potentially be a turkey sitting at day 50, 80, or even 99 days?
  2. Ask yourself where within your business you might unwittingly be relying on bell curve risk management or forecasting methodologies – think about taking a close look at your sales, production, staffing, accounting, cash and risk management generally.
  3. Now put your lists in order of the potential adverse impact on you and your business, then prioritising the ones you can do something about now, ask yourself what you need to do to gain some real comfort here.  Does this, for example, mean you reallocating some of your time and resources?
  4. Ask yourself, are you rolling the dice often enough and in the right places to take advantage of a potentially massively beneficial Black Swan event?  What ‘free’ resources do you have to allocate to this?  Should you be allocating more?

If you’ve got to the bottom of this, thank you so very much for reading.  I’m always here for good quality fee paying insolvency work, just please don’t bring any rubbish as I’m hunting a Black Swan!

Paul Brindley
Midlands Business Recovery
T 01902 672323

Leave a Reply

Your email address will not be published. Required fields are marked *