Posted by: kenwbudd | October 12, 2011

How to Prepare for a Black Swan

A number of unexpected catastrophes and shortages dominated the headlines in the first quarter of 2011. Japan was hit by a magnitude 9.0 earthquake and tsunami that caused a nuclear disaster, persistent power outages, and a host of other major societal and economic challenges.

China sharply tightened its limits on exports of rare earth minerals, on which the information technology, automotive, and energy industries rely. The nations of the Middle East and North Africa experienced severe political eruptions, including civil war in Libya and regime-shaking protests in Algeria, Egypt, Iraq, Jordan, Syria, and Tunisia, which pushed oil prices above US$100 per barrel.

Portugal and Greece tottered on the edge of insolvency, destabilizing their political leaders. Christchurch, New Zealand, was hit by two major earthquakes in quick succession, and the state of Queensland in Australia suffered the worst floods in recorded history in at least six river systems, resulting in great social and economic disruption.

All these events are examples of the kinds of high-magnitude, low-frequency upheavals that Nassim Nicholas Taleb labeled black swans, after a historical reference to their improbability.

In The Black Swan: The Impact of the Highly Improbable (Random House, 2007), Taleb defined a black swan as “an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries an extreme impact…. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Whether environmental, economic, political, societal, or technological in nature, individual black swan events are impossible to predict, but they regularly occur somewhere and affect someone. Some observers argue that the frequency of these events is increasing; others say global communication networks have simply made us more aware of them than we were in the past.

In any case, with the rise of global business, it is likely that black swans carry increased risks for your company, including negative impacts on your customers, suppliers, partners, assets, operations, employees, and shareholders.

Today, not only can a catastrophe in one part of the world affect the sourcing, manufacture, shipping, and sale of products locally, but the interconnections of global financial, economic, and political networks ensure that the effects of such events ripple around the world.

Read the full article at S+G

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