What do the credit crunch, rise of the internet, dominance of personal computers, fall of the Berlin Wall, the success of Harry Potter books and, perhaps even Kenya’s 2007 post electoral crisis and Rwanda’s remarkable economic growth have in common?
They are “almost random” events with a huge impact that were nearly impossible to predict. Sure after they have occurred, someone will always rationalise that they saw it coming.
Reading Nassim Nicholas Taleb’s 2007 book, ‘The Black Swan,’ will shake any manager’s worldview and cause one to think again about uncertainty and the chances of accurate prediction.
According to ‘The Economist’ newspaper, this provocative book is influential, ‘deeply intelligent’ and is must reading.
The book title comes from the past belief that all swans were white, until a rare Black Swan was spotted in Australia.
Black Swan events as defined by Taleb are what he calls an outlier, lying outside regular expectations, where nothing in the past can point to its possibility – and the event carries an extreme impact.
Strangely enough, he points out the Black Swan phenomena, a fact that we tend to ignore, because we don’t even recognise it exists.
This book written by a Wharton trained financial economist makes you think. It’s the kind of book that makes you turn back a few pages to make sure you really understood. Black Swan logic makes what you don’t know, far more relevant than what you know.
His thesis is that, “contrary to social science wisdom, almost no discovery, no technologies of note came from design and planning – they are just Black Swans.”
Taleb writes about the land of ‘Mediocristan’ (type 1 randomness) and ‘Extremistan’ (type 2 randomness) where Black Swan social phenomena lie. For instance, if you randomly got 100 people to line up shoulder to shoulder on a street in Kigali you would get an excellent, statistically correct picture of the average height of Rwandans.
Even if you brought in the tallest person in Rwanda, who is say more than eight feet tall it would not significantly effect (by less than one percent) the average height of the group.
In other words, when your sample is large, no single instance will significantly change the aggregate, the total, or the overall average. In other words in Mediocristan; a place of physical measures, a single event does not contribute much individually, only collectively.
However, the land of Extremistan is filled with mostly social phenomenon where the Black Swan events lie. Take another randomly selected group of 100 hard working Rwandans and compute their average income, now bring in the richest individual in the country.
It is not hard to see that their income would be many times the income of the total group combined.
“In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate or total,” notes Taleb.
The lesson for Rwandan managers is to try to make the distinction between the two worlds of man-made social events and the physical world.
Stop trying to predict everything and recognise or hopefully be able to take advantage of uncertainty.
David is a management consultant working in Rwanda