Black Swans

Tom Breur

7 August 2016

“Black Swan” (2007) was one of those business analytics best-sellers, where Nassim Taleb laid out how black swans trigger a turnaround in perception. Some books get discussed so much that you’d almost feel obliged to read them – I’d say this is one of them. Black Swans are totally unexpected events that trigger a paradigm shift.

The idea of revolutionary events driving paradigm shifts is all but new. Philosopher Thomas Kuhn wrote “The Structure of Scientific Revolutions” in 1962, and asserted that scientific innovations either arise from “mainstream science” or crises – the latter triggering paradigm shifts.

Paradigm changes are brought about because certain “theories about the business” (to quote Peter Drucker) have proven useful, but then all of a sudden appear to fail spectacularly. Think back about loan securisation models that were used to package and resell so-called “safe” mortgage risks. Remember those? Turned out to be not so safe after all…

As time goes by, more and more situations occur (like people “unexpectedly” falling behind on their mortgage payments) that don’t fit the existing theory. Initially these aberrations are minimized or discarded as outliers. After all, these phenoman simply “cannot” happen, they don’t fit within the reigning worldview.

At some point, these incidents recur so often they no longer can be ignored. In the end, some of the old assumptions will get challenged, and maybe even the entire worldview. This leads to some “implosion”, often accompanied by a crisis. In the case of our mortgage securities, a financial crisis.

Another interesting historical example is our ozone layer (https://en.wikipedia.org/wiki/Ozone_layer). There is a hole in the ozone layer above Antarctica that scientists have long known about. Or rather, measurements by NASA that indicated much higher than expected radiation there were habitually discarded, and removed from the dataset.

The practice of measuring high radiation in the southern hemisphere, and subsequently discarding those measurements, went on for decades until a crucial publication in 1985 (Farman, Gardiner & Shanklin). By then lots of bans were already in place, because awareness that depletion of Ozone was influenced by man had grown. Renewed analyses of historical data revealed that this hole above Antarctica had been there for a long time, which spurred the turnaround in thinking about risks of CFC’s, etc.

We all rely on assumptions, and they color our perception. When we are confronted with observations that don’t “fit”, that don’t make sense, it is a natural reflex to discard them. Only when we allow ourselves to think “Hang on, might there be some other explanation for this?” do we get into a frame of mind that enables breakthrough thinking.

 

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