Black swan events rarely occur, defy predictability, and usually trigger extreme consequences.

Having never appeared before and causing extreme consequences, the COVID-19 virus has been called a black swan event. Though the current pandemic is new, other similar viruses such as MERS and SARS offered a window into the possibility of a new disease with far-reaching effects, so to an extent it was predictable. No one doubts COVID-19 triggers extreme consequences, but considering these thoughts, can a company forecast black swan events?
Until 1697, when Dutch explorer Willem de Vlamingh discovered a black swan in Australia, people believed all swans were white. This discovery of something rare and unpredictable lead to the term black swan. Unfortunately, actual black swan events comprise a much more complicated series of events and results than identifying a new bird.

Determining why black swan events occur is the first step in identifying them. Our minds prefer to simplify events or occurrences. We like to limit the possibilities in our world, enabling us to focus our thoughts on what we perceive as the most critical data. This limitation of view allows a company to choose a path and then seek evidence that confirms their decision and confirmation bias, often ignoring conflicting paths. The people guiding the company tend not to look further afield for other possibilities, especially radical ones. Board members, the C-suite, managers, and employees become welded to their ideas. No one questions what random events could occur, disrupting the entire business plan. Most people believe it is enough to mitigate the usual risks. However, these conflicting paths may help a company gain greater insight into possible, unseen risks.

Overlooking a risk can occur if the company limits its outlook to only the country in which they operate. Today’s world demands a global perspective. Consider a company’s supply chain. If part A comes from country 1, part B comes from country 2, and part C comes from country 3 and each part only comes from one specific country, what happens if political unrest, economic turmoil, or another national disaster hits and the country can no longer produce the part? Even worse, if all components come from only one country, and that is the only supplier available, and that supplier cannot provide the product, everything grinds to a halt. Companies all too often depend on a limited supply chain. This approach simplifies the production chain, but endangers the company.

Another oversight exists if the company limits the period over which they consider history omitting risks that affected the company in the past. Consider the economic crashes of 1929 and 2008. Both had similar circumstances. Could the 1929 crash have been a warning of the 2008 crash? In both cases, the economy was flourishing, leading to speculation. Easy credit allowed people to get into debt buying assets with artificially inflated values. Eventually, the system failed. Can one say that nothing like the 2008 crash occurred before, or would it be better to state that nothing in the recent past would have predicted the 2008 crash?
 

Looking to the future, a company can lessen the effects of a black swan event if they identify and prepare for the potential event. Here are some ways to identify a black swan event.

1. Consider a broader range of possible events that could affect the company. That could include looking at a more global perspective and a more extended history.
2. Learn to consider the unexpected. Let your mind wander when contemplating what could confront your company. Explore multiple paths. Dare to accept new beliefs. Do not fall into the trap of “we have always done it like this” or “I never heard of that” or “that will never happen.”
3. Focus on a consequence you do not want to encounter and how to mitigate the ensuing damage.  This focus may prove more beneficial than spending time imagining an exact cause for the disruption. This approach allows for more flexibility.
4. Think for yourself, and do not just go with the majority.

To learn more about RubinBrown’s Enterprise Risk Management Services, contact your RubinBrown advisor.

 

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