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The Black Swan Effect

The Black Swan Effect
The Black Swan Effect
The Black Swan Effect

Black Swan is a movie that follows the story of a ballerina in a New York ballet company. Her life is consumed with dance.

Oops. Wrong Black Swan.

The Black Swan is a book that sets out the nature and impact of rare, improbable events. The author, Nassim Nicholas Taleb, coined the metaphor of Black Swan to describe them.

Continue reading The Black Swan Effect

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Nassim Nicholas Taleb

Nassim Nicholas Taleb is seen by many as a pre-eminent thinker of our time, and by some as a populariser with a selective reading of statistical theory. Yet without a doubt, his books have had a profound effect on business, management and public policy thinking – to the extent that he is widely feted in contexts as formal as the World Economic Forum, the RAND Corporation, and the US Government. Taleb’s focus is on uncertainty and randomness, and what it means to be resilient in the face of its inevitability. Around that focus is a breadth of philosophising and a depth of erudition that can be enchanting and off-putting in one sentence.

Nassim Nicholas Taleb

Short Biography

Offering a biography of Taleb feels like a slightly risky undertaking, in the light of his rejection of awards and honours, and the statement on his website‘s biography for conferences page: ‘Please note that the author does not allow fluffy and longer bios with information from the web. Only the official biography is authorized’

So, it is with hesitancy that I tell you that Taleb was born and grew up in Lebanon, studied at the University of Paris, where he gained a BS and MS, and at Wharton where he earned his MBA. He returned to Paris and was awarded a PhD in Management Science for a thesis on the mathematics of the pricing of derivatives from the University of Paris (Dauphine).

He spent around 20 years in the financial industry managing hedge funds and trading in derivatives for some of the world’s biggest financial institutions: Credit Suisse First Boston, UBS, BNP-Paribas, Indosuez (now Calyon), Bankers Trust (now Deutsche Bank). He also started and ran his own firm.

In 2004, after the success of his first book, he moved to becoming a full time author and in 2006, took on academic appointments too. He is now Distinguished Professor of Risk Engineering at New York University’s School of Engineering.

Taleb’s Ideas

Taleb has written four non-technical books that he refers to together as a four-volume series called ‘Incerto’ – the latin word for uncertainty. He is also working on a technical, mathematically formulated mirror work that he is making available free, online. Rather than give a link that may change, I refer you to Taleb’s site for the link.

The four books of Incerto each develop an aspect of Taleb’s thinking on uncertainty, each building on the others – although one seems to me to stand aside somewhat.

Fooled by Randomness (2004) was Taleb’s first and sets out his analysis of the extent to which randomness influences everything: most notably the financial markets. More importantly, its pervasiveness means we often fail to notice and acknowledge it. It is far easier to attribute events to agency – causes – than to randomness, but often (far more often than we think), randomness is the prime mover. This is the ‘illusion of control’.

The Black Swan (2007) made perhaps Taleb’s greatest impact to date on the world. His term – which he introduced in his earlier book – represents an event that we never see coming until it hits us. We assume that random events happen as if we are in a casino: 50% red and 50% black, the wheel will land on 14 Red one time in 37 (38 in US casinos). But some events are huge and unexpected and fall outside our usual experience, so we fail to plan for them. These can cause catastrophes.

Antifragile (2013) extends the thesis one step further. Fragility is the state of being highly susceptible to shocks. Resilience is the ability to withstand them. Taleb coins the word ‘antifragile’ to represent the state of growing stronger under uncertainty and shocks. He makes the case that this should be a design objective in financial trades, whole markets and for society as a whole. But don’t expect a closely argued technical account or even a business oriented book; Antifragile comes across more as a personal philosophy than an empirical analysis. Strong ideas, but little evidence.

Which brings me backwards to the third book in the chronological sequence:

The Bed of Procrustes (2011) is a book of aphorisms, in the mould of German philosophers like Wittgenstein. It is full of Taleb’s short pithy remarks – sometimes somewhat ornery in style. Every now and then, one hits you between the eyes and you think ‘yes, that’s spot on’. Most, however, seem like the contents of an academic teenager’s commonplace book. In all this feels self indulgent.

Taleb’s Contribution

It is hard to assess this without the benefit yet of hindsight. He is much lauded but also critiqued both for his writing style and statistical naiveté. But his central thesis – which needs barely a quarter of his wordage to demonstrate – is that randomness fools us constantly and, if we fail to understand it, it will make fools of us. The unexpected can change everything overnight and we have seen that in recent years in economics, politics, and societies.

These are important ideas and Taleb has brought them to the fore. So no manager or professional can therefore afford to be ignorant of them and nor, Taleb argues well, can they afford to not act on them. In the political, macro-economic and social spheres, however, I fear our leaders are failing us.

Taleb Talking about Antifragility at the RSA

Not so easy to follow, but it will give you a sense of both his ideas and his style. A seven minute talk followed by a discussion.

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Henry Mintzberg 2: Management Thinker

This is our 250th weekly Management Pocketblog.
We’re looking forward to the next 250!

In last week’s blog, we started our exploration of Henry Mintzberg, Gadfly Generalist. In this second blog, I want to examine two other aspects of his work: the way organisations are structured, and how they think strategically. But first, I feel the need to add in, gratuitously, another of Mintzberg’s more memorable quotes.

Mintzberg Delayering

Mintzberg on The Structure of Organisations

Mintzberg has visited this topic twice: in his 1979 book, The Structuring of Organisations, and then again, in 1989, in Mintzberg on Management. His earlier work identified five archetypical organisational structures or types, which he later revised to six.

  • Entrepreneurial Organisations are small, informal, with loose allocation of roles, but frequently strong leadership from a single chief executive.
  • Machine Organisations are excellent at repetitive tasks like manufacturing, placing efficiency of process at their heart, and formalising everything.
  • Diversified Organisations create a central administrative function to serve a range of operating units that are more or less autonomous. The degree of autonomy seems to vary in cycles with the current cycle creating a high degree of centralisation. See the earlier article, Kenichi Ohmae: Irrational Strategy.
  • Professional Organisations might also be called knowldege organisations. They use the skills and knowledge of their highly trained workforce to deliver fairly standardised services.
  • Innovative Organisations are flexible, informal and multi-disciplinary, allowing them to adapt and innovate. Mintzberg saw these as increasingly succeeding over competitors in the future.
  • Missionary Organisations have a clear mission that provides the basis for strategic choices and the motivation for employees.

Mintzberg on Adhocracy

I am going to make more of this than it may strictly deserve, as it is just one of very many topics on which Mintzberg writes. But it is one that interests me, especially with the emergence in recent years of the concept of holacracy, which seems a natural successor.

The term was, I think, first coined by Warren Bennis and then taken up and popularised by Alvin Toffler in his book, Future Shock. An adhocracy is a way of governing an organisation, not through formal structures, but through informal networks in which individuals take on the roles that are needed at the time. Such organisations are fluid and undocumented and unstructured knowledge has a high value.

Mintzberg developed these ideas, advocating small scale, temporary organisations coming together within the larger whole, to deliver a project, or one product or service, or to serve one customer. He saw two models:

The Operational Adhocracy, which works on behalf of it clients, like service businesses such as consulting

The Administrative Adhocracy, which comes together to serve its parent organisation.

Both of these models are excellent at creating adaptability and reacting to changes in circumstance. Consequently, both are poor at strategy building, because members have little investment in the adhocracy’s long-term development.

Mintzberg on Organisational Strategy

Mintzberg has made several influential contributions to thinking about organisational strategy too. His most notable influence has been, like Ohmae, to advocate non-linear, creative thinking over formulaic, analysis-driven strategy development. Once again (see last week) Mintzberg’s HBR article on the subject is very widely read and, once again, the enterprising reader could find a copy notwithstanding HBR’s copyright if you chose to. His books on the subject include: Rise and Fall of Strategic Planning (1994), The Strategy Process (1996), Strategy Safari (1998), and Strategy Bites Back (2004). Many of these are in revised editions and remain valuable today.

He sees three major pitfalls in traditional strategy making and rejects any assertions that our volatile, uncertain times are anything special – try telling that to people in Stalingrad during the Second World War, he says. All people at all times have seen their world as complex and uncertain.

Mintzberg’s three pitfalls are:

  1. Assuming that we can predict discontinuities. We tend to assume, implicitly, that the future will flow from the past and that changes will arise from trends. This is a theme that Nassim Nicholas Taleb has recently made his own, with his best selling book, The Black Swan.
  2. Planners are often detached, in the ivory planning towers, from daily realities. They are focused on the hard data and its analysis and miss out on the soft information that would alert them to big shifts. This says that operational managers need to be highly engaged in any strategic work.
  3. A belief that formal strategy development can follow a linear process. Instead, he argues, creative, divergent thinking is needed, which can make links outside of the logic-chain, subverting established categories and dogmas.

So, to end this exploration of Mintzberg’s thinking, one last, telling quote.

‘The real challenge in creating strategy lies in detecting the subtle discontinuities that may undermine a business in the future. And for that there is no technique, no program, just a sharp mind in touch with the situation.’

Pocketbooks you might enjoy

I am a little loath to include a book on the process and tools of strategy, but it is a good book and I have included it alongside others on creative thinking!

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