We have been spending a lot of thinking time lately with Nassim Nicolas Taleb, the author of The Black Swan and Antifragile. Black swans are his metaphor for events that are a) unpredictable; b) massive in their consequences for the people concerned; and c) obvious in hindsight.

Below are the three of his most significant points. We call them “risks hiding in plain sight.”

The world would have us treat our businesses like a game. Founding and operating a business enterprise is all about taking risks and dealing with uncertainty. But how well do you understand the nature of the risks in our world? Taleb has been a lone voice in the wilderness for many years now.  Early in his career, he was a successful options trader, learning about risk in a very volatile world. Well before the 2008 financial crash he identified the market environment that ultimately led to crisis and believes little has changed to make The world would have us treat our businesses like a game. another one less likely.

Banks, economists, and academia alike continue to be enthralled to what Taleb calls the “ludic – Latin for game – fallacy.” They build computer models and make forecasts based on game or portfolio theory. They preach the universal applicability of tools such as the normal distribution curve, means, and standard deviations to the organic socio-economic world of business. But in the real world, the cards are marked, the coins biased, and nobody acts in totally rational ways.

In business, we must work only with data and be skeptical of all expert opinion. Never use an external model for making predictions about your business. Rather, build a model from your own data and even then, remember it’s only a model and not reality.

I have a friend who runs a successful PR agency. He is his business. He is 100% dependent upon his brain continuing to function properly. Outside of work, his hobbies are base-jumping and heli-skiing. He is typical of us all, when he underestimates the risks–by a factor of between 20 and 30 times – to his most precious asset. And he does likewise with the consequences to his life of serious injury.

Beware our need for reinforcement.

  Beware our need for reinforcement. It’s easy to get praise when you ask family and friends, who will tell you exactly what you want to hear. Instead of seeking praise, seek criticism to improve your work.
It seems to me that as a culture, we are colluding in our own downfall. We are becoming fragile  because of two natural human tendencies:
  1. We need to be liked! We over-praise! We are always combining feedback, both positive and negative, with multiple compliments.
  1. We want only good news. So when we receive feedback that we don’t like, we do our best to disprove it. This is a well-documented psychological phenomenon called the “confirmation bias.” It is the tendency to seek out, interpret, lean towards, and recall only that which confirms our own beliefs, while simultaneously giving less and less, if any, consideration to alternatives. We worry more about terrorism than swimming pool accidents. We think more about bird flu than we do about diabetes. We also only listen to news channels that have the news we like to hear, like either liberal or conservative writers.
24-7 news and commentary feeds us a nonstop diet of the sensational that is not statistically valid. We are practical people who must focus in our areas of influence and not in the manufactured areas of concern out there in media land. The best tip I can give you is to avoid the distracting, distorting newscasts at all costs.
Businesses fail because they cannot cope with volatility. We need to be aggressively tinkering all the time. I love my frequent visits to a local coffee shop. The proprietors regularly try new ingredients, flavors, and recipes, and I’m happy to try them out (purely on a consultant basis, Businesses fail because they cannot cope with volatility. you understand). It is a thriving, bustling hive of terrific customer service. 

Aggressive tinkering is the engine of growth for ALL small businesses, if targeted on total customer service.  Taleb emphasizes the organic nature of business. It is not an engineered thing. Wealth creation is nonlinear. Frequency distributions cannot accurately describe it. Economic growth, sales revenue increases, and profit improvement are always nonlinear.

A dual strategy towards risk takingA dual strategy towards risk taking
Be ultra-conservative with 90% of your investments, and ultra-aggressive with the 10% that you can afford to lose. So, for example, with your pension, is most of it in municipal bonds and treasury bills? These are as close to guaranteed as we can have in our world. Only gamble an affordable proportion of it in venture capital where the upside is scalable and loaded with potential. Imagine getting in on the ground floor of the next Tesla or Microsoft.

Remember Siegfried’s Tiger!
The Black Swan Antifragile Read Taleb’s books and be aware that the stock market is like the casino industry.  They are both subject to the ludic fallacy and our confirmation bias, and they cannot cope with volatility. Casinos spend millions on security cameras and anti-cheating eventualities, even though the real-world data shows them that their “black swans” come from outside their game mindsets. Their uninsured losses were massive, and 267 people became unemployed when the Las Vegas headliner Siegfried (one half of Siegfried and Roy) was mauled by Mantecore, his own white tiger, during a performance in 2003.

The stock market was even more devastated by the 2008 black swan event known as the “subprime” mortgage game.

So, in summary, don’t get complacent about the model you use to plan your future, and avoid using an external model for making predictions about your business. Rather, build a model from your own data and keep revising it, and remember it’s only a model and not reality. Beware of the black swans.