by Pawel Motyl
From a business perspective, organizational black swans affecting a single company are the biggest threat. And to make it more interesting, these are often the result of events occurring within an organization, whereby the company is responsible for its own ornithological nightmare, usually due to poor decision-making. An example of a particularly vicious black swan was the Deepwater Horizon offshore oil rig explosion, whose tragic consequences were several deaths and a massive ecological disaster, as well as enormous damage to the company’s image and finances. It’s estimated that the tragedy cost BP over $61 billion.
The fourth subspecies of black swans are those that affect a small group of people—say, a team in a company, a family, or a group of friends. A friend’s unexpected illness, a bad financial decision that has consequences for the whole family, or a key employee suddenly quitting are all examples of such black swans.
The fifth group comprises events that affect individuals—they take only one person by surprise. I suspect this is the kind of black swan we subconsciously fear the most. In all the other categories, the problem affects groups; in this case, we’re left to deal with the black swan ourselves. There are myriad examples of the careers of competent, high-ranking, successful people in a range of fields collapsing due to something that was blindingly obvious to everyone else around the person affected.
Rule #1
Prepare for a black swan, because one thing is certain: sooner or later you will meet one.
In the world of black swans, it becomes more and more difficult to predict how a given situation will develop. Mohamed A. El-Erian, the former CEO of the Pacific Investment Management Company, and his colleagues even proposed a term for it in an economics context—the “new normal”—which over time became more and more popular and used in a more general sense.
The new normal defines a reality in which change and surprise are constant features and where nobody really knows what might happen, even in the immediate future. The new normal by itself is fairly unpleasant. It’s human nature to like to have a relatively clear view of what might happen, and when we don’t have such certainty we can feel psychologically uncomfortable. What’s worse, though, is that in the new normal, the traditional methods of decision-making fail, mechanisms that worked perfectly well for years suddenly become useless. The traditional approach to risk management is no longer a fundamental tool to support decision-making processes. It has become unreliable. However, it’s difficult to abandon tried and tested tools and approaches, even if we can see that they’re no longer fit for purpose and no longer provide us with reliable data, thus undermining our ability to make good decisions. The power of habit is so strong that we often stumble on, making more and more errors, despite its being plain as day that we’re heading in the wrong direction.
Look at the period 2008–12. The financial crisis and ensuing economic collapse were essentially the global sum of the combined decision-making errors by investors, entrepreneurs, managers, regulators, and even customers and consumers, all operating in an interdependent, interconnected system. It was an archetypal Catch-22 situation: the gradually deepening crisis made it increasingly difficult for the decision-makers to properly assess the situation, and the bad choices they made destabilized the environment even further, which in turn led to even more misguided decisions. Meanwhile, amid the rising chaos, people held on ever tighter to their tried and trusted management methods—and in so doing perfectly implemented all their wrong choices.
Once the world recovered from the shock, of course, the billion-dollar question was asked: Whose fault was it? Among all the hundreds of macroeconomic conspiracy theories, relatively little time was devoted to the actual decision-making mechanisms behind the crisis and the numerous traps that the new normal had set for the decision-makers.
The traditional approach to decision-making rested on a simple assumption that both the quality and the accuracy of decisions were based on the competence and experience of the decision-maker in tandem with the quality and completeness of the information at their disposal. That approach was highly effective for many years. If a decision was made by a professional acting in good faith and drawing on information from trusted sources, the decision was pretty likely to be the correct one. All you had to do was develop good systems for gathering and analyzing data and entrust key decisions to the most competent personnel to be guaranteed relative peace of mind. Recent years, though, have turned the situation on its head. During the crisis, it was precisely those people who were most experienced, with the greatest successes behind them, relying on tried and tested, reliable sources of information who made the most dramatically awful decisions. Suddenly the skies were filled with falling business stars, who despite their glittering careers and prior successes came crashing down, often not only dragging entire organizations down with them but also wiping out the fortunes of thousands of individuals. The cause of these dramas was not solely greed, though many diagnosed this as the source of the problem.
No, the main culprit was... the turkey.
2
Turkey Trouble
Once upon a time, there was a turkey living the good life on a farm. He passed his days in blissful peace, each day as lovely as the one before. Three times a day a nice farmworker brought him a bucket of feed, which the turkey gobbled down in ever-greater quantities. His pen was cleaned regularly. Time drifted by, 50 days, 100 days, 150 days, then 200 days. Every day the same: feeding and cleaning. If we’d asked that turkey to comment on life on that 200th day, he would have been full of positivity. This is the life! And if we’d asked him what the 201st was going to look like, he would have been puzzled: What else could it look like? The same as before! Three meals a day and a clean pen. Sadly, the turkey didn’t know that Thanksgiving was just around the corner and that on day 201 he would be meeting the first and last black swan in his life—something he was unable to predict based on his previous experience and for which he couldn’t prepare.1
Here’s the bad news: We’re no different to the turkey. We have a tendency to extrapolate positive trends. If something has developed over a reasonably long period in a predictable and ordered fashion, we subconsciously assume that it will continue that way. This is a trap that our cognitive system sets for us. It affects the way we absorb and process information from our environment, and then draw conclusions based on that information. We are particularly susceptible to positive trends because it’s comforting to assume (consciously or not) that our current successes will follow us into the future. This assumption is typically accompanied by our ignoring important signals from the world around us that the trend is about to change—just like the turkey, who, after 200 days of pampering, failed to notice that the farmer was sharpening his knife.
This extrapolating of trends in a new normal world, replete with black swans, is potentially lethal. The appearance of a black swan typically flies in the face of trends and destroys the status quo, surprising the decision-makers, who were fully convinced that the situation was stable. Here are a few examples.
An acquaintance of mine—let’s call him Mr. Turkey—was an active investor in the stock market. He invested over many years in the financial sector, and his portfolio brought consistently high returns. Mr. Turkey always thought of himself as a low-risk investor. For example, he avoided tech shares like the plague, which in 2001 saved him from painful losses when the dot-com bubble burst. I recall how, after this particular crash, he argued that come what may, nothing like that would ever happen to the banking world—one or two firms might go under due to poor decision-making, but a radical, global crash across the entire sector was simply impossible.
Then came January 2008, which was the best January ever for Mr. Turkey who, seeing how bank shares were rising, was ecstatic. He repeatedly explained to me how a thorough analysis of trends was the key to accurate decision-making. He showed me dozens of graphs and simulations that confirmed his arguments and of which, I�
�m ashamed to admit, I understood little.
There’s a classic trick that film directors often use: after an emotional, life-changing event, a caption appears on the screen saying “one year later,” and in this way, we jump forward to see how the lives of the protagonists have changed.
I wouldn’t recommend doing that for Mr. Turkey. Jump one year ahead and, rather unsurprisingly, you’d find an embittered man, angry at the world. Mr. Turkey had to watch as his portfolio, based on a few stable and respectable banks (or so he thought), crumbled to dust before his eyes.
After a time, Mr. Turkey came clean (with the help of a little tequila) and admitted he’d been completely taken in by the positive trend. I remember his words well: “I saw reality the way I wanted it to be. I accepted any information that confirmed my assumptions were right, and anything that called them into question was tossed in the garbage, the more so because the situation over the previous few years had been so good.” That’s it in a nutshell. These words of Mr. Turkey should be a kind of business memento mori for investors.
Just look at Nokia.
The beginning of the twenty-first century was a great period for Nokia. The Finnish cell phone manufacturer had crushed its rivals, taking an amazing 50.9 percent of market share and giving Symbian, the operating system installed in its equipment, an even bigger advantage: up to 62.5 percent of the phones sold in 2007 used it. Nokia had left its rivals trailing way behind as it rushed toward a glittering future. The various innovations that were emerging, like touch screens, which consumers were slow to take up, or the weird operating system launched on November 12, 2007, called Android SDK, weren’t perceived as threats in any way. It was more than a year before the HTC Dream, the first smartphone to use the Android operating system, even appeared. Drunk on its enormous successes, Nokia, despite many and varied warnings and criticisms of Symbian, continued to back the system, sticking with phones fitted with traditional keyboards or, at best, combining a keyboard with a smallish touch screen.
Time to use that filmmaker’s trick...
“Six years later.”
Nokia’s share of the cell phone market was 2.8 percent (data from Q1, 2013), and nobody could even remember what Symbian was. According to a report from “Worldwide Quarterly Mobile Phone Tracker,” published by the International Data Corporation, at the end of 2013, 81 percent of all mobile appliances sold came with the Android operating system, the same system dismissed and ignored by Nokia. Meanwhile, the Finns had almost totally dropped out of the cell phone game, becoming one of the most surprising business failures of the twenty-first century. In 2014, Nokia was acquired by Microsoft, which in 2016 sold it to HMD Global and FIH Mobile. It re-entered the game in 2017, launching new smartphone models using—shock, horror—the Android system, but the company does not seem likely to regain its position as market leader any time soon.
Nokia fell prey to the same mistakes as the turkey. Years of success dulled its edge and led it to, very conveniently, extrapolate the prevailing trend—everything had gone swimmingly yesterday, so tomorrow would be just as good. This mind-set meant it was easy to overlook the warnings coming from all around, which, it later turned out, were absolutely worth paying attention to. It was also easier to stick to the same old routines and ignore new ideas. During this period, the Finns put countless new models onto the market, few of which sold well. The market turned away from traditional keyboards, seduced by the allure of touch screens. The biggest irony, as Frank Nuovo, a former chief designer at Nokia, recalled, was that the first prototypes of a smartphone and tablet using touch screens were developed by Nokia at the end of the 1990s, years before Apple’s iPhone appeared. Sadly, Nokia, which spent a total of $40 billion on research and development (four times the amount Apple spent!), failed to implement its own solutions and monetize them. Should we be surprised? As the industry portal gizmodo.com reported, Anssi Vanjoki, Nokia’s chief strategist, said at the end of 2009 that “Apple has attracted much attention [... ], but they have still remained a niche manufacturer.” 2
Rule #2
The better it’s going, and the more successful you are, the more you are at risk of turkey syndrome.
The deeper you fall into turkey syndrome, the nastier your black swan will be.
Others who clearly forgot Rule #2 were the aforementioned Robert C. Merton and Wendelin Wiedeking. In both cases, the fundamental reason for their poor decisions was their conviction that past successes were proof of the correctness and effectiveness of the solutions applied, so it made no sense to change anything. Unfortunately for both men, the arrival of a black swan destroyed that theory.
In business, this phenomenon has been observed on a much grander scale. Jim Collins, renowned author of the bestseller Good to Great, spent four years researching the reasons behind the collapse of companies that had previously been market leaders. He published his findings in 2009, in a book whose title requires no further comment: How the Mighty Fall. Collins divided the process of collapse into five phases, which ideally fit the cases described above.
Phase 1: Hubris born of success. A series of wins breeds arrogance and, with it, the disappearance of the desire to understand the reasons for the ongoing success. The commonest symptom of this phase is the increasing conviction that we are successful because we are special.
Phase 2: Undisciplined pursuit of more. The certainty of being right and of having a guaranteed recipe for success leads to reckless diving into uncharted waters, frequently with no real reason to do so. This phase isn’t accompanied by deeper analysis. Why analyze anything when you’re sure you’re going to win?
Phase 3: Denial of risk and peril. This phase is key and heralds the beginning of the death spiral. Early warning signals of impending doom are repeatedly ignored, and the decision-makers focus on the most positive fragments of reality, no matter how minuscule, that confirm their assumptions. (I suspect Mr. Turkey would relate to this.) All the decisions that follow are entirely misguided.
Phase 4: Grasping for salvation. When the scale of the threat suddenly hits home, many decision-makers react in a chaotic, unconsidered fashion, hoping to save the situation with a single shot. However, instead of drawing on analysis or discipline to help them focus their aim, they’re shooting in the dark. It isn’t difficult to spend a fortune launching a new product; it does, however, take skill to make money doing it—and that’s the only way to save a company caught in phase 4.
Phase 5: Capitulation to irrelevance or death. Phase 5 marks the point where a deteriorating financial situation and successive poor decisions extinguish an organization’s internal energy and undermine the positions of its leaders and morale of employees. A company that capitulates internally has only two options: to vegetate long-term and struggle to survive, or to shut up shop completely. 3
Andy Grove, past CEO of the Intel Corporation (1987–98), often said that success leads to complacency, and complacency leads to failure. The better things are going, the less willing we are to change and the more likely we are to ignore warning signals that all is not well.
The publisher of the Encyclopædia Britannica certainly ignored the warning signs. The Encyclopædia Britannica, originally published in three volumes between 1768 and 1771, became synonymous with quality in encyclopedias, achieving enormous market success. It dominated the world of reference publishing for decades, undergoing constant improvements and simultaneously strengthening its position as an unchallenged leader. Nobody could compete with Encyclopædia Britannica. A legendary brand, years of history, a renowned academic board taking care of the facts, and the end product itself made it not only an academic aid but also an object of desire for collectors the world over. A business model like this couldn’t fail. And for 230 years, it didn’t.
Then, toward the end of the twentieth century, the publisher heard from one of their managers about a strange idea. A group of enthusiasts had decided to create an online encyclopedia,
entrusting the definitions and developments of the entries to the users themselves. From the point of view of the publisher, whose work was based on the highest academic rigor and factual accuracy, the idea was absurd—there was no way it could work. But Nupedia, which launched in 2000 and was renamed Wikipedia a year later, was a smash hit. Its lightning development in multiple languages gave people easy access to almost 4 million entries (that’s about forty times the number in Britannica), which may not have been as perfectly defined as in the legendary encyclopedia, but appeared to be good enough for the majority of users. Customers began to ebb away from Britannica, and the publisher, which only a decade earlier had been able to sell over 100,000 copies annually, saw its sales shrink by 2010 to a paltry 8, 500. In 2012, the company took the painful decision to abandon traditional publishing and concentrate instead on a digital version, as well as developing its educational programming. More than two hundred years of unbroken business success were abruptly halted by a seemingly benign black swan, which revolutionized the field the publisher operated in.
It’s one of the greatest paradoxes to have appeared in decision-making in recent years: The better we are, the bigger the risk, because the less keen we are to change. Meanwhile, the speed at which the world around us evolves makes the business stability and long-term planning we fought so hard to achieve extremely risky. Today, not being prepared to instantly modify your behavior can translate into an equally instant disaster.
There’s a quote from the world of sport that goes along the following lines:
My biggest enemy isn’t my rival, it isn’t injury. I’m most worried about my past successes, because every day I spend in first place, in the leader’s position, means my motivation to train and to invest extra energy in training drops.
