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Black Swans And What They Mean for Your Organisation

In our VUCA world (Volatile, Uncertain, Complex, Ambiguous), Black Swan events have become a particular interest for organisations. A term coined by Finance professor Nassim Nicholas Taleb, Black Swans are events that are:

  • Unpredictable as they are beyond what is normally expected of a situation.

  • Have potentially severe consequences.

Black swan events are characterised by their extreme rarity, their severe impact, and the widespread insistence that they were obvious in hindsight.

Examples of Black Swan events include the SARS outbreak of 2003 and 2008 global financial crisis. The recent oil price crash, together with the Covid-19 outbreak have also been dubbed as Black Swan events. The world is a lot more interconnected than it was in 2003 and 2008, with many companies having vast global supply chains. As such, the consequences of these Black Swan events have the potential to be extremely magnified.

Is your organisation prepared to deal with Black Swan events?

Every organisation understands the importance of risk management and having a contingency plan in place. However, risk management systems and contingency plans often rely on predictions and recognising previous patterns. It is even more difficult to predict Black Swan events, owing to its rarity. Furthermore, Black Swan events often consist of many unrelated factors interacting with one another. For example, who would have thought that the Covid-19 outbreak would lead to an oil price crash?

Even if they are highly unpredictable, the aftermath of Black Swan events can, and should, still be mitigated. Black Swan events are the most extreme form of change that organisations can go through. As such, an organisation that successfully handles a Black Swan event, can be assured of their continuity.

Below, we have outlined 3 steps an organisation can take to ensure that their risk management systems are able to cope with Black Swan events.

1. Map out the networks that your organisation exists in

Creating a network map of your industry helps you to see where the nodes intersect with one another. This allows your organisation to identify which parts might have negative impact on your business if a Black Swan were to hit it. In Taleb's book, The Black Swan, he mentions that networks are made up of extremely connected nodes and poorly connected ones. An insult to an extremely connected node will cause more problems to the entire network than an insult to a poorly-connected one. As such, a network map will allow a company discern other available nodes when their main node has been hit.

2. Create a list of potential Black Swan events

As mentioned earlier, Black Swan events are hard to predict. However, this does not mean that a business cannot attempt at some form of prediction. When it comes to predicting Black Swan events, companies should try to cast as wide a net as possible. So, this includes any environmental, political, societal and technological events that have the potential to be Black Swans. From there, these events can be categorised into their levels of impact on the organisation.

3. Asking 'what if' questions

Now that you have a network map and a list of potential Black Swan events, your organisation needs to ask themselves several 'what if' questions. What if a political Black Swan event affects this node of the network? What is the impact on the business? How will it affect other nodes? Asking such questions may uncover unknown risks that you did not think of previously. Rather than the focus being on the likelihood of the event, the focus will be on aftermath. As a result, your organisation will be more compelled to think of solutions that will mitigate the consequences and your contingency plans will become stronger.

Ideas come and go, stories stay. - Nassim Nicholas Taleb


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