The Black Swan and us
Re-setting strategy in high-risk times
We are victims of change. Huge change. Change that some tried to predict but that most of the rest of us did not see coming. Change that fits at least some of the characteristics of a Black Swan.
Nassim Nicholas Taleb wrote in his #1 best-seller book, The Black Swan: The Impact of the Highly Improbable: "A Black Swan is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable." 1
The Black Swan changed our world
Here's the thing about Black Swans: "Because Black Swans are always unexpected, they dramatically change the world of those who are not prepared for them." 2
So what happens to us when we are hit by a huge, unexpected change, especially when that change engenders great loss? Of course, that's the upshot of the Coronavirus Pandemic. Hundreds of thousands of people have lost their lives to COVID-19. Many more have lost their jobs and livelihoods in the resulting economic shutdown. Even more have seen their businesses and careers diminished and their dreams at least dented if not blown away.
What happens is that we enter the process of grieving, of coping as best we can. The intensity of the psychological process and our actions in response vary, in part due to our individual psychological make-up and in part due to the depths of the Pandemic's effects on us. But virtually all of us are affected, whether we acknowledge it or not.
"I'm not OK."
Here's a true story, to illustrate the point.
My friend, let’s call him David to protect his privacy, is a fellow coach and one smart guy, someone I hope to collaborate more with in the months ahead.
About a month ago, another friend said, "David seems a little off his game."
Then, a week later, David did not show up on Zoom for a virtual networking meeting at which he was the featured speaker.
I reached out to David to tell him he was missed at the meeting and to see if he was OK.
He said he was OK. He was stunned that he had missed the meeting and said he never had done such a thing before and that he would apologize to the host.
We then connected on a one-to-one Zoom call.
"I am OK," he again said.
But then he took a deep breath and said that was not true, he was not OK. He had lost 70% of his coaching clients. But not everything was bad: He had picked up two new clients and the paid networking group that he facilitates was mostly intact.
He then confessed that "the problem has been with me, not just the business itself." He said that despite having the support of his family and having savings to carry him ahead, he was "turned off with things." He said for the last couple of weeks he lacked motivation and direction. He said the reason was not just the economic hit, but that "this whole situation has shaken out what I used to thrive on, the engagement part and social part of life."
We proceeded to talk about the new reality of having to network and coach on Zoom rather than in high-touch face-to-face physical meetings. I talked about my successful pivot to this new reality and encouraged him to embrace it as a more efficient but still effective way to keep doing business and to connect with existing and potential clients.
Stages of emotion
I then raised the Kübler-Ross model for his consideration and suggested that he was in the Depression stage. 3
A few words about the Kübler-Ross Model. In 1969, psychiatrist Elisabeth Kübler-Ross wrote a ground-breaking book, On Death and Dying, in which she described the stages of emotions which are experienced by a person who is approaching death or is a survivor of an intimate death. 4 (I learned about the Kübler-Ross Model through my late clinical social worker spouse and found it very helpful it as I journeyed through multiple emotional states after her unexpected death two years ago.)
Since then, Kübler-Ross' model has been extended and adapted to address what people go through when they are faced with the need for great change.
Here's an exhibit that applies the Kübler-Ross Model in a way that is seems especially relevant to what we all are going through in the Coronavirus Pandemic: 5
My journey
I talked with David about my progression through the Kübler-Ross Change Curve.
In early March I was in shock at the prospect of a pandemic.
By mid March I was in denial that this was a "Black Swan" game-changing event.
Then, in late March, I entered the frustration stage as I was losing clients, which quickly turned to anger as I saw what I had been building with increasing momentum slip backwards.
By the beginning of April I was depressed and frightened about my situation and that of so many others.
The change came in mid April, as I realized that my coaching, and especially my group coaching format, could help people change their businesses for the better, given the changed environment. I recognized that I had the tools and experience to help people on a one-on-one basis as my free contribution to making things better. That led to my decision to really engage strongly in networking and to offer no-charge strategy re-planning sessions and to recruit people into my coached business support and accountability groups (or into one-on-one coaching), for their and my own betterment.
I am now in the integration stage, operating successfully again and working on growing the good I can spread.
A note of caution on applying the Kübler-Ross framework: We don't necessarily move along the stages step by step. We can move into stages in a random order and may sometimes even go back to a previous stage. We may even get stuck in a stage and not move on from there.
Consider normalcy abnormal
When I began to think about re-strategizing in the time of COVID-19, the killing of George Floyd had not hit the news. The enormous passionate response across the country to Floyd's killing adds yet another serious layer of change to the environment in which businesses need to function and must appropriately respond to.
Times are hardly normal!
My purpose here is not to give guidance as to what I think is the appropriate response to the national call for racial justice. However you respond (I suggest you respond in a way that adds your voice and actions to the call for justice), you absolutely need to factor this change into your strategy reset that has to be underway because of the Coronavirus Pandemic.
Beyond our personal emotional journey and the reset that the impact of the Pandemic and the response to the killing of George Floyd necessitate, there lies the question of what we can do to mitigate the possibility of both deeper damage from the continuing effects of the Pandemic and the anti-racism paradigm shift, and the possibility of future negative big changes, Black Swan or lesser.
“Don’t get caught in the inertia trap. Assume the basic rules of the game will change. When you do your business planning, game out the bad things that can happen with the basics of your business. What would you do if your major customer went bankrupt? How would you cope if a breakthrough allowed a competitor to underbid you? How would you deal with a commodity shortage? Build such potential change into your plans. Have enough resilience and adaptability so that your business won’t fold and fail when market conditions shift and the rules change.”
That's what I wrote in 2007 in my blog post, The Inertia Trap: When business is good, it's time to worry. 6 Since then we have seen the Great Recession and now the Pandemic and the anti-racism uprising. The rules have changed and businesses have folded and failed, or are on the brink of doing so.
Not that we can exempt ourselves from calamity. We always have risk exposure. But with the understanding that "business as usual" is a temporary state, that change is inevitable and that Black Swans are possible, we can plan and adopt strategies and hedges that are more likely to yield a better future and lessen that chance of calamitous failure.
Here's my take on how to look at planning and strategy in the context of change and the predictability of change:
For most of us, normalcy is usually the setting for our annual plan, minor change is no big deal, the somewhat predictable brighter future is what we expect and set our strategies to win in, and the possibility of huge, very impactful but not foreseen change is mostly ignored.
The obvious problem with that summary of how we plan is that we do not fully appreciate that change is inevitable but not necessarily predictable, it is not always positive, and it can be huge and surprising. We underestimate change.
Mental traps get in our way
In research for my upcoming book, BIG DECISIONS: Why we make them poorly, how we can make them better, I have identified a host of mental traps, errors, biases and shortcuts that sway how we view and plan for change and the future. Look at this list of 20 of these pitfalls. It's no wonder we do a poor job planning for change and the future!
a priori problem. We can't get enough data to predict an outlier event for the very reason that such events are rare.
Bad news avoidance. Most people see the need for change as bad news, and our tendency whether individually or in groups is to avoid bad news.
Base-rate neglect. What has worked for us before and our propensity to apply rules generally help us function, but sometimes we erroneously apply those rules and our experience to current problems where the facts don’t apply. We neglect the less obvious evidence and go with what we see as "tried and true," even when the background information is more predictive of what will happen.
Bayesian conservatism. The tendency to revise one's belief insufficiently when presented with new evidence.
Black Swan blindness. We underestimate or ignore the possibility of an outlier event with extreme impact that is outside the realm of regular expectations because we are more comfortable seeing the world as something structured, ordinary, and comprehensible.
Current moment bias (also called "present bias" and "hyperbolic discounting"). We tend to have a stronger preference for immediate rather than for later payoffs. We make choices today that our future selves would prefer that we would not have made. We find it difficult to see ourselves in the future and to alter our current behaviors and expectations to have a better future. We often opt for current pleasure and leave the pain for later.
Epistemic arrogance. Our hubris about how much we know. As we gain knowledge, we are more likely to overestimate what we know and underestimate uncertainty.
Fallacy of silent evidence. Looking at history, we do not see the full story, only the rosier parts of the process. This can lead us astray when we try to apply history to the future.
Forever changeless trap. In this trap we think of the current condition as being the same forever.
Future blindness. Our natural inability to take into account the properties of the future - like autism, which prevents one from taking into account the minds of others.
Narrative fallacy. We have limited ability to look at a series of facts without imposing an explanation on them or seeing a logical relationship among them. This desire to see "the story" increases our impression of understanding when we really don't know what the true relationship might be, if any. Over-interpretation and going beyond the raw facts can be especially dangerous when a rare event is unfolding.
Normalcy bias. A belief people hold when considering the possibility of a disaster. It causes people to underestimate both the likelihood of a disaster and its possible effects, because people believe that things will always function the way things normally have functioned.
Overconfidence effect. Individuals' tendency to overestimate their ability to predict future events.
Probability neglect. Our inability to properly grasp a proper sense of peril and risk, which often leads us to overstate the risks of relatively harmless activities and to underrate more dangerous ones.
Risk blindness. We generally take risks not out of bravado but out of ignorance. We tend not to see the probability of events occurring and therefore dismiss outliers and adverse outcomes when projecting the future.
Selection bias. We can draw a false conclusion or make a faulty prediction from a sample of people or events that is non-representative of the full population of people or events.
Status quo bias. We tend to be apprehensive of change, which can lead us to make choices that we believe will assure that things will remain the same or will change as little as possible. This hinders adaption to inevitable change.
Sunk cost fallacy. Our tendency to persist in achieving a goal to justify past investment, no matter the prognosis.
System justification. An amplification of status-quo bias. We tend to prefer and defend current social, economic, and political arrangements, sometimes even at the expense of individual and collective self-interest.
Traditional wisdom. The reasoning that leads people to say or imply that a practice must be OK today simply because it has been the apparently wise practice in the past. Past practices may or may not have a good justification going forward; merely saying that they have been used in the past is not necessary sufficient.
The upshot of these biases and traps is that we are personally challenged to clearly see change and what it foretells for the future, to anticipate it, and to wisely respond to it.
Equally disturbing, our personal biases and blindness translate to organizational biases and blindness. Consider the following evidence.
What risk?
Risk is something that in many ways we recognize in our society and try to control for. For example, traffic engineers and safety experts build careers on making roads and vehicles safer and reducing the chance of accidents. We carry insurance to address the risks of fire and theft. When it is dark and unfamiliar, our senses are heightened and we try to avoid danger.
Indeed, risk awareness and risk avoidance are built into the fabric of our personal and professional lives.
Yet, let's take the example of Kodak, which failed to recognize the risk of sticking to film photography when it had the patents to digital photography in its hands. Or of BP, which systemically ignored the risks of its Gulf of Mexico oil well exploding. Or of Sears and other department store retailers, who continued to try to run successful store networks as mall sales kept falling. Or of other "leading organizations" that have fallen into similar traps.
Why do a large majority of organizations appear not to formally address risk when making their all-important strategic decisions?
Are the threats too abstract to consider?
Do they get lulled by past success and current "business as usual"?
Are they so disconnected from the external environment that they don't spot what will harm them sooner or later?
Are they not interested in being good stewards and taking the time to protect their organizations and stakeholders?
Protecting the status quo
What's very apparent in the Kodak, BP and Sears stories is that a premium is put on protecting the status quo versus changing strategies to capitalize on change or at least to avoid its worst consequences.
Being averse to changing the organization's strategic focus is understandable: After all, prior strategies led to success. But assuming the necessary conditions that enabled the organization to be so successful in the past will continue to hold is to exhibit great hubris. It is so human to fall prey to the "forever changeless trap" and think that the current condition will be the same forever - especially when the current condition is what has made us so successful!
We would like to think that the leaders, strategists and decision makers who guide and control business, government and the non-profit sector are on top of their organizations and the future. Yet, recent events, specifically the Coronavirus Pandemic and the George Floyd protests, belie that belief. In fact, the results of our 2016 Strategic Leader Survey, which focused on decision making, show a general inattention to strategic risk by organizational leaders. 7
As the chart shows:
60% of organizations don't use a process to identify emerging risks to the organization.
Nearly two-thirds don't broadly define and track competition, nor do they use worst-case forecasts in their strategic decision making.
Three-quarters delay in factoring a potential future risk into decision making.
80% don't seek to cut exposure to extreme negative "Black Swan" events (e.g. a tsunami that destroys key infrastructure or a 9-11-type event that fundamentally disrupts financial markets) and even more don't seek to increase exposure to extreme positive "Black Swan" events.
More than 70% don't bother to model the risk profile for each potential strategic option that they might pursue.
Almost two-thirds don't develop scenarios for a limited number of potential strategy-disrupting events to help them respond should these events arise.
Very few organizations run simulations or conduct "war games" to help leaders see what strategy outcomes might be.
80% don't conduct "pre-mortems" - acting as if strategy decisions went wrong to see the possible causes of failure and how they might be remedied or avoided.
There you have it. Tools exist to help us avoid or at least mitigate the risks of unanticipated negative change and of plans going awry. But for the most part, we do not use these tools. That's sad.
We need strategic risk management!
The truth is that only a minority of organizations take important steps to address risk in strategic decision making.
The stark reality that took down Kodak, damaged BP and shattered Sears is that strategic risk can thwart an organization’s ability to achieve its vision. Strategic choices carry risks that can not only block achievement of objectives but can harm the entire organization. This reality calls for organizations to do much more than most appear to be doing to pursue strategic risk management: Understanding the risk exposure - the likelihood of harm or loss and its magnitude - created when choosing and implementing strategies and taking steps to reduce this exposure.
Consider using decision tools and a system
It's beyond the scope of this thought piece to lay out and explain all the tools and methods that are at our disposal that we can use to avoid bad decisions about the future and to develop strategies that appropriately address risk and especially the risk of unforeseen great change.
But if you want my take on decision-making tools that are helpful and on an evidence-based decision-making system that can improve the quality of your and your organization's strategic decisions, I suggest you walk through my presentation, Achieve your vision! Make better strategic decisions. 8
Here's a teaser.
You will learn about 15 helpful decision-making tools:
Use System 2 to make strategy decisions
Look for evidence before hypothesizing
Recognize and eliminate anchoring
Average multiple judgments
Use the base rate
Consider luck
Generate options but don’t overload
Have others challenge your thinking
Reframe for change
Discern among experts
Discount sunk costs
Consider opportunity costs
Be a Bayesian
Lead a learning process
Check it off, simulate and keep score
And you will walk away with a useful seven-step decision-making framework, iDecide:
IDENTIFY the need.
DEFINE the problem.
EXPOSE traps and biases.
CHALLENGE the evidence.
INTERPRET the evidence.
DETERMINE the best course.
EXECUTE the decision.
I want to help!
As a further step, please consider reaching out and engaging with me for a one-on-one session.
My mission, as an experienced strategy consultant and business coach, is to help leaders and organizations live their vision of great success.
To that end, as my contribution to helping business owners, leaders and professionals navigate the current crisis, I am offering a no-charge one-on-one strategy re-planning session to as many people as my schedule will allow. In the past month or so, I have had about 25 of these 1.5 hour Zoom sessions. In each case, the person I have helped has walked away with a sharpened if not substantially altered plan for adapting and succeeding.
I would love to help you assess your vision, strategies and goals in light of the dramatically altered environment, as my time allows. If you are interested, please shoot me a message here.
NOTES
https://www.amazon.com/Black-Swan-Improbable-Robustness-Fragility/dp/081297381X
https://www.mentalhelp.net/grief-and-bereavement/stage-of-grief-models-kubler-ross/
https://www.amazon.com/Death-Dying-Elisabeth-K%C3%BCbler-Ross-ebook/dp/B0053GIJFO
https://www.cleverism.com/understanding-kubler-ross-change-curve/
https://www.forrestconsult.com/blog/blog-post-title-one-eh25x
