Black Swan Events: preparing for the indefensible - Professor Paul Arbon AM
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Black Swan Events:
… preparing for the indefensible
Professor Paul Arbon AM
Torrens Resilience Institute © 2010
Taleb 2010 1
What are Black Swans?
The metaphor of the black swan corresponds to the
ancient idea of a ‘rare bird.’ The Roman poet Juvenl
refers to a ‘bird as rare as the black swan.’
Modern philosophers - Popper, Mill, Hume, and others
– used this concept to describe the fundamental risk in
the use of modern empirical science.
Torrens Resilience Institute © 2010
Taleb 2010 18
Before the discovery of Australia, natural historians were
convinced that all swans were white, an unassailable belief
completely confirmed by repeated observations (empirical
evidence).
The sighting of the first black swan… illustrates a severe
limitation to our learning from observations or experience
and the fragility of our (factual) knowledge.
One single observation can invalidate a general statement
derived from millennia of confirmatory sightings … All you
need is one single black bird.
Torrens Resilience Institute © 2010
Taleb 2010 2
Why Black Swan thinking?
Mainstream risk
management assumes
risks are foreseeable.
In Black Swan thinking we
focus on “unforeseeable”
risks and events that may
not be predicted.
Torrens Resilience Institute © 2010
Cavallo 2010
Two main underpinnings of black swan thought:
• the nonsense of approaching complex systems
empirically (quantitatively); being too complex to
be reduced to reliable models or formulas
• the inadequacy of experience (the qualitative
approach) because the context may change
Torrens Resilience Institute © 2010
Cavallo 2010
“Let’s face it, the universe is messy. It is nonlinear, turbulent and chaotic. It is dynamic. It spends its time in transient behaviour on its way to somewhere else, not in mathematically neat equilibria. It self-organises and evolves. It creates diversity, not uniformity. That’s … what makes it work.” (Meadows). Torrens Resilience Institute © 2010
• In the context of high uncertainty and complexity, normal
tools of risk management are not enough.
• A normal approach involves identification of hazards,
likelihood and consequences in order to deal with larger
risks by avoiding them, accepting them (e.g. insurance),
transferring them to another party or reducing them by
applying more efficient controls.
• This cannot be done with unforeseeable risks because
there is not enough information about them.
Torrens Resilience Institute © 2010
Cavallo 2010
Are these Black Swans?
Nowadays, we are continuously confronted with questions
about the validity of traditional risk management in complex
systems globally:
• MERS (Novel) Corona Virus
• Multi resistant infections
• The Icelandic volcano Eyjafjallajokull
• The Asian Tsunami
• Impact of “natural disasters” on global work/economy
• Interdependent system crash
• Climate variability impacts
• The Japan “triple” disaster
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Cavallo 2010
Key attributes of the Black Swan:
It is an outlier, outside the realm of regular
expectation(s)...
It carries an extreme impact.
It is rare and is often understood
after the fact.
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Taleb 2010 3
Key Question
Is modern risk management a
process that excludes
the possibility of the
Black Swan?
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Taleb 2010 6Black Swan thinking:
• Black Swan logic argues what you don’t know is far
more relevant than what you do know.
• Many Black Swans can be caused and exacerbated
by their being unexpected.
• Think of the terrorist attack of September 11, 2001:
had the risk been reasonably conceivable on
September 10, it may not have happened.
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Taleb 2010 7The Black Swan is the result of collective and
individual knowledge limitations (or distortions), mostly
confidence in knowledge; it is not an objective
phenomenon.
Torrens Resilience Institute © 2010
Taleb 2010 8The most severe mistake … is to try to define an
‘objective Black Swan’ that would be invariant in the
eyes of all observers.
The events of September 11, 2001, were a Black
Swan for the victims, but certainly not to the
perpetrators.
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Taleb 2010 9Prediction is firmly institutionalized in our world
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Taleb 2010 27Being a Turkey:
Consider a turkey that is fed every day. Every
single feeding will firm up the bird’s belief that it is
the general rule of life to be fed every day by
friendly members of the human race ‘looking out
for its best interests.’ On the afternoon of the
Wednesday before Thanksgiving, something
unexpected will happen to the turkey. It will incur a
revision of belief.
Torrens Resilience Institute © 2010
Taleb 2010 22The Turkey Problem:
The problem of inductive knowledge
Consider that the feeling of safety reached its
maximum when the risk was at the highest. But the
problem is even more general than that; it strikes
at the nature of empirical knowledge itself.
Something has worked in the past, until – well, it
unexpectedly no longer does, and what we have
learned from the past turns out to be at best
irrelevant or false, at worst viciously misleading.
Torrens Resilience Institute © 2010
Taleb 2010 23The Problem of Inductive Knowledge:
• How can we logically go from specific instances to
reach general conclusions?
• How do we know what we know?
• How do we know that what we have observed from
given objects and events suffices to enable us to
figure out their other properties?
• There are traps built into any kind of knowledge
gained from observation.
• Predictions are helpful but may mislead us…
Torrens Resilience Institute © 2010
Taleb 2010 21The Idea of Robustness:
• Why do we formulate theories leading to projections
and forecasts without focusing on the robustness of
these theories and the consequences of errors?
• It is much easier to deal with the Black Swan
problem if we focus on our robustness to errors
rather than improving the predictions.
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Taleb 2010 11Evidence based practice:
The new holy grail..
As much as it is
ingrained in our
habits and
conventional wisdom,
confirmation can lead
to dangerous error.
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Taleb 2010 24Learning and what we know:
• We tend to learn the precise, not the general.
• We are conditioned to be specific.
• The French, after the Great War, built a wall along
the previous German invasion route to prevent
reinvasion- Hitler just (almost) effortlessly went
around it. The French had been excellent students
of history; they just learned with too much precision.
They were too practical and exceedingly focused for
their own safety.
Torrens Resilience Institute © 2010
Taleb 2010 12Defending against the black swan
It is necessary … to stand
conventional wisdom on its
head and to show how
inapplicable it is to our
modern, complex, and
increasingly recursive
environment.
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Taleb 2010 13Recursive here means that the world in which we
live has an increasing number of feedback loops,
causing events to be the cause of more events.
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Taleb 2010 14We live in an world
where impact flows
globally and rapidly and
inter-connections and
dependencies among
systems are common.
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Taleb 2010 15What can we do?
Assume that a US legislator with courage, influence,
intellect, vision, and perseverance manages to enact a
law that goes into universal effect and employment on
September 10, 2001; it imposes continuously locked
bulletproof doors in every cockpit (at high costs to the
struggling airlines) - just in case terrorists decide to
use planes to attack the World Trade Center in New
York City.
This is a thought experiment.
Torrens Resilience Institute © 2010
Taleb 2010 16The person who imposed locks on cockpit doors gets
no statues in public squares, not so much as a quick
mention of his contribution in his obituary.
Seeing how superfluous his measure was, and how it
squandered resources, the public, with great help from
airline pilots, might well boot him out of office.
Torrens Resilience Institute © 2010
Taleb 2010 17Perception and understanding
Additional knowledge
of the minutiae of
daily business can
be useless, even
actually toxic.
Torrens Resilience Institute © 2010
Taleb 2010 29• Show two groups of people a blurry image of a fire
hydrant, blurry enough for them not to recognise what it
is. For one group, increase the resolution slowly, in ten
steps. For the second, do it faster, in five steps.
• Stop at a point where both groups have been presented
an identical image and ask each of them to identify what
they see. The members of the group that saw fewer
intermediate steps are likely to recognise the hydrant
much faster.
• The more information you give someone, the more
hypotheses they will formulate along the way. They see
more random noise and mistake it for information.
Torrens Resilience Institute © 2010
Taleb 2010 30Our ideas are sticky!
• Once we produce a theory, or make a decision we are
less likely to change our minds.
• Those who delay developing their theories are better off.
• When you develop your opinions on the basis of weak
evidence, you will have difficulty interpreting subsequent
information that contradicts these opinions, even if this
new information is obviously more accurate.
Torrens Resilience Institute © 2010
Taleb 2010 31Sticky ideas lead to
confirmation bias…
and belief perseverance:
We treat ideas like
possessions, and it is
hard for us to part with them.
Torrens Resilience Institute © 2010
Taleb 2010 32The Expert Problem
You invoke the outlier. Something happened that was
outside the system, outside the scope of your science.
Given that it was not predictable, you are not to blame.
It was a Black Swan and you are not supposed to
predict Black Swans and certainly cannot be blamed
for their occurrence.
Torrens Resilience Institute © 2010
Taleb 2010 33The thinking problem
Heuristics and biases (Adapted from Esgate, et al., 2005.)
The belief that a limited finding is representative of a wider
Representativeness population. E.g. yesterday and today it was rainy, hence tomorrow
it is going to rain for sure.
Tendency to look for information confirming your own opinion
Confirmation bias
neglecting information that may contradict it.
The belief that if an event occurs consecutively and independently
more than once, then the event that has not occurred till now, is
Gambler’s fallacy
going to happen next. E.g. playing roulette: after three times red,
the belief that black is coming out next.
A probability of a general event is estimated higher than one of
the singular events. This is impossible as the product of the
singular probabilities will always give a lower probability value for
Conjunction fallacy
the total probability. E.g. A and B have respectively a probability of
0.6. The total probability of the occurrence of both events A and B
will be 0.36.
The more information available in one’s mind, the more it bears
Availability on the outcome, e.g. “If I can think of it, then it must be
Torrens Resilience Institute important”. © 2010
Cavallo 2010Dancing with complexity
• ‘We can’t control [complex] systems or figure
them out. But we can dance with
them!’(Meadows 2002).
• We can be adaptable as long as we are trained
to face ‘complex’ uncertainty.
• Personal characteristics are very important.
• Many organisations invest in contingency plans,
rather than development of their human
resources.
Torrens Resilience Institute © 2010
Cavallo 2010Training for adaptability
(Meadows 2002, Snowden 1999).
Adaptability
The ability to react in a timely manner to change in the environment
- i.e. in the context of a set of strategies that are already being executed, and a
Responsiveness change occurring that creates a new threat or opportunity, responsiveness is the
capacity to recognise and deal with the new threat or opportunity as effectively as
if there were ample time to plan and prepare for it
The ability to recover from or adjust to misfortune or damage, and the ability to
degrade gracefully under attack or as a result of partial failure
Resilience - i.e. the core functions of the force continue to achieve essential levels of
capability when individual elements are disabled one or more at a time; there is
quick recovery from damage with minimal interruption or loss of capability
The ability to recognise when to shift from one strategy to another and to do so
easily.
Agility - i.e. producing a rapid change of tack to more effective behaviours when
significant external and/or internal changes arise requiring significant and different
responses
The ability to create and maintain effectiveness across a wide range of tasks,
situations, and conditions.
Flexibility - i.e. structure and capability of the force can be reconfigured in different ways to
do different things, under different sets of conditions, and the need to do this can
be recognised and implemented rapidly
Torrens Resilience Institute © 2010
Cavallo 2010Guidelines to increase adaptability
Starting from the system’s history allows a more objective view; particularly, at
History
the outset of a project facts are more reliable than theories.
Encouraging the challenging of opinions and models is very important to be able
Creativity
to notice emerging system’s behaviour.
Drafting is a good technique to correct mistakes, admit uncertainties and hence
Outline
stay flexible.
Speak up Nobody in the team should pretend things are under control if they are not.
Particularly, at the outset of a project, it is important to avoid absolutist and rigid
Humbleness
approaches.
Protect True and complete information should be a value to honour in a system.
Creating feedback loops allows a team to stay dynamic and to adjust
Feedback
continuously to the changing environment of a SoS.
It is crucial while managing risks in a complex project to consider consequences
Whole system in the whole SoS in both its spatial and time-related components, i.e. in the short
and long term, too.
Experts should be willing to learn further, admit ignorance and be taught by
Interdisciplinary other specialists without being obsessed by the ‘academically correct’ cast of
mind.
Independently from their specific task team players should expand their
Care interests, competencies and personal feelings to the areas of the project which
would be affected by their decisions.
Torrens Resilience Institute © 2010
Cavallo 2010Responding to Black Swans
In these circumstances we have to move from
planning to preparations. The high level of
uncertainty means that our plans will be redundant
and we must rely on the ability of the organisation-
at a cellular level-to respond consistently in the
face of uncertainty.
Torrens Resilience Institute © 2010
Cavallo 2010Hazard
RiskEvent Hazard Modification
Risk Reduction
Event
RiskDamage Absorbing Capacity
Damage
Resilience
Risk? Function
Preparedness
Buffering Capacity
Changes in Function
Local Response
Capacity
Needs
Local Responses Emergency
RiskDisaster
Outside Responses
Risk
Torrens Resilience Institute Disaster Emergency
© 2010Building resilient systems
• Risk management
• Identify hazards and treat risks
• Absorbing capacity
• Absorb impact and limit damage
• Buffering capacity
• Overcome change in function - redundancy
• Response Capacity
• Rescue and relief, surge capacity
Torrens Resilience Institute © 2010Questions
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