Black Swans: The Impact of the Highly Improbable
Before the exploration of Australia by Europeans, people thought all swans were white. This assumption seemed completely confirmed by empirical evidence. Then in Australia, an outlier… black swans. This inconsequential event illustrates the limitation of learning by experience and assuming we know and understand uncertainty. Galorath’s Evin Stump and his work in Xippr (Experience Informed Project Risk Reduction; pronounced “zipper”), has been preaching about Black Swans for some time and convinced me to read Nassim Nicholas Taleb’s book “The Black Swan: The Impact of the Highly Improbable.” A Black Swan is:
1. An outlier, because lies outside the realm of regular expectations, because history cannot convincingly point to the possibility
2. Has an extreme impact if it occurs
Traditional risk analysis, such as Monte Carlo Analysis is excellent at predicting probability in terms of uncertainty, except for one thing…. it completely misses Black Swans. So we continue to invest our money with money managers who predict regular growth… with statistical worst cases not so bad… but then Black Swan occurs…. a highly improbable event, banking crisis or whatever, and wipes out a significant portion of the nation’s wealth. The impact of Black Swans was not included in the financial analysis. Or airplanes crash into the World Trade Towers. And the world changes forever.
Now we need to know when to deal with Black Swans and when they are just paranoia. For an average project there may not be any real Black Swans. But for the most difficult projects, for example projects with low Technology Readiness Levels or with severe political implications, a Black Swan can be a significant driver.
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Some observations:
Black Swans are partially a result of mass stupidity. The financial crisis was foreseen and so are a lot of other supposedly unforeseen crises. Just as models got us into the financial mess, anticipatory models such as XIPRR could get us out.
Galorath actually has generated lots of expertise in XIPRR approaches. Before XIPRR, the Far Out project independently did a similar analysis, specific to spacecraft cost overruns.
Washington would do well to stress test every project through a risk approach such as XIPRR.
I recently saw a black swan in Aruba. Beautiful.