Black Swan Events

Recently, there was an article in the September Harvard Business Review and it focused on Assessing Risk today.  Traditionally, there has been a focus on planning for high probability, high impact events.  As a consequence, the planning for low probability/high consequence events has been neglected.

The article stated that companies have become adept at managing predictable, lower-level risks; they have a false sense of security about their ability to anticipate and deal with more hazardous events.

Low probability/high consequence events are also known as “Black Swan” events. Good examples of these “Black Swan” events are the Madoff Ponzi Scheme and the failure of Lehman Brothers, etc.   In the business continuity realm, September 11 was a Black Swan event.  Nassim Nicholas Taleb in his 2007 book The Black Swan deemed the following criteria to define such an event:

  • The event is a surprise (to the observer).
  • The event has a major impact.

 

After the fact, the event is rationalized by hindsight, as if it had been expected. So, how do we make management aware of Black Swan events and prepare for them?  We recommend you develop a “Heat Map” and plot the likelihood and significance of various types of threats at the organization.  This Heat Map, which should be a component of your Threat and Risk Assessment, should focus senior executives on unlikely but potentially devastating risk that merit but do not receive the attention they do.

 

About MHA:  MHA Consulting, with its decade-long track record, is a proven leader in business continuity planning, disaster recovery planning, IT best practices and data center moves and relocations. Every day, MHA helps protect trillions of dollars of global-market assets and top companies around the world rely on MHA services for the continuity of their business. For more information on MHA, contact Michael Herrera at herrera@mha-it.com.

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2 Responses to “Black Swan Events”

  1. The Six Mistakes Executives Make in Risk Management « husdal.com Says:

    […] was a post on Michael Herrera’s BCP blog that alerted me to this article in the HBR., and Iit is a good article indeed. Risk Management, so […]

  2. Bob Cook Says:

    The Icelandic volcano eruption is just another reminder of how the unlikely is happening often as our world becomes so interconnected. The unlikely is becoming likely. Companies have trouble, though, putting a value on continuity planning, but it seems that the financial models used by the “black swan” investors who bet on the unlikely happening might be applicable. I’ve begun blogging on this issue from my corporate real estate perspective: http://bobcook1234.wordpress.com/2010/04/20/icelandic-volcano-another-black-swan-showing-serious-need-for-business-continuity-planning/


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