Member Insights: Black Swans, and how Leaders Can Avoid Them

Columbus Chamber
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Member Insights by Alloy 

THE LUDIC FALLACY OF TRUSTING OUR INTUITION AND EXPERIENCE

“No matter how many white swans we come across, the finding of just one black swan will lead to a surprising rejection of our universal belief that ‘all swans are white’.” — Nassim Nicholas Taleb

Nassim Nicholas Taleb

Leaders frequently use their intuition to identify problems, diagnose cause and effect, and make predictions. The problem is that human beings are actually terrible at intuiting; and we’re only getting worse. As complexity and the pressures of speed in today’s non-routine work environment increase, too many leaders continue to place far too much confidence in their intuition and underestimate their ignorance. This over-reliance on past methods and over-confidence in intuition and experiences is called the Ludic Fallacy. It makes us think that we are fully aware of all of the risks and probabilities, as if reality is like a game of cards or dice. Only in hindsight do we realize reality is nothing like a game. Unfortunately, rather than making this admission many leaders instead kid themselves, using hindsight bias to explain away past failures and missed opportunities. The fact is, they never saw that black swan coming, and it changed their view of the world dramatically. It is just another indication that we are absolutely pitiful at both making predictions of the future and establishing causes for the present. But can that change? Can leaders eliminate the black swan surprises that stem from over-confidence in experience and intuition? Yes…mostly. Although we can’t predict everything, leaders can eliminate the two most glaring areas of blindness—blindness to the obvious (i.e. a lack of knowledge) and blindness to their own blindness (i.e. bias).

“We are blind to the obvious and blind to our blindness” — Daniel Khaneman

 

BLIND TO THE OBVIOUS

Daniel Kahneman, Israeli-American psychologist and 2002 Nobel Memorial Prize in Economic Sciences

The concept is simple. The more information you have, the less likely you are to be hit by what Nicholas Taleb calls a Black Swan, and the more ignorant you are, the more you are at risk. Imagine making a bet on your favorite horse, Rocket. Because of Rocket’s build and track record, the skill of the jockey, and the poor competition, you believe that Rocket is the safest bet and gamble everything you own on the horse to win.

Imagine your surprise when the starting pistol is fired and Rocket not only doesn’t leave the gates but lies down on the track. This seemingly impossible scenario is a Black Swan event. Given the information you’d gathered, Rocket’s winning was a safe bet, yet you lost everything the instant the race began.

It’s a tragic event for you, but not for everyone. Rocket’s owner made a fortune by betting against his own horse because, unlike you, he had additional information. He knew that Rocket was going to go on strike to protest animal cruelty. Just that small amount of information saved him from having to suffer a Black Swan event.

BLIND TO OUR BLINDNESS

When we do have information about how the world works, we tend to cling to it; and that’s puts us at risk, too. We often use narrative fallacies, which stem from our ability to give meaning to unconnected bits of information, to make sense of the information from the past. We use hindsight bias, to reorganize events in order to support today’s beliefs, and we use confirmation bias to maintain these beliefs in the future. These biases may be harmless in some instances, but are catastrophic for leadership. The book Black Swan reminds us of the investor who had experience and statistics limited to the period 1920-28, ending only one year before the greatest stock market crash in U.S. history. Over that period, he had observed a few small dips and peaks, but in general he noticed that the trend of the market was upward. Armed with biases, he believed that the past trends must continue in the future and spent his life savings on stocks. The next day, the market crashed and he lost everything.

Opening our Eyes and Preventing Black Swans in 3 Steps

1. Admit it. You’re biased

For leaders, simply knowing what you don’t know is a powerful first step in avoiding Black Swan moments. It is the best defense against falling into cognitive traps and fallacies as you make crucial decisions. Knowing that, as a leader, you are subject to cognitive bias, should make it much easier to recognize when you’re only looking for information that confirms what you already believe to be true. Likewise, knowing that we humans like to organize everything into neat, causal narratives to simplify the complexity of the world, should make leaders more likely to search for further information to gain a better view of the “big picture.”

2. Add a Framework

At ALLOY, when we recognize a good strategy or way of thinking being leveraged, we simply ask the question, “What is the framework you are using?” If a framework is missing from the conversation, we look for one in order to add to our knowledge base and/or to fight our natural bias. Try this simple technique to remove your own blinders and promote new learning. As a bonus, training your intuition as well as your team with better practice frameworks, discourages the temptation to train through style and preference.

No way of looking at things is too sacred to be reconsidered. No way of doing things is beyond improvement.
— Edward de Bono

3. Go wider, before you go deeper

Edward de Bono, Maltese physician, psychologist, philosopher, author, inventor, most known for lateral thinking and the book Six Thinking Hats

Finally, rather than feeding the desire to see events in clear-cut cause and effect, or reducing knowledge to one tried and true framework, consider a number of possibilities without committing to any single one (see our article on rapid option making). Edward de Bono calls this Lateral Thinking — a way of solving problems that encourages multiple viewpoints rather than traditional vertical logic. Too often, when leaders rely on intuition to do this, they find ourselves producing ideas that are similar to or derivative of previous ideas. Instead, use multiple frameworks as stimuli to a much broader level of creativity. This way, not only are you less likely to allow unconscious bias, but you are much more likely to generate uniquely different, and many times better ideas. Imagine using one simple framework for setting business goals such as SMART goals. While you may avoid intuitive errors, such as forgetting to make the goal specific and measurable, adding another framework, such as the Hedgehog Concept, provides a new viewpoint and may lead to a much more creative and stronger goal.