Posts Tagged ‘Black Swan’

Taleb, Kahneman, and…Rajakovich?

April 4, 2013

Ok, so the headline might be a bit deceptive. I was not actually, physically present

Nassim Nicholas Taleb

when these two scholars met. But if we take the meta-universe as our context, then I could…oh, I’ll just move along.

Check out this discussion between Daniel Kahneman and Nassim Nicholas Taleb. Trying to summarize an 80-minute discussion would make me an even larger fool of randomness than I was before, so I’ll just subject you to some of it instead! Cha-ching.

A key point of the discussion centered around the following theme: Size means fragility. In percentage terms, the larger the project, the greater the overruns; the larger the organization, the more susceptible they are to risk of bankruptcy; generally, the greater the degree of centralization, the more susceptible we are to extreme negative outcomes.

Most people will understand this point at some level. Taleb used the example of government, the economy, and large banks. I’ll use the example of decision-making in just about any context. Where one person or a small group of people make decisions from on high without a very good knowledge of the details of a situation, they may make small gains in terms of continuity. They may also cause large problems.

The effect is even worse when the person or group is focused on things that will have little impact, instead of those that will have a large one.

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Negotiation and evolutionary psychology – a look at our nature

May 18, 2012

A couple disparate events came together to form the basis for this post. One is my rediscovery of my interest in evolutionary psychology. The other is a random PR guy on the BBC breakfast show this morning. On a side note, I’m mentioning this show for the last time, because it is simply unwatchable. I put it on while feeding the baby at 7 AM, and was tempted to knock back some of the formula milk.

Let’s start with the random PR guy. ‘Breakfast’ wanted to discuss the Facebook IPO and realized they needed an angle apart from the purely financial aspects. So, they trotted out some guy to provide the expected, but painfully misguided idea that Facebook has cemented its place as our number one social media platform…forever. Random PR guy, meet book, book, random PR guy.

So why mention this? The point is that we are all biased – some more than others – and possibly irrevocably so. It is the same reason that some people believe they are the first one to develop new approaches to marketing, procurement, accounting, strategy or operations that have established a new framework which will then last forever. And develop the ego to go with it.

History vehemently disagrees, and although that is sort of known – again, some people are widely read while others are too busy enlightening the world – it gets conveniently pushed to the background. Certain approaches fit well in certain environments, but then the environment inevitably changes in a big way (here is where you go back and reference Black Swan and/or Fooled By Randomness).

The same human nature that causes the “I’m super-special” bias (have I just coined a term?) also was kind enough to bring us the “I am incapable of being in a true partnership” bias. If you are super-special, why should you partner with anyone? They will only mask your brilliance.

We have seen obvious examples of negotiations that are crying out for a true partnership (NFL and the NFL players union) for example. Companies with their main suppliers. CEOs with key executives. There are only a very small percentage that are able to break through the desire to pull leverage games, degrade the other side, and invent reasons why you are superior. This feeling comes through in every interaction and trust is broken down. In game theory terms, the recipient’s optimal strategy is then risk minimization mode…which then prevents reaching the larger prize.

If you are that guy, you most likely don’t know it. But give listening a shot and you may be surprised.

The Black Swan (film)

Random Black Swan photo. People like pretty pictures. The Black Swan (film) (Photo credit: Wikipedia)

How bloggers are fooled by randomness

March 21, 2011

If there is one thing that each of you needs to read it is Fooled By Randomness by Nassim Nicholas Taleb. Some people are hopelessly ensnared by their own frame of reference and are destined to remain fooled by randomness forever. For others, a light will go on, and their perspective will be adjusted.

It is easier to understand the principles of randomness by pointing out when it fools us, so here’s a list of examples that I have seen.

1. Mixing up cause and effect – T. Cummins on the Commitment Matters blog provides a couple examples in one of his most recent posts. Check it out here. In this case, the apparent recent decline in collaboration is due to a decline in trust. So, humans decided 20-30 years ago to stop trusting each other? He mentions greater anonymity, but is there greater or lesser anonymity now than 40 years ago? He also mentions greater competition. So, in the past, people did not strive as hard to make money? He mentions impersonal business relationships, globalization, and lack of concern about the environment. So in the early 1900’s Ford motor company had personal, trusting relationships with its suppliers? The DuPont behemoth violating the Sherman anti-trust act was acting out of a deep-rooted connection with its workers, the public, and the environment? Coal mining companies were less interested in making lots of money and more concerned about the environment in which they worked?  Sorry, the good old days argument just doesn’t hold up.

2. Randomness in selecting time intervals – It is not entirely clear, but inferring from the context of the Commitment Matters blog, it seems as though the time horizon chosen is the last 100 years or so. Why is the last 100 years more instructive than the last 50,000? Selecting a recent time interval allows small changes in human behavior to seem large when much of our evolution took place thousands of years ago, not hundreds.

3. Blame America cop-out – If you are an average person in America, you most likely believe that everyone just kind of recognizes that the US is a world leader given the position of power it currently occupies. Having lived in the UK for the last 3.5 years, I assure you that even my last statement will be slightly controversial. However, the tacit acceptance of this position of power comes in the form of blaming the US for some of the ills of the business world such as increased litigation, less collaboration, adversarial negotiating style, etc. What is not clear is why these things have necessarily inserted themselves into the global culture. The US Department of Exporting Bad Business Practices (USDEBBP) is just not that good. There are many causes of trends…created by a system so complex than anyone reducing it to “It came from America!”….um, not much to say to those people.

4. The world is moving faster – may be a sub-set of number 2, but this one deserves its own post due to its having wormed its way into conventional wisdom. We hear phrases like “of course, innovation these days is moving at lightning speed,” and “our lives are so much more hectic than before,” and concepts that make things seem really complex like “mass customization.” How do you think a textile producer in the early-mid 1700’s felt when he used to make textiles starting from raising the sheep through to selling it in the marketplace, and then found himself as only one link in the chain after the introduction of the factory system. How about the farmer that used to measure his day by the sun rising and setting and then began to work in a factory built on the concepts of Taylorism for 12 hours per day? How fast was his world moving? How do you think today will look through the lens of 50 years from now? From our own very limited perspective, it may seem that the world is moving faster, but step off the train for a moment, look at the big picture, and it will tell a much different story. We really aren’t that special.

Oil, currencies, and commodity prices – where are they headed?

October 28, 2010

Now, if I knew the answer to that question, would I be writing this blog?

We probably all realize that oil shocks are not just possible, but rather likely, depending on the time horizon we choose. The potential impact is of the Black Swan variety – i.e. really big. So what is our role as procurement professionals armed with this knowledge? To only take risks with our eyes open, and not speculate on where oil might be headed in the short term – like this guy. http://tinyurl.com/25nxqyx

It is not just oil either…other commodities are prone to shocks as well, potentially even occurring at the same time. Are our business leaders prepared, and have we done our best to prepare them? My thoughts – procurement working with finance to understand where we are exposed and potentially accepting less quarterly profit to hedge that risk. There are off-the shelf derivatives for insuring against Black Swans, and if you are large enough, investment banks willing to customize them for you. Some traders have stood the test of time using just such a strategy.


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