The Black Swan Problem

CHAPTER TWOCorporate Swans

AT THIS POINT IN the book, we change gears and take the perspective of a company. What does it mean to the managers of a firm that we live in a world of wild uncertainty? What is it that they can do that will increase the odds that they survive and thrive in such a Black Swan infested place? And what is there to say that they should care about tail risk in the first place?

As we take the corporate perspective, several interesting things happen. Firms are strange creatures in more than one way. They have several unique features that all profoundly affect how we should think about Black Swans. We will explore them all in this book. One central aspect about firms is that they operate under a specific mandate, which is to generate profits, or, as it were, to ‘create value’ for those who have invested in them. More often than not, the owners are not the ones managing the firm. Instead, they delegate the daily running of the firm to the executive team, which creates a separation between ownership and control that has far‐reaching implications. Firms are also peculiar because of something called limited liability, a feature of corporation law that implies that shareholders cannot lose money beyond the size of their original investment. Yet another aspect that makes firms fascinating entities to study is the complex nature of their decision‐making processes. A firm has many stakeholders who try to influence policy for their maximum benefit and a variety ...