The Black Swan Problem

CHAPTER FIVETaming the Swan

A VERY BASIC OBSERVATION is that the same Black Swan can affect two otherwise similar firms very differently depending on their resourcefulness going into the event. One may come out of it largely unscathed, whereas another may be badly decimated and reduced to a shadow of its former self. Whether or not consequences count as massive or not is a function of the firm's ability to withstand the shock. We are going to frame this issue in terms of fragility versus resilience. Fragility means that something breaks easily and crumbles when exposed to a stressor. Resilience, in contrast, denotes a capacity to quickly recover and bounce back to a level of performance similar to the one enjoyed before the shock.

Taming the Swan is about achieving the vaunted state of resilience. The resources accumulated, and the actions taken to prepare, will decide how well we fare when confronted with a shock to performance. In simple terms, the more a firm engages in proactive risk mitigation, and the more risk capital it has, the more resilient it is going to be. These strategies are costly, however, and we run into the organizational forces that resist them in favour of maximizing short‐term performance. We have to design our Black Swan response mindful of the limited resources and patience available for tail risk management and try to ensure that we get the most out of whatever resources we commit to it.

DRAWING THE LINE

Taming the Swan is, on one level, about ...