CNBC’s article on the “three black swans” [1] that Russia’s banks are apparently facing is a perfect example of getting the entire black swan concept wrong.
Herman Gref is quoted as saying that Sherbank is facing “not one Black Swan but three Black Swans,” the combination of threats from new businesses, the addition of new regulations, and the need to invest in new technologies.
In reality they’re not facing three black swans, but one — the individual phenomenon of “being attacked by new businesses” when you think about it shouldn’t be considered an “incredibly rare, impossible to predict” event but a basic daily threat of doing business. They’re complaining that a bunch of hard things have happened all at the same time, but each of these things is always a danger. It’s really the trifecta that’s the black swan.
That’s not to say Gref is wrong about facing an unusually difficult challenge. He’s just wrong in claiming it was as rare as three simultaneous Black Swans, and misunderstanding such a concept should be the big deal when you’re an economist and CEO of Russia’s biggest bank.
It’s the kind of error that Nassim Taleb, popularizer of the Black Swan concept, keeps talking about in his books. The theme of The Black Swan is that people don’t prepare for things that have a low but important likelihood of happening, and then you have CEOs who insist “there’s no way anyone could have predicted this” simply because people were predicting that something else would happen.
And that’s also why Taleb makes such a big point about people “having skin in the game.” As he points out, if you’re a CEO whose compensation rises if you make money for the company, but who doesn’t lose your salary if the company loses money, then you will optimize for doing things that have a high likelihood of making money even if the downside is poorly covered, because the downside doesn’t really affect you, especially in a world where “well, that’s not what the analysts expected” is a valid excuse.
In this particular article you have to ask where the incompetence is. Should we fault Gref for not understanding what a Black Swan actually is, or for intentionally exaggerating the unpredictability of the predicament they’re in? Should we fault Boyle, the journalist who wrote the article, for misunderstanding the Black Swan concept?
Taleb’s concepts of Black Swans and antifragility are especially important to entrepreneurs because it’s all about skin in the game. High finance gets it wrong all the time, but we can’t afford to.
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