Black swan decision making sikich 2014 rev 0

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Black swan decision making sikich 2014 rev 0

  1. 1. Copyright 2013, Logical Management Systems, Corp., all rights reserved How to Craft Difficult Decisions Under Uncertain Conditions: Flexibly Blending Skills to Help You Address the “Black Swans” and “Shapeshifters” You May Encounter
  2. 2. Copyright 2013, Logical Management Systems, Corp., all rights reserved Geary W. Sikich Contact: (219) 922-7718 – G.Sikich@att.net gsikich@logicalmanagement.com Geary Sikich leads Logical Management Systems, Corp.’s enterprise assurance, strategic mapping, crisis management, continuity and disaster recovery consulting services. Geary is an impact-based planning expert. His client list spans private sector industries and public sector entities at all levels. Geary focuses his consulting practice on impact-based Strategic Planning, Managing Emerging Technologies, and Strategic Decision Support and Knowledge Management Systems. His main research interests are in the areas of organizational strategy, decision theory, managerial decision making, and risk management technologies. He has written over 250 academic and applied papers and four books: It Can’t Happen Here: “All Hazards” Crisis Management Planning (PennWell Publishing, 1993) The Emergency Management Planning Handbook (McGraw-Hill, 1994) Integrated Business Continuity, Maintaining Resilience in Uncertain Times (PennWell Publishing 2003) Protecting Your Business in a Pandemic: Plans, Tools, and Advice for Maintaining Business Continuity (Praeger Publishing 2008). Mr. Sikich is a frequent speaker on high profile continuity issues, having developed and validated over 2,500 plans and conducted over 300 seminars and workshops throughout the world for over 100 clients in energy, chemical, transportation, government, healthcare, technology, manufacturing, heavy industry, utilities, legal & insurance, banking & finance, security services, institutions and management advisory specialty firms.
  3. 3. We tend to subconsciously decide what to do before figuring out why we want to do it. Disaster Management
  4. 4. Copyright 2013, Logical Management Systems, Corp., all rights reserved Are you making things fit; regardless of the consequences? You may be falling into an “Activity Trap” In Greek mythology Procrustes or "the stretcher [who hammers out the metal]", also known as Prokoptas or Damastes "subduer", was a rogue smith and bandit from Attica who physically attacked people by stretching them or cutting off their legs, so as to force them to fit the size of an iron bed. In general, when something is Procrustean, different lengths or sizes or properties are fitted to an arbitrary standard. Management and the Activity Trap - George Odiorne
  5. 5. Copyright 2013, Logical Management Systems, Corp., all rights reserved How many animals of each kind did Moses take on the ark? 2 4 6 8
  6. 6. Copyright 2013, Logical Management Systems, Corp., all rights reserved Not one person knows how to make a pencil. That is, no one person has all the knowledge needed to do all the things involved in making pencils. It takes the combined knowledge and skills of countless people. Millions of people are involved in one way or another in the making of pencils. No one person, including the head of the pencil company, contributes more than a very tiny part of the total knowledge involved in the making of pencils. People know that these tasks all involve very complex processes that no one person alone can possibly know in complete detail. More than a billion pencils are made each year
  7. 7. Copyright 2013, Logical Management Systems, Corp., all rights reserved You may be surprised to learn how complicated the making of a simple pencil really is. As we study the story of “I, Pencil,” identify the parts and materials used in making this product. More than a billion pencils are made each year How many people actually know how to make a pencil?
  8. 8. Copyright 2013, Logical Management Systems, Corp., all rights reserved More than a billion pencils are made each year
  9. 9. Copyright 2013, Logical Management Systems, Corp., all rights reserved More than a billion pencils are made each year
  10. 10. Copyright 2012, Logical Management Systems, Corp., all rights reserved We like simplicity We like concrete reasons We like causes We like things that make sense (even if that sense happens to be wrong). More than a billion pencils are made each year
  11. 11. Copyright 2013, Logical Management Systems, Corp., all rights reserved Complexity Touchpoints Responsiveness Resource Constraints It is much easier to sell: “Look what I did for you” than “Look what I avoided for you.” Ultimate “Black Swan” or Delusional Distraction?
  12. 12. Copyright 2013, Logical Management Systems, Corp., all rights reserved More than a billion pencils are made each year
  13. 13. Copyright 2013, Logical Management Systems, Corp., all rights reserved A black swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. Taleb continues by recognizing what he terms the problem – “Lack of knowledge when it comes to rare events with serious consequences.” Nassim Taleb “The Black Swan: The Impact of the Highly Improbable.”
  14. 14. Copyright 2013, Logical Management Systems, Corp., all rights reserved “Black Swan” Conundrum: Extremely Rare Events – Strategy, Risk Management, Business Continuity Planning, Competitive Intelligence
  15. 15. Copyright 2013, Logical Management Systems, Corp., all rights reserved The problem –  “Black Swan” event is a subjective term – Your “Black Swan” may be my “White” or “Gray” Swan  “Black Swan” events are labeled after the fact  “Black Swan” events are selective in their consequences for those who experience them  “Black Swan” sudden discontinuities of great consequence.
  16. 16. Copyright 2013, Logical Management Systems, Corp., all rights reserved Business Impact Analysis what are we analyzing? We know now what to measure, we know the current performance and we have discovered some problem areas. Now we have to understand why problems are generated, and what the causes for these problems are.
  17. 17. Copyright 2013, Logical Management Systems, Corp., all rights reserved If you don’t know what you don’t know, how can you prepare for it? Conventional practices leave us vulnerable to random, potentially catastrophic events, that cannot be predicted based on simple extrapolations from the past or projections of the future. Prediction – Projection
  18. 18. Copyright 2013, Logical Management Systems, Corp., all rights reserved Risk parity is an approach that focuses on the allocation of risk, usually defined by exposure, velocity and volatility rather than allocation of assets to the risk. The risk parity approach asserts that when asset allocations are adjusted (leveraged or deleveraged) to the same risk level, risk parity is created resulting in more resistance to discontinuity events. The principles of risk parity will be applied differently according to the risk appetite, goals and objectives of the organization and can yield different results for each organization over time. Risk Parity
  19. 19. A stone and its weight in pebbles – size matters. A collection of small units with semi-independent variations produces vastly different risk characteristics than a single large unit Living in a Non-Predictive World
  20. 20. Decision Making Issues Related to Risk Identify Alter Neutralize Share Diversify Mitigate Transfer Contain Offset Effects Reduce Exposure Alleviate Impact Change Negative – Positive Insure Against Loss Monitor Hedge Derivatives Buffer Discount
  21. 21. Copyright 2013, Logical Management Systems, Corp., all rights reserved Effect of a single observation, event or element plays a disproportionate role in decision-making. Estimation errors result. Depth of, and breadth of consequence underestimated. Randomness, “Black Swans” and “Shapeshifters”
  22. 22. Copyright 2013, Logical Management Systems, Corp., all rights reserved False Positives Mistaking the absence of evidence (of harm) for the absence of harm. Overestimation of the chances of success and underestimation of the chances of failure. Artificially suppressed volatility causes fragility – extreme fragility – while exhibiting no visible risks. “Why did we build something so fragile (susceptible) to these types of events?”
  23. 23. Copyright 2012, Logical Management Systems, Corp., all rights reserved Is terrorism more widespread today? or Is terrorism more of a media driven spectacle?
  24. 24. Copyright 2013, Logical Management Systems, Corp., all rights reserved We know very little about how different highly disruptive, nonlinear changes might interact with and amplify one another. Randomness, “Black Swans” and “Shapeshifters” All things being equal Experience teaches
  25. 25. Copyright 2013, Logical Management Systems, Corp., all rights reserved A rising piano never hurt anyone Addressing the symptoms of risk and seeking to define the cause often causes us to mistake efficiency for effectiveness resulting in mistaking execution for strategy.
  26. 26. Copyright 2013, Logical Management Systems, Corp., all rights reserved What is Diagnostic Bias?  Labeling  Loss Aversion  Commitment  Value Attribution A diagnostic bias is created when four elements combine to create a barrier to effective decision making. Recognizing diagnostic bias before it debilitates effective decision making can make all the difference in day-to-day operations. It is essential in crisis situations to avert compounding initial errors.
  27. 27. Copyright 2013, Logical Management Systems, Corp., all rights reserved Some of the factors influencing labeling include:  Limited time exposure.  First impressions.  Hearsay.  Arbitrary information.  Dismissing objective data when the information does not fit with what you want to see. Diagnostic Bias: Labeling
  28. 28. Copyright 2013, Logical Management Systems, Corp., all rights reserved Four phases of loss aversion include:  “No Skin in the Game” – You have risk I do not  “Free Lunch” – No loss and no commitment.  “It’s not all that bad” – We rationalize; it’s not too late to get out, but hey, we can recover our losses they are not that bad.  “Train Wreck” – We are unwilling to let go because we feel that we are too far in, we are committed and we are going to make this work no matter what the cost! Diagnostic Bias: Loss Aversion
  29. 29. Copyright 2013, Logical Management Systems, Corp., all rights reserved Three justifications of commitment include:  “The Bullseye over the Bullet Holes” – We know we have hit our target because the bullseye is over the bullet holes. Fascinating patterns emerge, connecting seemingly unrelated events.  “Do we know what we are looking at?” – We sure do; and just because the evidence is contradictory does not mean that we are wrong.  “Iceberg? What Iceberg?” – Our commitment is so overpowering that we are unable to realize that we may have overestimated our abilities to form objective opinions. Diagnostic Bias: Commitment
  30. 30. Copyright 2013, Logical Management Systems, Corp., all rights reserved Three examples of value attribution include:  “The First Round Draft Choice” – Expectations change the reality that we live in. The value that we attribute to something fundamentally changes how we perceive it.  “A single word” – A single word has the power to alter our whole perception of another person/thing – affecting the relationship even before it begins.  “Judge, Jury, Judgment?” – Whenever we are called upon to make judgments, value attribution plays a role, often altering our reactions to the situation. Diagnostic Bias: Value Attribution
  31. 31. Diagnostic Bias: Examples Ambiguity effect Anchoring Availability cascade Bandwagon effect Bias blind spot Clustering illusion Confirmation bias Conjunction fallacy Distinction bias Endowment effect Experimenter's or Expectation bias False consensus effect Focusing effect Framing effect Gambler's fallacy Hindsight bias Hyperbolic discounting Illusion of controlIllusory superiority Loss aversion Negativity bias Neglect of probability Omission bias
  32. 32. Copyright 2013, Logical Management Systems, Corp., all rights reserved Unintended Consequences
  33. 33. Nonlinearity: evolution creates change, collateral factors come into play, (uniqueness is created in the way that evolution occurs). Nonlinear evolution of events in combination with reactions to events. Reactivity: evolution is affected by reaction to change. Consequences: long lasting effects; not readily apparent. Nonlinearity, Opacity, Reactivity
  34. 34. Copyright 2013, Logical Management Systems, Corp., all rights reserved Since 1956 there have been over 200 incidents – from sunk rigs to blowouts, collapse and hurricanes, storms, etc. Randomness, “Black Swans” and “Shapeshifters”
  35. 35. Copyright 2013, Logical Management Systems, Corp., all rights reserved Volcanic States? Idaho 10 volcanoes New Hampshire 2 volcanoes Randomness, “Black Swans” and “Shapeshifters”
  36. 36. Copyright 2013, Logical Management Systems, Corp., all rights reserved Instead of actually doing something, they have taken refuge in deciding what to do. I do not know the solution; so I seek people out and posit the problem. Deus ex Machina: An unexpected or improbable person or event that saves a hopeless situation. “Decision Paralysis”
  37. 37. Copyright 2013, Logical Management Systems, Corp., all rights reserved Suggested Actions/Possible Solutions As a result of the globalized environment in which we operate today risks that were virtually unknown in the past decade continue to surface requiring a constant assessment of the global landscape to determine potential impacts (positive and negative) of risk realization.
  38. 38. Copyright 2013, Logical Management Systems, Corp., all rights reserved Preemptive Proactive Reactive Heightened Awareness or Reactive and Backward Looking Anticipates Change Recognizes complexity & interconnectivity Research focuses on long term trends, drivers, issues Expanded knowledge base Not process dependent Alignment – SP, BC, RM, CI Recognizes Change Causal focus overlooks opacity, complexity & interconnectivity Research – tactical trends, drivers, issues Knowledge: “Cylinders of Excellence” Process focused Alignment – “Cylinders of Excellence” Process is means to an end “Mission Critical” Fails to ask: “Is the process still relevant?” Research – prescriptive, little creative problem solving Knowledge: potentially inaccurate “False Positives” Alignment – “Defined Boundaries” Suggested Actions/Possible Solutions
  39. 39. Copyright 2013, Logical Management Systems, Corp., all rights reserved Step 1: Where Are We? Develop an External Environment Profile What are the key factors in our external environment and how much can we control them? Step 2: Where Are We? Develop an Internal Environment Profile Build detailed snapshots of your business activities as they are at present. Step 3: Where Are We Going? Develop Assumptions about the Future External Environment Catalog future influences systematically; know your key challenges and threats. Step 4: Where Can We Go? Develop a Capabilities Profile What are our strengths and needs? How are we doing in our key results and activities areas? Step 5: Where Might We Go? Develop Future Internal Environment Assumptions Build assumptions, potentials, etc. Do not build predictions or forecasts! Assess what the future business situation might look like. Step 6: Where Do We Want to Go? Develop Objectives Create a pyramid of objectives; redefine your business; set functional objectives. Suggested Actions/Possible Solutions
  40. 40. Copyright 2013, Logical Management Systems, Corp., all rights reserved Step 7: What Do We Have to Do? Develop a Gap Analysis Profile What will be the effect of new external forces? What assumptions can we make about future changes to our environment? Step 8: What Could We Do? Opportunities and Problems Act to fill the gaps. Conduct an opportunity-problem feasibility analysis; risk analysis assessment; resource-requirements assessment. Build action program proposals. Step 9: What Should We Do? Select Strategy and Program Objectives Classify strategy and program objectives; make explicit commitments; adjust objectives. Step 10: How Can We Do It? Implementation Evaluate the impact of new programs. Step 11: How Are We Doing? Control Monitor external environment. Analyze fiscal and physical variances. Conduct an overall assessment. Step 12: Change What’s not Working: Revise, Control, Remain Flexible Revise strategy and program objectives as needed; revise explicit commitments as needed; adjust objectives as needed. Suggested Actions/Possible Solutions
  41. 41. Copyright 2013, Logical Management Systems, Corp., all rights reserved Before you go hunting “Black Swans” remember hindsight is 100% accurate. “The lure of the distant and the difficult is deceptive. The great opportunity is where you are. ” — John Burroughs
  42. 42. Copyright 2013, Logical Management Systems, Corp., all rights reserved Geary W. Sikich Principal Logical Management Systems, Corp. www.logicalmanagement.com gsikich@logicalmanagement.com g.sikich@att.net +1 (219) 922-7718 Do not say anything, unless what you are going to say is more beautiful than silence(Arabic proverb) Nothing is certain, but many things are reasonably probable
  43. 43. Copyright 2013, Logical Management Systems, Corp., all rights reserved Geary W. Sikich Principal Logical Management Systems, Corp. www.logicalmanagement.com gsikich@logicalmanagement.com g.sikich@att.net +1 (219) 922-7718 “If you keep doing what you’ve always done – you’ll keep getting what you’ve always gotten.”

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