Black swan decision making sikich 2014 rev 0

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

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.

We tend to
subconsciously
decide what to
do before figuring
out why we want
to do it.
Disaster Management

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

How many animals of each kind did Moses
take on the ark?
2
4
6
8

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

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.
How many people actually know how to make a pencil?

We like simplicity
We like concrete
reasons
We like causes
We like things that make
sense (even if that sense
happens to be wrong).

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?

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.”

“Black Swan” Conundrum:
Extremely Rare Events –
Strategy, Risk Management,
Business Continuity Planning,
Competitive Intelligence

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.

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.

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

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

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

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

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”

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?”

Is terrorism more widespread today?
or
Is terrorism more of a media driven spectacle?

We know very little
about how different
highly disruptive,
nonlinear changes
might interact with
and amplify one
another.
All things being equal
Experience teaches

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.

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.

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

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

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

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

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

Unintended Consequences

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

Since 1956 there have been
over 200 incidents – from sunk
rigs to blowouts, collapse and
hurricanes, storms, etc.

Volcanic States?
Idaho 10 volcanoes
New Hampshire 2 volcanoes

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”

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.

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”

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.

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.

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

Geary W. Sikich
Principal
Logical Management Systems, Corp.
www.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

Geary W. Sikich
Principal
Logical Management Systems, Corp.
www.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.”

Black swan decision making sikich 2014 rev 0

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