When Black Swans Aren't: On Better Recognition, Assessment, and Forecasting of Large Scale, Large Impact, and Rare Event Change

• Date: 01 March 2013
• Published date: 01 March 2013
• DOI: http://doi.org/10.1111/rmir.12000
• Author: Guntram Fritz Albin Werther

Risk Management and Insurance Review

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Risk Management and Insurance Review, 2013, Vol.16, No. 1, 1-23

DOI: 10.1111/rmir.12000

INVITED ARTICLES

WHEN BLACK SWAN S AREN’T:ONBETTER

RECOGNITION,ASSESSMENT,AND FORECASTING OF

LARGE SCALE,LARGE IMPACT,AND RARE EVENT CHANGE

Guntram Fritz Albin Werther

ABSTRACT

The article discusses professional best practice implications stemming from dif-

fering varieties of thinking about black swans. The possibilities of rare event

recognition in general, and the conforming limits on the forecastingart that arise

from different views of possibilities is addressed. In particular, assessing how

different philosophical groundings partner with methodological and practice

implications to shape and limit practice possibilities is highlighted. Opportu-

nities for securing comparative advantages—individual, organizational, and

societal—are revealed by introducing holistic methods for better recognizing,

assessing, and managing emerging large scale, large impact, rare events thought

by most people to be unpredictable black swans. To achieve this, the article uses

mainstream model and analyst failure dynamics to develop a way to better rec-

ognize and time large scale, large impact rare event emergence. As part of this

discussion, the article assesses the philosophical and factual bases of Nassim

Taleb’s famous book, The Black Swan: The Impact of the Highly Improbable,and

argues that strong-versionblack swan perspectives (views that meaningful fore-

casting is not possible in an essentially chaotic world where rare black swans

shape reality) are significantly responsible for placing unreal limits on the very

possibilities of improving professional best practices, they being grounded in

philosophical traditions that needlessly constrain better training, and compe-

tent risk assessment and futures forecasting.

Guntram Fritz Albin Werther is a Professor of Strategic Management at The Fox School of Busi-

ness, Alter Hall, Room 504, 1801 Liacouras Walk,Temple University,Philadelphia, Pennsylvania,

19122, phone: 480-253-0089; e-mail: Guntram.werther@temple.edu. This article is based upon nu-

merous, often similarly titled, mid to senior executive presentations to Fortune 100 firms and

to leading financial, actuarial, and insurance professional associations, on work in extreme risk

recognition, assessment, and management funded by the Society of Actuaries, and in holistic

international futures forecasting funded by the Proteus FuturesGroup, The Office of the Director

of National Intelligence. Aspects were featured in ODNI’s Intelligence Community Center for

Academic Excellence 2008 Summer Seminar. The author thanks the Society of Actuaries’ re-

search leadership, and industry-based project oversight group, for helping make this topic more

accessible to actuarial, risk management, and insurance professionals.

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2RISK MANAGEMENT AND INSURANCE REVIEW

INTRODUCTION

Belief systems guide behavior and shape professional practice (Pinker, 2003), especially

taught views about best practices, and consequently influence individual, organiza-

tional, and societal effectiveness. Worse than not knowing how to do something within

an admittedly complicated, changing world is believing that it cannot be done, behaving

accordingly, and then building up societal and professional systems and “best practices”

upon false foundations. That is the summary effect, this article argues, of strong vari-

eties of black swan thinking, particularly Nassim Taleb’sinfluential version (Taleb, 2007),

wherein it is argued on philosophical grounds that the future cannot be forecast, and espe-

cially that large impact, large scale, rare events (LSLIRE)1and their implications, cannot

be foreseen.

The world, and change within it, such people argue, is simply too complex, too random,

too chaotic to forecast. Because of this, the realm of the possible and of best practice is

shaped in very particular philosophically constrained ways. Both quantitative, including

statistical, and qualitative foresight and forecasting methods are chimeras: impossible to

rely on tools, especially for LSLIRE foresight (Taleb, 2007). Success is luck,2forecasting

expertise, like the teaching of risk assessment and futures forecasting, is fraud, self-

delusion, or foolishness, while the best way to organize society involves building up

resilience in the face of the unforeseeable and learning to “benefit from disorder” (Taleb,

2012; Milner, 2012). Indeed, strong-view black swan proponents maintain that society

needs to be reorganized around a black swan-based philosophically grounded opinion:

“Some make the mistake of thinking that I hoped to see us develop better methods of

predicting black swans. . . . To deal with black swans, we instead need things that gain

from volatility, variability, stress and disorder” (Taleb, 2012).

This strong version of black swan centrality is argued even as normal-range event

forecasters—recently Nate Silver (2012)—correctly forecast each states’ electoral vote

in the 2012 U.S. presidential election and crisis (LSLIRE) event forecasters actually do

correctly foresee and forecast emergences, including events that Taleb labels as unpre-

dictable black swans.

Alternatively, if, philosophically speaking, events commonly labeled as unpredictable

black swans, with their implications, can often be recognized, assessed, and sometimes

even managed, and if, more broadly, emerging futures, including LSLIREs, can be fore-

cast, then how professionals teach, do, and evaluate best practices in actuarial science,

insurance, political economics, risk management, business, government, and other pro-

fessions concerned with knowing the future can be improved. Remaining true black

swan events that cannot yet be recognized, forecast, or assessed using current tools and

perspectives become mere areas for improvement, not impossibilities shaping all.

Importantly, acceptable excuses for missing emergent events, including LSLIREs, are

reduced (Bazerman and Watkins, 2004), and the comparative advantage benefits for

1Note: The acronym LSLIRE for a large scale, large impact, rare event, was offered by Thomas

Herget. Since one of the main historic functions of both science and professional practice is

creating more acronyms, I use it here.

2See Knox (1994, pp. 19-20) and Lindberg (1992, pp. 23-24) for historical and philosophical

implications of such a position.