It is now apparent that we live in a world for which traditional risk models are no match. Black swan events (low-probability, high-impact events) and other complex risks are increasing, and risk models that perpetuate illusions of reliably predicting them are part of the problem.
At Pivot International, we are a leading global new product development (NPD) partner with expertise across fourteen industries helping clients combat complex risks to bring successful innovations to market. We do this with a single-source model that integrates product design, development, manufacturing, and supply chain management. With in-house DFM expertise, alternative sourcing solutions (including 320,000 square feet of manufacturing space worldwide, including domestic options), and nearly fifty years of proven experience, we help clients worldwide successfully navigate complex risks.
In attempting to predict rather than reduce vulnerability to risk, even seasoned risk managers routinely fall prey to seven mistakes. This piece will offer seven correctives that can help company leaders better prepare for and navigate black swan events and complex risk scenarios.
1. Understand The Problem of Prediction
Black swans can’t be meaningfully extrapolated from past events, which is another way of saying they lack precedent. This order of risk emerges from complex-system dynamics, which is to say they are fateful byproducts of social, cultural, geopolitical, and techno-economic innovation.
For example, take the advent of the automobile, nuclear power, the digital revolution, and CRISPR technology. These innovations are without precedent, and before their emergence, no one could have predicted the risk of automobile fatalities, the specter of nuclear war, the danger of cyberattacks, or the threat of gene drive. This highlights why not even machine learning can reliably predict black swan events.
2. Focus on Whens, Not Ifs
We have a dismal track record of predicting black swans and other complex risks. For one, becoming preoccupied with predictive analysis can result in tunnel vision that blinds us to threats in our periphery, causing us to miss the forest for the trees. To reduce vulnerability to risk, don’t focus on if, focus on when, working from the assumption that impact has already occurred. From here, it’s much easier to begin reasonably assessing the resilience of your business, supply chain, and market landscape.
3. Don’t Dismiss Cassandras
All human cultures have their own version of the ancient Greek myth of Cassandra. This myth functions as a cautionary tale about the perils of disbelieving or ignoring individuals who warn against valid and often dire threats. While it’s true that black swans can’t be predicted based on the past, this doesn’t mean that credible warnings are never issued.
Warren Buffet, for example, repeatedly warned of the financial crisis of 2008, even earning the moniker “The Wall Street Cassandra,” but few companies listened. And early in the global pandemic, preeminent risk analyst Nassim Taleb warned in great detail that a supply chain crisis was unfolding that would only become apparent in late 2021. But many companies failed to take heed and have been largely unprepared for the port bottlenecks and container, chip, component, and trucking shortages currently plaguing the global supply chain.
4. See Risk Management as a Profit-Generating Pursuit
A dollar not lost is economically equivalent to a dollar earned, but humans are psychologically wired to miss this point and thus to pursue positives rather than avoiding negatives. (Something that political campaign managers and marketing gurus have understood for decades and used to their advantage.) In practice, this means that most companies pursue profits at the expense of avoiding losses. Instead, they need to see risk management as a profit-generating pursuit.
5. Beware of Standard Deviation
Standard deviation is routinely used in finance but beware of its common misapplication, especially to risk management. Research shows that even quantitative analysts struggle to understand standard deviation. When these analysts were given information detailing a stock’s average absolute movement (its mean absolute deviation) and asked to run the numbers, they confused it with standard deviation. When professional analysts struggle with standard deviation, this doesn’t bode well for business leaders. But the real lesson here is this: when it comes to managing complex risk, relying on a single number is an exercise in folly, and even a comprehensive Risk Score can lead to a false sense of security.
6. Don’t Sacrifice Resilience for Efficiency
The single-minded pursuit of efficiency represents a grave risk to resilience. In nature, anti-fragile, adaptive systems have built-in redundancies or “risk protection” features that dramatically increase their resilience to threat and loss. (Lose one eye or lung, for example, and you’ve got another to spare.) But for decades, businesses have been allergic to redundancies, leaving them bereft of crucial buffers. Without strategically building redundancies into your business model, you’ll sacrifice resilience for efficiency, leaving your company dangerously exposed.
7. Illuminate Your Blindspot
The human preference for certainty, aversion to ambiguity, a tendency toward cognitive bias, and inclination to overestimate competence and underestimate risk represents what may be the clearest and present danger in risk management. Leaders who tend to be the best prepared for black swans and complex risk are almost always those who actively seek to illuminate their blind spot to strategically reconceive the risk landscape. How? Ask unorthodox questions, redefine problems, struggle with opposing perspectives, entertain outlier opinions, and invite critical feedback to reveal and challenge unseen assumptions.
While black swans and other complex risk scenarios can’t be reliably predicted, you can reduce your vulnerability to them. By heeding these correctives to seven common risk management mistakes, you can better navigate complex risk landscapes and protect your business.
Are you looking for a partner to help you combat risk and deliver a winning innovation to market? We’re what you’ve been looking for! We work closely with your team every step of the way, optimizing your design for manufacture to drive cost savings, fuel innovation, increase supply chain security, and deliver a competitive product. Contact us today to learn about how we can help you achieve a successful launch!