So you think you know the future?
As you read this, do you think you know what’s likely to happen in the months and years ahead? Can you predict your own future with confidence?
It seems that many have perfected the science of prediction. If you read the papers, listen to the radio or watch TV, you will find a steady stream of highly scientific predictions of what the future holds. Organisations such as the Central Bank or the ESRI, and a myriad of private institutions, release forecasts for the economic environment predicting a range of outcomes for measures like inflation, GDP, interest rates, unemployment and so forth.
Most media outlets report on these forecasts as if they are actually going to pan out as predicted. The headline reads ‘Ireland’s economic activity WILL increase by 5% next year’. How can we be so certain? The answer, I’m afraid, is we can’t. And it gets worse. The majority of these forecasts are wrong, most of them by significant margins.
So, the next time that you are tempted to make a business decision based on what you read in the paper from an economic ‘guru’, ask yourself “does this allow for the possibility of a black swan event?”
A Black Swan event?!
Nassim Nicholas Taleb, in his book ‘The Black Swan, the impact of the highly improbable‘, introduces the image of a black swan to represent the reality of unlikely occurrences. For many hundreds of years, bird watchers believed all swans were white. There was simply no reason to think otherwise. That is, until the sighting of the first black swan.
Taleb defines a Black Swan as a highly improbable event that has three attributes: it is essentially unpredictable, it carries an extreme impact and after the event we concoct an explanation that makes it appear less random, and more predictable, than it was.
You could reasonably argue that the financial crisis of 2008 was a Black Swan. Yes, there were signs that an economic contraction was due but few predicted such a severe liquidity crisis. Of course, people are now queuing up with their retrospective analysis on how all of this was eminently predictable.
Taleb’s book is a remarkable exploration of the impact of the unexpected event on our lives. He suggests what we don’t know is far more relevant than what we do know. He believes that we need to use the extreme event as a starting point and not treat it as an exception to be pushed under the rug. He also believes that the future will be increasingly less predictable.
If you still believe you are immune from the impact of unexpected events, consider the existence of a turkey. In the months leading up to Christmas, the bird is happily eating and growing and enjoying a full and predictable life. Then one day in December, he is introduced to an unexpected event. Taleb highlights that the turkey’s knowledge was actually of negative value to him as he had no demonstrated reason to suspect, or prepare for, his impending doom.
So, how do we prepare ourselves for the Black Swan events that will inevitably impact on our lives? Taleb’s advice is straight-forward and quirky: don’t take a forecast from someone wearing a tie, go to parties, maximise trial and error and learn to fail with pride.
My less quirky advice: read this book.
This review originally appeared in the Goodbiz.ie newsletter.