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 – [email protected]@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 complicatedthe making of a simple pencil really is. As westudy the story of “I, Pencil,” identify the partsand 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 Analysiswhat 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 PositivesMistaking 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

AnchoringAvailability 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 ReactiveHeightened 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 ProfileWhat are the key factors in our external environment and how much can we control them?

Step 2: Where Are We? Develop an Internal Environment ProfileBuild detailed snapshots of your business activities as they are at present.

Step 3: Where Are We Going? Develop Assumptions about the Future External EnvironmentCatalog future influences systematically; know your key challenges and threats.

Step 4: Where Can We Go? Develop a Capabilities ProfileWhat 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 AssumptionsBuild 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 ObjectivesCreate a pyramid of objectives; redefine your business; set functional objectives.



Step 7: What Do We Have to Do? Develop a Gap Analysis ProfileWhat 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 ProblemsAct 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 ObjectivesClassify strategy and program objectives; make explicit commitments; adjust objectives.Step 10: How Can We Do It? ImplementationEvaluate the impact of new programs.

Step 11: How Are We Doing? ControlMonitor external environment. Analyze fiscal and physical variances. Conduct an overall assessment.

Step 12: Change What’s not Working: Revise, Control, Remain FlexibleRevise 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. SikichPrincipalLogical Management Systems, Corp.

www.logicalmanagement.com

[email protected]

[email protected]

+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. SikichPrincipalLogical Management Systems, Corp.

www.logicalmanagement.com

[email protected]

[email protected]

+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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