#23:The Smile of the Black Swan

For individuals and organizations, risk refers to events that are difficult to predict, or that fall outside the bounds of what can be anticipated or managed. Here, let us consider risk as encompassing both positive outcomes (opportunities) and negative ones (threats). We cannot predict when we will die, whether we will be caught up in an accident or incident, stumble upon a large sum of money, or encounter a life-changing relationship. Events such as the September 11 terrorist attacks, the Great East Japan Earthquake, and Russia’s invasion of Ukraine were not foreseen. Likewise, the discovery of penicillin, the creation of iPS cells, and the explosive advancement of AI were not predicted. While positive risks are welcome, negative risks are something we want to avoid or at least minimize. When we think about how to deal with risk, which are deviations from our expectations, there are several options: avoiding risk, transferring risk, or preparing for risk. For example, the saying “a wise person stays away from danger” reflects risk avoidance; purchasing insurance prepares for illness or accidents; and stockpiling essentials prepares for natural disasters or war.

However, when attempting to manage negative risks in this way, one inevitably faces the question of how far the scope of risk management should extend. The risk that a morning commute train might be delayed is manageable, but a delay of ten minutes is hardly significant enough to warrant active management. A delay of an hour may require contingency planning, yet few people go about their daily lives anticipating a terrorist bombing that destroys the railway system. In other words, the risks subject to management are those deviations that fall within a certain range of expected outcomes. This “range” varies greatly depending on the entity bearing the risk. A large corporation with a sound balance sheet and ample cash reserves can withstand sudden interest rate hikes or the collapse of a business partner. The same cannot be said for a startup that continues to make large investments financed by borrowing far exceeding its capital. On the other hand, if a company adopts a policy of minimizing investment and avoiding debt entirely in order to evade risk, it may reduce short-term exposure but lose its growth potential over the medium to long term, and ultimately face greater risk as investors turn away. Thus, when considering deviations from expectations that generate risk, one must also account for variation across the time axis.

In today’s world, where the business environment is constantly changing, companies must of course prepare for risks. However, management cannot spend every day discussing natural disasters, a potential third world war, or the next pandemic. At the same time, treating all “business as usual,” such as new product launches by competitors, supply chain fluctuations driven by supply-demand imbalances, or changes in financing costs due to cycles in bond and capital markets, solely as risks would make effective management impossible. What is required is a structured approach: defining the scope of risks to be managed, forecasting those risks over time, developing scenarios for when they materialize, and designing responses for each scenario. In essence, this means building a system to recognize, anticipate, and absorb future deviations. While individuals can respond almost automatically to something like a one-hour delay in their commute, organizations must deliberately and strategically design such responses.

Risks that fall outside the scope of management, those that exceed all expectations, or so-called “black swans,” do materialize from time to time. In such cases, individualized responses become almost impossible. It is not feasible to devote vast resources to constructing scenarios and response plans for natural catastrophes or a third world war. Instead, organizations must become what Nassim Nicholas Taleb calls “antifragile.” Just as muscles grow stronger under stress, or like the Hydra that grows two heads when one is cut off, systems must be built so that they become stronger through exposure to risk. In practice, this is often implemented as a “barbell strategy,” combining roughly 90 percent ultra-conservative choices with 10 percent extremely high-risk bets. Under normal conditions, this approach enables highly stable growth while also preparing the organization to avoid catastrophic damage when a black swan event occurs. However, it comes at a cost. In ordinary times, it reduces efficiency. This is, above all, a strategy that prioritizes survival.

A corporate strategy that does not miss positive black swans would take the form of ambidextrous management, simultaneously pursuing the deepening of existing knowledge and the exploration of new knowledge. It involves steadily and persistently growing core businesses while continuing to invest in unknown fields, accepting failure and not shying away from what may turn out to be wasted expenditures. Such a seemingly contradictory approach inevitably creates internal friction and can weigh on overall profitability, making success far from easy. At the individual level, this might mean living prudently, generally avoiding unnecessary risks, maintaining solid insurance coverage, and leading a stable life, while occasionally taking chances by trying new things, traveling, and engaging with many different people. After all, without going out to a party, one cannot make new connections. As Louis Pasteur, the founder of modern bacteriology, famously said, “Chance favors only the prepared mind.”