What Are Black Swan Events And Why Are They So Important?

My wife is a Black Swan.

At least to me she is. And she’s the Ultimate Positive Black Swan at that.

Then again, the popularity of the internet, the tool I am using to communicate with you at this very second, is a Black Swan too.

The stock market crash of 1987 was a Black Swan too. 9/11. Yes, that was a Black Swan also.

Okay. So what are Black Swans and why are they so important for all of us to know about?

Black Swan events were a term coined by Nassim Nicholas Taleb in his book, The Black Swan, to describe unforeseen positive and negative events.

Taleb, in my opinion, is a genius. You really have to focus when you are reading his book or you just get lost.

You might think Taleb’s goal in writing The Black Swan was to help us learn to predict Black Swans.

That’s not the goal.

In fact that’s impossible because you can’t predict outliers.

However, Taleb’s goal is more realistic:

Expose yourself to as many positive Black Swans as possible while keeping yourself from being exposed to as many negative Black Swans as possible.

How do you do that? How do you expose yourself to as many positive Black Swans as possible? And then, how do take advantage of these positive Black Swans?

Back to my wife, The Ultimate Positive Black Swan.

The fact that I met my wife is a total Black Swan experience. Meeting my wife was a total random, unforeseen event:

Random event number one: One Saturday morning I happened to be walking out of the Decathlon Club right when my future wife was driving into the club.

Random event number two: My future wife happened to park her car next to mine at the exact same time I arrived at my car.

What were the odds of these two events happening at the exact right time?

One Million to One?

One Billion to One?

I have no idea except it was complete luck that I ever met my wife. And that’s why she’s my Ultimate Positive Black Swan.

There was one more thing, no two more things, necessary for my wife and I to meet:

My mindset had to be open to meeting my wife
My wife’s mindset had to be open to meeting me

We might have just smiled at each other and said, “Good morning,” if our mindsets weren’t right.

Think about how you met your husband, wife, partner, boyfriend or girlfriend. What were the odds of that happening?

Black Swans are all around us.

The key is taking advantage of the positive ones and limiting the damage from the negative ones.

The trick is a combination of your mindset, exposure, and adaptation.

Let’s start by looking at Positive Black Swans in business:

Many new businesses and products are the result of Positive Black Swans. Here are couple examples of Positive Black Swan businesses:

Twitter.
Google.

But we have to plan for success, don’t we?

Absolutely we do.

I’m not saying we shouldn’t do proper business planning. It’s essential for existing product lines and businesses.

Michelle Phan: The Black Swan of the Makeup Industry

Michelle Phan’s story is a classic rags to riches story. Like many rags to riches stories, Phan’s story is a Positive Black Swan story.

Phan, for those of you who don’t know, built a multi-million dollar career by posting YouTube makeup tips.

Here’s how she did it:

Phan’s Black Swan theory was building a following by posting YouTube videos of makeup tips.

Phan posted video after video. She posted 53 videos and nothing much happened.

However, the 54^th video (a video on how to get Lady Gaga eyes) went viral.

https://www.youtube.com/watch?v=bHVOxhEpjp0

Then Phan did the thing you must do for an opportunity to turn into a Positive Black Swan:

You need to be prepared to take advantage of your Black Swan opportunity.

Phan had plenty of more videos ready once she got her break with the Lady Gaga video. Phan’s YouTube videos have over One Billion views.

Phan has continued leveraging her success to this day.

She founded a company called Ipsy that is valued at $500M.

The next step when a Positive Black Swan happens to you is obvious:

Focus your resources on taking advantage of The Positive Black Swans. How?

I’m going to talk in terms of a technology company, but the concepts are probably transferrable to any business:

Allocate some percentage (say 10-20% for an established company) of your R&D budget to Black Swans, but…
Spread your bets, and…
Don’t force arbitrary revenue goals, and…
Be prepared for success when the Positive Black Swan hits.

This sounds like it could be a money pit

You’re absolutely correct. I am not saying you shouldn’t manage your Positive Black Swan projects. I am saying these projects need to be managed through the development cycle.

The Positive Black Swans may not look financially attractive until after the fact:

The challenge for established companies is justifying spending some of your precious capital on a bunch of fliers?

I admit it’s not easy if you’ve never done something like this before because it takes conviction:

I know many of the projects I launch are going to fail, but…
I also know that the one or two that make it are going to make up for the ones that don’t, and…
I know that if we don’t put ourselves in position to take advantage of Positive Black Swans then someone else could eat our lunch.

The challenge for startups is pivoting:

Get to market with a great product (10X to 100X better than the competition) with minimal features, and then..
Add and delete features as unforeseen opportunities (Positive Black Swans) pop up

What steps can you take to prevent exposure to Negative Black Swans?

You know, I thought about this for a long time. The conclusion I came to is there are some Negative Black Swans that are just out of your control, and there are others you can indeed limit your exposure to.

What are the ones that are out of your control?

I don’t think there is much the victims of the Paris attacks could have done to keep themselves safe. That is a Negative Black Swan of the worst possible kind, and there was nothing anyone could do about it.

So, what Negative Black Swans can you limit your exposure to?

Investing is full of negative Black Swan events. The crashes of 1987, 2001, and 2008 were negative Black Swan events, but the preventative measure was to simply limit your exposure to any single type of investment tool.

Then your money is safe even if there is a crash.

The same theory holds true in business. A business that is dependent upon to few customers is a candidate for a Negative Black Swan event.

Now you’ve scared me. I wish life were more predictable.

I don’t.

I just have to look at my wife, my Ultimate Positive Black Swan.

So here’s to more (Positive) Black Swans and being prepared when they come our way.

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