The Flow of Risk Management’s Black Swans

Safety Boxes

We’ve all experienced catastrophic endpoints. If you were in New York on 9/11, if you’ve ever had a relative you’ve hunted deer, drank whisky, and traded bad jokes with who suddenly and unexpectedly committed suicide (I did), if you’ve ever even gotten into a fender-bender on the way to work (we all have), you’ve been there. You’ve experienced a discontinuity.

My favorite anecdote from Nassim Talib’s The Black Swan was in the form of a graph of a domesticated turkey’s life. Fed, watered, and comfortably housed every day, that turkey’s confidence in his future got greater and greater, and reached it’s maximum in the week before Thanksgiving. And then he was prepped (to use a mild term) for someone’s holiday dinner.

The point of Talib’s graph was to point out the inadequacy of extrapolating from a steady and seemingly predictable past into the future. And to point out the power of the discontinuity, the point in time where the present deviates dramatically from the past. For risk managers, this graph holds a fundamental lesson in what’s important in staving off disaster, but it falls short of providing a prescription for success. Indeed, one of Talib’s points is that trying to predict this sort of event is fruitless. The best you can do is protect yourself as much as possible from them.

Mihaly Csiksentmihalyi’s seminal work, Flow, gives us clues to what a solution may look like. He studied flow states, originally defined by his studies of surgeons, mountain climbers, chess players, and dancers. He was looking for the basis of the intense states of concentration that allow these people to lose their self-consciousness and perform at a very primal level. His work is worth a read by anyone who cares about enjoying their work, but the pertinent part for this discussion is boxes. I call them safety boxes.

Safety boxes?

Csiksentmihalyi defined a number of parameters that must be satisfied in order for flow to occur. He used a box metaphor, since borders were critical to flow. The goal of the endeavor must be well defined, as well as the path to the goal, and both must be perceived to be within immediate reach. And the person seeking flow must feel safe.

Safety in a box. That’s the intersection between flow and black swans.

Safety in a box means that the consequences of a risk are available as immediate feedback (another critical factor in flow), and the adverse outcomes lie within defined borders. Safety boxes are nested like Chinese puzzle boxes or Russian Matryoshka dolls, each with a slightly greater potential for adverse consequences.

This discussion flows from my previous post about safety being paramount for successful management, but it extends into a more important concept for both your professional and personal life.  Limiting exposure.

What does this mean?  Is it biz-speak for something that could be better expressed more simply?  Perhaps yes.  What it means is that you don’t want to rail and piss off your anger at a subordinate when the upside is a limited prospect of getting her to work harder while the downside is losing your job for being a harasser.  It’s about making a sincere effort to explore the potential barriers and pitfalls of committing to an approach when other options exist that may have less risk, or more potential for gain.

It’s about keeping your legs inside the bus when it’s hurtling down the road past trucks hauling poorly tied-down lumber.  Simply, it’s about being conservative about actions you may take that open you to big, big losses.  Tragic consequences.

And, conversely, it’s about opening your life to opportunities that are unlikely but have the potential to transcend every other aspect of your life.  Who cares about your 401k when you’ve just won the $230 million dollar MegaMillions prize?  Buy a MegaMillions ticket whenever the jackpot reaches the $100 million point – you’ll never win, but if you do all your other investments become moot.  Open yourself to the big wins.

And close off the big losses.  Don’t rob liquor stores, even if you have a great system for knocking them off and reaping thousands with little effort.  The downside is too compelling.  You may end up in prison for a long, long time.  You may end up murdering someone, with real life consequences along with a karmic debt that I’m frankly loathe to pay.

Stay in the middle of the road, with occasional positive forays.

Feel the power of your beauty.  You are beautiful.  Play on it, play with it, but don’t ever get ugly.

I love you,