Black Swans

Black swan events are so fascinating that they are a common source of discussion in many risk management forums. The variety of perspectives coming from all directions never ceases to amaze.

To a risk manager, ‘black swan’ phenomena are highly unlikely events that have massive impacts on a business or society on the rare occasions they occur. It means that the event is unexpected, but is of huge consequence (Ferguson, 2014). There is no scientific way at present to predict black swan events reasonably and acceptably.

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I tend to question the result of the research, which suggested that by exploiting many types of data, risk managers can help prevent (or at least contain) the damage related to black swan events and other risky blind spots.

How can any data be useful without the process of correlation? Black swan events cannot be accurately quantified or calculated. They are unknown unknowns.

The interesting part mentioned in one study points to the use of integrated data to point to potential risk. The mere mention of integrated data underlines correlation; i.e. we have to associate correctly one datum to the next, or one set of information to the others, for them to be of value.

That can prove rather impossible when we have nothing to start with. How do we start working on something we do not know? There is an immense number of data points where one can start. Only by scratching the surface of knowledge that knowing starts.

Unknown unknowns (black swans) might be in the room, for all we know, but we just cannot see them until circumstances make them visible.

Once we see that the risk exists, we would surmise that it no longer qualifies as a black swan event, because we are now aware of the risk, and the element of surprise is no longer there. It is now the normal type of risk that you, and many risk managers are already familiar with, the known unknowns.

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Bill Pieroni, Chief Operating Officer at insurance giant Marsh, and a few others, contend that the best way to manage risk, even black swans is to use big data.

He explains that some events occur with more and more regularity, suggesting that some seemingly unknowable events are in fact, becoming more or less predictable. He claims that this big data will give way to shades-of-grey swans.

Perhaps he is talking about the transition from being unknown to more or less known. Although it sounds logical, shades of grey will be a doubtful state, a ghost of something that will not present any solid evidence but introduce vagueness to nothingness. It might only serve as a uncertainty generator.

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In the present age and time, black swan events can only be addressed by intuition.

Despite being labeled as one of the cognitive biases that underlie human flaws in decision-making, I believe that this is a true statement.

We can all agree that if anyone has the right perspective, understanding, and tools to process universal data, and integrate them into some coherent information, prediction of a black swan event is theoretically possible.

The problem in this concept is that nobody has found a way to make it practically possible.

Ergo, contrary to what the author implies, real-world application of Pieroni’s ideas is still impossible.

The risk universe is immense, yet each component, regardless of how small it might be, can affect the results. If we put a bracket to what data we analyze, then we do not have the whole picture.

If we do not put a bracket of limitation to what we evaluate, then we are analyzing infinity and we will not arrive at an answer. We are talking about a great and expansive risk network that trumps common comprehension.

I imagine that many risk drivers actually lie so far outside the boundaries of what we tend to consider that it is futile to predict a potential outcome.

Tracing the cause of a black swan event that has already happened can lead us to the most seemingly insignificant occurrence.

It is easy to posit real life examples of how some insignificant events result in a big events, spawning other effects in never ending fashion. Some of you might even trace a problem to the time when a person was born, arguing that if he had not come into being, things would have turned out differently.

I tell you, the iterations are endless. The good thing is, it is an excellent mental exercise.

Source: Frago, R. (2015).Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective. ISBN 978-0-9947608-0-7 (Canada). Section 1.7

Rufran C. Frago – Author (19-Oct-16)

Related sites:

Related articles authored by Rufran Frago.

  1. Risk Relativity
  2. Phantom Schedules
  3. Man is the Center of the Risk Universe
  4. Project Schedule Baseline Top 10 Prerequisites
  5. Setting Critical Path
  6. Schedule Critical path
  7. Primer to Good Schedule Integration
  8. Project Schedule: P50, Anyone?
  9. Schedule Baseline Dilemma Part 1
  10. Schedule Baseline Dilemma Part 2
  11. 4D Scheduling Part 1: What is it about?
  12. 4D Scheduling Part 2
  13. 4D Scheduling Part 3
  14. Mega-Projects Schedule Management and Integration
  15. Scaffolding Hours: What are they? Part 1
  16. Scaffolding Hours: What are they? Part 2
  17. Your World, Our Risk Universe
  18. Rufran Frago in the Global Risk Community Site
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About rcfrago

Rufran C. Frago is a practicing Professional Engineer (APEGA), a PMP (PMI), a CCP (AACE) and a RMP (PMI). He has published more than 100 articles. He is the author of the book Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective He studied at Batangas State University and University of Batangas graduating with a Diploma in Petroleum Refinery Maintenance Technician (1979), Bachelor of Science in Mechanical Engineering (1984), and Bachelor of Science in Management Engineering in 1987 respectively. He was in his senior year taking up Bachelor of Science in Electrical Engineering, needing only one semester to complete, when he took a break to concentrate on married life. Rufran has never stopped academic learning after getting his degrees in the University. He continues his education by taking up some MBA courses under the University of the Philippines-PBMIT Consortium (1987-1988). He completed Computer Technician Program at International Correspondence School, Pennsylvania, USA in 1994, Applied Project Management Certificate program at Southern Alberta Institute of Technology in 2009, and Professional Management Certificate program specializing in Construction Management in 2014. He is now completing the Professional Management Certificate program specializing in Risk Management. He was a recipient of the Gerry Roxas Leadership Award (1976) and the American Field Service (AFS) Scholarship in 1976-77, studying in America for a year. Upon his return in 1977, California-Texas Philippines (Caltex Philippines Inc.), one of Asia’s biggest oil and gas refineries at the time, awards him with a two-year national college scholarship, specializing in Petroleum Refinery Maintenance. He went on extensive training in various maintenance disciplines for the next two years. Caltex hired him upon his graduation in 1979. He has spent more than 38 years of his life working in the Oil & Gas, Petrochemicals, Oleo-chemicals, Sugar Refining/Manufacturing, Consultancy, High School and University Education industries in Asia, Middle East, Canada, and North Africa). Rufran has worked with Caltex, Uniman, Unichem (now Cocochem), ARAMCO-KSA, Central Azucarera de Tarlac, Arabian Gulf Oil Company-Libya, Batangas State University, St. Bridget’s College, JG Summit Petrochemicals, Halliburton-Kellogg, Brown and Root, and OPTI Canada. He works with Suncor Energy Inc at present. He has wide range of expertise that includes problem solving, project management, training and mentoring, programs and projects planning and scheduling, cost management, risk-based management, construction management, project review and auditing, estimating, engineering and design, fabrication and module management, maintenance, operation, material selection, warehousing, EH&S and reliability engineering (predictive and preventive maintenance). He wants to share his knowledge and leave behind some form of legacy to all specially his wife, children and grandchildren, Eva and Mia.
This entry was posted in Analysis, Baseline Management, Black Swans, Business, Canadian Politics, Causes and effects, Construction Management, Critical Path, Critical Path Management, Data Assessment, Data Maturity, Decision Making, Deterministic Schedule, E-Touch Up, Economics, Information Maturity, Integrated Schedule, Integration, Issues and Problems, Managing Assumptions, Managing Constraints, Monitoring, Oil Future, Opportunities, Opportunity, Planning and Scheduling, Program Management, Program Schedule, Progress Measurement, Project Management, Reporting, Risk Assessment and Treatment, Risk Relativity, Risk Universe, Risk-based Management, rufran frago, Rufran's Blogs, Threats, Uncategorized and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

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