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Overview

The Black Swan offers insights into making better predictions. We over-rely on our intuition and ignore accuracy, as well as other factors that lead to poor decision making. Sometimes we have an inability to understand randomness itself, which leads to “Black Swans” — events thought impossible that redefine how we see the world.

Every weather forecast relies on models and data. It’s impressive how accurate they are in predicting whether it will rain or not. You might think that doesn’t matter, but for companies with billions of dollars at risk, or scientists trying to predict the likelihood of a tsunami or an earthquake, it is serious business. And these days it’s more important than ever.

The methods used to assess and manage risk are flawed. We can overcome this problem with the following key points: why experts’ opinions aren’t as good as you think; what Monte Carlo has to do with risk management, and how we calculate the risk of a situation that hasn’t happened before.

Big Idea #1: To manage risks means to be smart about taking chances.

Risk management is a part of the jargon used by organizations and governments. It’s also something that many people have heard about, but don’t know what it means. Risk management helps you to understand risk better, so it’s important to keep things simple:

Risk is the likelihood and magnitude of an undesirable event. For example, in a scientific or mathematical context, risk always describes the probability and magnitude of an undesired effect.

But what exactly are probability and magnitude?

While probability is a way to measure the likelihood of an event happening, magnitude can be measured in several ways. One is by the amount of money lost or lives lost. However, there are many different undesirable events that can happen. For example, natural disasters and product recalls are just two examples of undesirable events that can occur.

Now that you know what risk is, how do you manage it? Managing risk means using resources to decrease danger. For example, management can be defined as “the planning, organizing and coordinating of resources toward a goal”. In other words, managing your resources effectively to get the job done. It’s important because it allows for the use of limited assets in order to achieve an objective.

Now that you understand the definition of risk management, it’s time to learn how it developed and how it applies today.

Big Idea #2: Risk management is becoming increasingly important to companies around the world.

Risk management has been around for a long time. It began when some leader decided to fortify their city’s walls or put away extra provisions in case of a tough winter. But risk management has evolved since then and the advent of computers has dramatically improved the field. Even before that, nuclear power and oil exploration increased the sophistication of risk management, which is why it’s on most large organizations’ minds today, regardless of their field.

Risk management has become a critical field in today’s business world. How did it evolve?

During World War II, the US government used a group of people called “war quants” to figure out things like the enemy’s production capacity and potential invasion risk. They were trained in quantitative calculations and helped make decisions during wartime.

But, in today’s world, risk management isn’t just for war. It’s used by everyone from governments to corporations. For example, a study conducted by The Economist in 2007 looked at risk management across 29 countries and 320 organizations.