Innovation Junkies Podcast

1.49 BONUS: Black Swan or Gray Rhino?

The Jeffs compare Michele Wucker’s concept of The Gray Rhino and Nassim Taleb’s concept of The Black Swan. They explore: what Black Swan & Gray Rhino events are, past & current Gray Rhino crises in the U.S. and how leaders can handle Gray Rhino or Black Swan events in their organization

Jeff Standridge: This is Jeff Standridge, and this is the Innovation Junkies podcast. If you want to drastically improve your business, learn proven growth strategies, and generate sustained results for your organization, you’ve come to the right place. Welcome to the Innovation Junkies podcast.

Jeff Standridge: Hey, guys. Jeff Standridge here, and welcome to another episode of the Innovation Junkies podcast. Hey, Jeff.

Jeff Amerine: I’m glad to be back.

Jeff Standridge: Yeah. This is a bonus episode. That’s right. That’s right. Bonus episode today.

Jeff Amerine: Well, how about I kick this off with a couple of thoughts that are kind of relevant to what we talk about but really relevant to what we see happening in the world. Some years back, Nassim Taleb wrote a book called The Black Swan. It was the impact of what happens when highly improbable things actually manifest and occur.
He made the assertion that things like the dot-com bubble, 9/11 attack, the 2008 financial reset, that those were black swan events, these sort of large, unexpected, unpredictable things that you couldn’t necessarily foresee, and the adversity they caused and all the different things that came out of that, both good and bad, from innovation, societal change, and whatnot.

Jeff Standridge: So things that you couldn’t predict. They just happened because—

Jeff Amerine: They just happened. Exactly. Big seismic changing type of things. Then there’s another author named Michele Wucker that has written a book called The Gray Rhino. Her assertion is, yeah, okay, we get that there’s occasionally going to be these things that sneak up on you that couldn’t have been foreseen, but are they really a black swan, or are they a gray rhino?
The gray rhino is something that obvious. It’s right in front of you. If you’re in the Serengeti, you’re in Africa, and you see a rhino, and there are a few numbers of them, you can’t miss them, right? They’re gigantic. So her assertion is, how do you recognize and act on the obvious dangers we ignore?
As a point of the conversation, how do we weave that into how is this relevant to someone that’s trying to run a constantly improving, innovative business? How does it relate to strategy? So that’s kind of the context of the conversation, and I would pose the question are black swans events in a business really black swan events, or do we have the blinders on or are we ignoring the signals that we see?
You’ve run a number of businesses. You’ve been involved in a number of businesses. Think about your own experience, Jeff. What do you think? Are these things really black swans, or are they gray rhinos?

Jeff Standridge: What about gray swan? I think it’s probably maybe kind of a little bit of both, right? I believe that we far too commonly and far too easily chalk things up to black swan events when in reality, there’s probably a middle ground between the two. It’s kind of like he said, she said, and then there’s the truth, and it’s somewhere in between.
I know that when I look back at some of the business failures that I have experienced, maybe I couldn’t have predicted the failure that I actually experienced, but I could look back in retrospect and see some signs that it was coming and that perhaps had I taken some action I could have averted the disaster that I ultimately experienced.

Jeff Amerine: Exactly. This was one that was very visible in the early days of the war in Afghanistan. Donald Rumsfeld said, “While there’s known knowns, there’s known unknowns, and there’s unknown unknowns.” It’s easy for us at times to chalk up to well, who could have ever anticipated that? Who could have known?
A good example, and I don’t have the reference directly off the top of my head, but there was a guy that made over a billion dollars shorting the financial bubble because he could see what was going to happen with mortgage-backed securities and the credit default swaps, and all this other kind of contrived financial engineering that was built around the basis of something that wasn’t creditworthy at its core. So he began to short all of that stuff and made a ton of money. So for him, it was definitely a gray rhino that was coming, not a black swan.
You wonder at times is it willful ignorance when we get to that point, or is it that we don’t want to believe that there’s a contrarian view or something happening? I’m just wondering about your thoughts on that? You said it’s somewhere in between, but talk about what leaders can do to unwind some of that.

Jeff Standridge: Before we do that, talk a little bit about how the mortgage crisis of several years ago is the student loan crisis of today, and what we learned during the mortgage crisis that could be applied to the pending student loan crisis that we have today?

Jeff Amerine: Yeah. The other thing that I think to add some perspective is there was a confluence of factors that led to that financial crisis that had at their original history something that was well-intended from 35 years before, where it was this idea; The Community Reinvestment Act was intended to make sure that people who had typically been denied mortgages had a greater chance of getting a mortgage.
That was very well-intended, but it led to some things. It led to pathological behavior, where there was no checking of credit qualification at all. So speculators and people were using that to kind of build something out of this sort of house of cards, so it was this cascading of factors that came together.
So redirect the question again, I may have gotten a little too far into the weeds there.

Jeff Standridge: Well, no, I was just comparing. You talked about the mortgage crisis. I was comparing it to maybe we have a gray rhino going on right now around student loans.

Jeff Amerine: Perfect. Student loans, and thank you for bringing me back to that.

Jeff Standridge: Well, you had a birthday recently. Sometimes we have to help you with those kinds of things.

Jeff Amerine: I tell you what, it’s like half a step away from being in full-on geezer mode, but thank you for pointing that out. It was my last full year with five as the first number in my age, so I don’t want to give too many more clues away.

Jeff Standridge: One foot in the grave and the other one on a banana peel.

Jeff Amerine: Well, you could argue, and we’re close to the educational system, but you could definitely argue that we built a process in education that encourages students to go out and get massive amounts of debt to pay for increasingly high tuition, living expenses, et cetera. A lot of the major universities in the US are like a country club. They’re competing for students all across the country for this immersive experience that may end in some kind of quality education that actually gives them earning power, but may not, and there’s large disparities between STEM-related degrees and employability and the other things that you can learn. Yet we’ve saddled these kids with mounting amount of debt that sometimes might take them 15 to 20 years to pay off. So when did that bubble pop? The other thing too is think about the size of the bubble that’s been created, and it really only serves 35% of all of the adult population. That’s essentially what your four-year or six-year undergraduate baccalaureate attainment rate is. So it’s like, what are we doing? It’s a system that’s based on leverage rather than paying as you go.

Jeff Standridge: So back to your question about what leaders can do in their businesses? And we can kind of kick this back and forth. I like to use the reference from Jim Collins in Good to Great, where he talks about what is it that drives your economic engine. I think we, as leaders, can get very reactive in our business and can head down, so how do we attune ourselves to these potential gray rhinos that are charging us?
Number one, raise our heads up and keep our eyes fixed on where we’re going and what metrics point to the economic vitality of our organization. Is it revenue, profit, margins, turnover? Whatever those are for our business. It’s having a good handle on those and looking at them. Looking at them and taking action on them.
I think the second thing we can do is how many times we, as small, medium enterprise owners, do we really step back and run a risk mitigation exercise, a risk management exercise, and say what are the critical competitive risks? What are the critical internal risks? What are the critical personnel risks? Quality risks? What are the risks that we are facing in our organization? What’s the likelihood that they could happen, and if they happen what’s the potential effect?
The likelihood is only one measure. The potential effect is another. If likelihood is low or moderate but the potential effect would be catastrophic, then maybe we need to take some action to mitigate those risks.

Jeff Amerine: Yeah. And that’s something… We go through a simple spreadsheet tool that talks about critical, major, and minor, in terms of severity, critical being something that could put you out of business, major a significant setback, minor when you get to it, and then it assigns a probability based on it occurring. That gives you kind of a weighted order of merit.
Then you’ve got a priority list of how you should attack these risks, that if you let them go can definitely torpedo the business and can definitely cause bad things.
I like a lot of what Gino Wickman talks about in his book, Traction, where there’s this, and weekly is a pretty short interval, but he’s got this action meeting where everybody that’s in the company has to go through and talk about those issues which I would call a risk on a weekly basis. It’s not one of these things where you just kind of wallow in well, it’s not fixed yet. There’s a time-definite associated with when things are going to be addressed and fixed. I think that kind of discipline allows all of these gray rhino issues not to become the blind spot black swans if you’re disciplined about how you go about it.

Jeff Standridge: Very good. Today we’re talking in our bonus episode about black swans and gray rhinos. We encourage you to check out the references that we’ve linked in the show notes. With that, that will wrap another episode of the Innovation Junkies podcast. Thank you for joining.

Jeff Amerine: Hey, folks, this is Jeff Amerine. We want to thank you for tuning in. We sincerely appreciate your time. If you’re enjoying the Innovative Junkies podcast please do us a huge favor. Click the subscribe button right now and please leave us a review. It would mean the world to both of us and don’t forget to share us on social media.   

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