THE BLACK SWAN – A CASE STUDY 1
The Black Swan – A Case Study
Richard Carson
Political Science 540
Professor Dana Lee Baker
Washington State University Vancouver
Executive Summary
The Black Swan theory was developed by Nassim Nicholas Taleb in order to explain what he calls the “impact of the highly improbable.”[1]According to Taleb, the Black Swan is a rare bird[2] that was assumed by ornithologists not to exist in nature. Taleb uses the Black Swan as a metaphor[3] for an unpredictable, high-impact event that has major social, environmental, economic or political implications.[4]Such events are rare, hard to predict and take on major historical significance.
Taleb’s proposition is that it is: (1) impossible to predict Black Swan events (outliers and history),[5] (2) human nature to rationalize (triplet of opacity)[6] and explain such events(mind as explanation machine),[7] and (3) possible to build systems to exploit negative events (seize any opportunity)[8] and positive events (positive accident).[9]Taleb calls the latter trying “to turn a lot of Black Swans white!”[10]
This paper is a review of different public administration theoriesand how Taleb’s Black Swan theory is applicable and how public administration might be better practiced. The paper reviews the theories and begs the question regarding the predictability of the unpredictable.[11]The specific theoretical constructs selected and evaluated are primarily taken from the course readings.[12][13]
A Case Study: The Black Swan
Taleb’s Black Swan Theory consists of three main points.First, it is impossible to predict Black Swan events. He says that, “Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focused on the ‘normal,’ particularly with ‘bell curve’ methods of inference that tell you close to nothing.”[14]
Second, it is human nature to rationalize and explain such events. He says “Do not give children sticks of dynamite, even if they come with a warning.”[15] He goes on to say that “citizens must be protected from themselves.”[16]
Third, Taleb believes it is possible tobuild robust systems to either respond to negative events or exploit positive events.For the former, he notes that “A crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself.”[17] For the latter, he observes that, “What is fragile should break early while it is still small. Nothing should become too big to fail.”[18] This is a proactive strategy to avoid the Black Swan event. In essence he is saying it is better to suffer and correct for a series of small failures.
Taleb further elaborated on such response systems by creating the map of the limits of statistics. The map explains when decisions are safe and when knowledge is questionable. He takes the decision and deviation examples and charts them into four quadrants (see Figure 1). Taleb says that “We can identify where the danger zone is located, which I call ‘the fourth quadrant,’ and show it on a map with more or less clear boundaries.”[19]
The Black Swan map is created by looking first at decisions as simple or complex. These are charted against the domains of either inconsequential deviations orconsequential deviations.
The first quadrant consists of simple decisions with inconsequential deviations. The second quadrant consists of simple decisions and consequential deviations. The third quadrant consists ofcomplex decisions with inconsequential deviations.
The fourth quadrant is where complex decisions collide with consequential deviations. It is in the fourth quadrant that there are “limits to statistics” and where the “extreme fragility to Black Swans”[20] exists.It is in the fourth quadrant that the analyst must be wary of statistically based claims. It is here where the human ability to rationalize the irrational is found, as is the ability to create what he calls the “confirmation bias.”
Recent examples of singular[21]unpredictable Black Swan events in the United States are the housing market crash (2007), Hurricane Katrina (2005), the September 11th terrorist attacks (2001), and the spread of AIDS/HIV (1981). It could be argued that the election of a black president (2008) was the ultimate political metaphor for a Black Swan event.More longitudinal examples, that will be addressed later, are the nuclear power plant disasters in America at Three Mile Island (1979), the Soviet Union at Chernobyl (1986), and Japan at Fukushima (2011).
THE BLACK SWAN – A CASE STUDY 1
Case Study: Public Administration Theories
A variety of public administration theories have been discussed during the course.These were either oblivious to Black Swan events, began to contemplate the Black Swan theory or explicitly contemplated them. These theories are chosen because they historically demonstrate an evolution of public policy theory and thought that set the stage for Taleb’s improbable Black Swanevent.
In order to make direct comparisons between Taleb’s theory and those of public policy theorists, the paper focuses on three policy themes. It will look to predictability, rationality and exploitability of public policy in relation to the Black Swan event (see Figure 2).
First, predictability is evaluated in terms of questioning whether the public policy theory claims it is predictable or whether it is unpredictable according to Taleb. Second, rationality is evaluated in terms of questioning whether the public policy claims to be rational before a Black Swan event or whether it is really rationalization after the fact. Third, exploitability is evaluated in terms of questioning whether the public policy theory allows for the outcomes being exploited depending on whether they are positive or negative.
Study of Administration. Woodrow Wilson’s(1887)treatiseprovides the beginnings of modern American public administration thought as the “practical science of administration.”[22] The treatise is also oblivious to the existence of Black Swan events.
Predictability. Wilson talks about the “perennial discords between master and workmen” as the days “before the Black Death.”[23]He says that the “weightier debates… are no longer of immediate practical moment.”[24]Keep in mind that this was the time and place when the commissioner of the United States Patent and Trademark Office said in 1899 that "Everything that can be invented has been invented."[25]The underlying belief was that through the science of public administration all things were predictable and manageable.
Rationality. Wilson’s premise is that the study of administration must ask about what government “can properly and successfully do” with the “utmost possible efficiency and at the least cost.” Wilson’s belief was that the “field of administration is a field of business” and therefore “removed from the hurry and strife of politics.” In other words, public administration could “rescue” executives and “set them upon foundations laid deep in stable principle.”
Exploitability.In Wilson’s essay there were no Black Swan events discussed.It is worth noting that in 1918 Woodrow Wilson proposed the League of Nations, the precursor to the United Nations. It was his belief that another World War I could be averted through international policy interventions. This was Wilson’s way of addressing a Black Swan event after the fact.
Scientific Management. Fredrick Taylor (1912) takes Wilson’s idea further and puts it squarely in the context of the trend toward scientific management.
Predictability.Taylor states that the properly applied principles of scientific management “must in all cases produce far larger and better results.”[26]However, this does not predict Black Swan events.
Rationality. Taylor uses the “first-class American baseball team”[27] as an example of a scientific management system that “can be justly and truthfully characterized as management in which harmony is the rule rather than discord.” It needs to be pointed out that the conviction of Taylor’s belief is such that hind sight is not a problem because there are no Black Swan events. He notes that “under this intimate, close, personnel cooperation… it becomes practically impossible to have a serious quarrel.”[28]
Exploitability. In Taylor’s essay there werethere were no Black Swan events discussed that scientific management needed to accommodate. However, it is ironic that one of Taleb’s Black Swans is World War I (1914-1918). Certainly this event could have been predicted and prevented before it became too big to fail., but scientific management failed to account for it.
Modern Bureaucracy. Max Weber (1924)description of “modern officialdom” is a theoretical summary of the functions of bureaucracy as he thought they should be in his day.
Predictability.This is not apredictive theory. It is an explanation of functionality in the new bureaucracy model.
Rationality. Weber’ view of governance is a classic case of bounded rationality. The expectations and principles are tightly drawn. Weber says that “The official is set for a ‘career’ within the hierarchical order of the public service.”[29]
Exploitability. In Weber’s essay there weren’t any Black Swan events that scientific management could not manage.Unlike many of his contemporaries, Weber did not attempt to create any specific set of rules governing social sciences or sociology. Weber focused more on individuals and culture and this is clear in his methodology. For this reason, his focus was not so much on the lessons from World War I or the possibility of a World War II, as it was on reinventing the German bureaucracy.
Theory of Organization.[30] Luther Gulick’s (1937) contribution to public administration theory is to elaborate on the division of management functions through the POSDCORD model of planning, organizing, staffing, directing, coordinating, reporting and budgeting.
Predictability. Again, we have a set hierarchy of what people should do in order to be effective. Gulick’s theory is an extension of a long line of theoretical improvements to scientific management. He said “those who know administration… will find this analysis a valid and helpful pattern, into which can be fitted each of the major activities and duties.”[31]
Rationality. Gulick’s view of governance is also governed by bounded rationality. The expectations and principles are tightly drawn. Gulick asks “What is the work of the Chief Executive?”[32] He then gives us the POSDCORD hierarchical order of the public service to answer the question.
Exploitability.Gulick considered time a crucial factor in public policy events and that all public policy innovations were rooted in timing. He also believed that time had been a neglected factor in Public Administration.
Science of Muddling Through. Charles Lindblom (1959) developed one of the most systematic bureaucratic theories called “incrementalism.”
Predictability. Lindbolm’s approach is to “rely heavily on the record of the past experience with small policy steps to predict the consequences of similar steps extended into the future.”[33] Lindbolm talks about evaluating “all possible policy outcomes,” but concludes that “For complex problems” that this approach “is of course impossible.”[34] Instead he prescribes a more limited evaluation model in terms of values and alternatives selected. He calls this “the method of successive limited comparisons.”[35]
Rationality. Lindbolm’s view of governance is also governed by bounded rationality. The expectations and principles are tightly drawn. He suggests using the “branch” method of successive limited comparisons. He further limits the ability to rationalize outcomes by basically eliminating “means-end analysis” since it “is often inappropriate or limited.”[36]
Exploitability. In Lindbolm’s essay there aren’t any Black Swan events that scientific management needs to manage, so there was nothing to exploit. However, he does come to an interesting conclusion. He characterizes incrementalism as “a succession of comparisons [that] greatly reduces or eliminates reliance on theory.”[37] By that he means reliance on the “root” method of comprehensively analyzing all possible alternatives – which would include Black Swan events. This is very similar to Taleb’s 2nd and 3rd Quadrants (see Figure 1) where decisions and deviations minimize the impact of Black Swan events.
Agendas, Alternatives, and Public Policy. John Kingdon (1995) takes the incrementalist theory one step further by introducing multiple streams theory. The streams are identified as being problems, policies and politics.In doing so, Kingdon’s essay begins to envision a world where Black Swans exist.
Predictability. Kingdon asks the question “Does change take place incrementally, in gradual, short steps, or does one observe sudden, discontinuous change?”[38]Kingdon envisions sudden change when two or more of the three streams connect. At this point it is up to the policy entrepreneur to identify the event.
Rationality.Kingdon’s view of governance notes “the limitations of three common approaches” in his theory.[39] The first approach is governed by comprehensive rational policy making. Second, he recognizes the influence of incrementalism throughout the policy making process. Third is the garbage can model regarding agenda setting. But he also recognizes that it “does not describe the more discontinuous or sudden agenda change.”[40]
Exploitability. The policy entrepreneur is the change agent who first recognizes the merging of the streams and the birth of the event, and then exploits it as negative or positive.
Bureaucratic Reasoning. In thischapter, Gormley and Balla (2012) present us with what is thebasic antithesis of the Black Swan Theory.This is primarily a discussion of bounded rationality, rational choice and incrementalism. The authors describe the bureaucratic environment that is like a Star Trek planet populated by Vulcans. In other words, bureaucrats who are logical to a fault, emotionless and incorruptible.
Predictability. This theory is predicated on the belief that “What’s past is prologue” [41] and what will happen over time is apolitical and relatively predictable. The failure of such a predictive model is that it does not and cannot predict the Black Swan event.
Rationality. The authors discuss the limitations of bounded rationality as it plays out through both standard operating procedures and incrementalism. These approaches provide the bureaucrat with a socially fair, legally consistent and intellectually reasoned process when implementing public policy.
Gormley and Balla discuss the three difficulties of bounded rationality. Those are fragmentary choices, imperfectly anticipated values and few alternatives. They also discuss the rational choice model where decision makers consider all alternatives and anticipate all consequences.
Exploitability. The authors conclude “an excellent way to enhance rationality in both legislative and bureaucratic decision making is through greater reliance on evidence-based research.”[42]
Punctuated Equilibrium. Finally, there is a theory that best reflects Taleb’s theory. That would be “punctuated equilibrium” as developed by Baumgartner and Jones (1993).[43]
Unfortunately, this is not a theory that appears in the course texts. This is a social theory that has its root in biological theory. In biological terms such shifts are often cataclysmic or evolutionary.[44] In social theory terms such shifts change the future public policy of society and government. The public policy systems conform to the “new normal”[45] and continue on in a stasis mode as redirected by the paradigm shift.
The authors suggest that policy process, positive feedback models are those in which “ideas of momentum, bandwagon effects, thresholds, and cascades play critical roles.” “A positive-feedback mechanism includes a self-reinforcing process that accentuates rather than counterbalances a trend. … The world of positive feedback processes is changeable, fickle, and erratic when compared with stable and predictable outcomes associated with negative feedback processes.”[46]
Predictability. The Black Swan theory and punctuated equilibrium theory share a common defect and the same promise. They both are based on the premise that some events are impossible to predict with any certainty.
Rationality.The social theory states that most public policy systems continue in a stasis phase, as defined by the bounded rationality of human decision-makers, which are occasionally punctuated by radical shifts.
Exploitability.Natural disasters are examples of an impossible to predict event, humans rationalizing what happened in hind-sight, and government exploiting the event in order to build systems to prevent the negative occurrence and the preparing for a positive future emergency response. However, punctuated equilibrium is more about public policy change that is created by the policy agendas of partisan coalitions (i.e., grassroot organizations, lobbyists, academics). When these coalitions prevail in their argument, then they are in a position to put in place a fairly dramatic set of reforms.
Figure 2 – Theory Comparisons
Conclusion
The majority of public administration theories were developed in the late 19th and early 20th centuries. Many were based in the belief that scientific management, like good business practices, provided a logical and predictable path to public policy decision-making. In the 21st Century, the predictability of public policy outcomes is becoming more dubious because of the work of theorists like Nassim Taleb.
Taleb’s theory of The Black Swan is one of the most radical theories that have been put forward. It is radical in terms of it being an extreme theory that is a definite change from accepted or traditional theories.
The Black Swan theory makes for a compelling argument. It is an important lens by which to better understand and evaluate the short comings of public policy theory in general. However, the problem with The Black Swan theory is that the very statistical proof that validates its existence does not validate its predictability. One definition of sociological theory is:
Sociological theory is defined...as a set of interrelated ideas that allow for the systematization of knowledge of the social world. This knowledge is then used to explain the social world and make predictions about the future of the social world.[47]
The Black Swan theory is inherently a partial theory. First, it provides the reader with knowledge to explain the failings of conventional public policy theory. Second, it provides guidelines by which to evaluate the possible success or failure of such theories to predict reality in terms of outcomes. And finally, it provides systems by which to exploit such events. However, it does not predict such events. It encourages the evaluator to ask “what if” questions that can challenge the potential outcome of the traditional public policy theory prediction.