Preface: Nassim Taleb (who wrote the best-selling books Fooled by Randomness and The Black Swan) and his coauthors argue that conventional risk-management textbooks don’t prepare us for the real world.
For instance, no forecasting model predicted the impact of the current (2008) economic crisis. Managers make six common mistakes when confronting risk:
They try to anticipate extreme events, they study the past for guidance, they disregard advice about what not to do, they use standard deviations to measure risk, they fail to recognize that mathematical equivalents can be psychologically different, and they believe there’s no room for redundancy when it comes to efficiency.
Companies that ignore Black Swan (low-probability, high-impact) events will go under. But instead of trying to anticipate them, managers should reduce their companies’ overall vulnerability.