Friday, April 04, 2008

Why Swarm Business is much better in dealing with Black Swans

The financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. ……. We would be far better off if there were a different ecology, in which financial institutions went bust on occasion and were rapidly replaced by new ones. – Nassim Nicholas Taleb, The Black Swan (2007)

NTT, as Nassim Nichals Taleb calls himself, showed uncanny foresight when he wrote “The Black Swan”, only a year before the subprime mortgage crisis is pulling the largest banks down into the deepest disaster of their history. Banks like Citi, UBS, or Bear Sterns supposedly had ironclad risk management, to precisely avoid the sort of financial meltdown they are currently experiencing. As NTT writes, these banks are extremely good at planning for all sorts of foreseeable risks, only to be hit by the “big one”, the black swan, the one devastating blow that nobody could predict.

Swarm businesses are much better in dealing with those sorts of catastrophes. In a swarm of bees, if some of the honey collectors are hit by accidents, the swarm just continues functioning flawlessly. Even if a really big crisis – a black swan – hits the swarm, it copes extremely well. Take for example unexpected death of the queen. In this case bees will immediately and autonomously engage into succession planning. They will choose an ordinary larva, and start feeding it royal jelly, which will turn it into a queen. They do this without central intervention, by self-organizing decision of the swarm. This way the swarm evades extinction, and quickly gets a new egg-laying queen ensuring further prosperity of the swarm.

The same is true for swarm business. In a decentralized self-organizing business, risk management is not a highly centralized function directly reporting to an imperial CEO, but is part of everybody’s daily job. In a swarm business there continuously will be minor glitches and small catastrophes, but it will not be possible to get the maximum meltdown we are currently experiencing in the financial markets.

2 comments:

  1. I've been musing for a while on your title. Until now I had not associated Mr. Taleb with Swarm Creativity. It's an interesting point of view, but in case of banking a bit theoretical.

    Maybe you can get more practical? In your book you are referring to Mr. Obanja. How is his network doing now? Kenya has lived through its Black Swan for a while now.

    I was quite impressed with his story, as I was impressed with the results of the also kenyan Jamii Bora organization, that was described in 'The Starfish And The Spider'

    I think these two examples couldn deliver a description of how and whether swarm organisations survive black swans.

    ReplyDelete
  2. Interesting text. You have a nice blog. Keep it up!

    ReplyDelete