Is it Safe to Come Out Yet?

The damage to business from the global pandemic is just beginning. Instead of waiting for positive signs, use a better method to manage risk in your business.
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If you’re a business owner, you’re likely to be having one of these experiences at the moment:

  • Working your butt off to keep your existing business running (much like furiously pedaling a stationary bike).
  • Experimenting with various ideas to “pivot” into an entirely new business.
  • Distracting yourself with home improvement projects and learning to play the ukulele while avoiding your email.

If your business is booming during the global pandemic and making tons of money, congratulations … I hate you.

Many of us have gone through all of these steps so far – a capitalist version of the seven stages of grief – and we’re eagerly waiting for a signal that the world has returned to some level normalcy. Just hoping that someone will tell us that it’s safe to come out now.

I’ll skip to the end in case you don’t want to keep reading: don’t wait for that announcement because no one … NO ONE … has the relevant information to know when that will be.

This isn’t because we’re lacking in the power of observation. All of us are in a similar position and can see, for the most part, the same effects of the pandemic. The reason that there won’t be a decisive call that the economic crisis it caused has ended is that we do not possess the ability to predict, and therefore respond to events that haven’t occurred before.

When it became obvious in early March that we were heading into a nationwide shut-down, I spent a frantic couple of weeks battening down the hatches in my companies to insulate them as much as possible against the impending economic shock. Once I had done everything possible to secure cashflow, reduce outflows, and modify operations – I took the time to better understand the nature of mass disruption I order to navigate my business through to the other side. A critical question to answer was: what really happens when systems (like a national economy) are disrupted to the point that every member is affected in a sudden and unanticipated way.

The best guide that I could find on this quest is Nassim Taleb.

Most readers will be familiar with his book, “The Black Swan”, the title of which is a term used to describe unexpected events. But it was a follow-up work, “Antifragile: Things That Gain From Disorder” which provided me with the most insight to our current situation. I had a copy on my shelf since it was published in 2012, but never dove into it because Taleb’s writing takes a lot of time to absorb. Thanks, Covid-19!

Now, I’m not smart enough to explain his concepts about how massively disruptive events impact economic and social systems. What’s most important for business owners to understand from Taleb’s work is that we can’t rely on predictive models to respond effectively to real-world randomness. In a nutshell, there is no mathematical formula that tells us what’s going to happen next, or even when we’ll arrive at a new normal, no matter what answers statistical analyses produce.

I observed this truth early in the crisis when economists at the Federal Reserve revealed that their historic models couldn’t produce reliable forecasts in the face of whole sectors of the economy shutting down. The very idea of such a thing happening wasn’t ever contemplated in the standard tools they use to track and predict financial flows. That is the black swan.

Down here, below the ivory tower, we have less freedom to analyze randomness and conduct multiple experiments in our businesses. However, there is an approach that Taleb describes which helps to make us less vulnerable, more resilient, and possibly anti-fragile to the shocks created by these events.

The “barbell strategy” avoids medium-risk behavior in favor of pursuing a linear combination of tactics on the far ends of the risk spectrum. In practice this would be combining extremely safe actions with a measure of high-risk efforts that have a low probability of success but potentially huge upside. The key idea behind the barbell is that the middle path does not help us weather shocks when they arrive; your boat will sink when the wave hits. The goal then is to gain a positive exposure to black swan events [earn money] while limiting the damage caused by the unexpected crisis.

Perhaps it’s not unwise to experiment with a new model that places your business in areas of both extreme safety and extreme risk at the same time. Because we’re currently in the middle of a great disruption (rather than just preparing for one), our collective risk tolerance is low. However, it also provides a unique environment for maneuvering out of our comfort zones.

A final word of caution: this isn’t an easy step-by-step process we’re used to reading about in clickbait pieces on our newsfeeds. If you think the barbell strategy is logical for your business, read Taleb’s book first. After all, you probably have the time.

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