I’m a couple of hundred pages into The Black Swan, by Nassim Nicholas Taleb.  In Taleb’s world view, The Black Swan can be the highly-improbable good event or the highly-improbable bad event, either of which has the ability to change the course of history.  He makes a good case for his statement that highly-improbable events have more impact on the world’s future than probable events.  I’m sorry, if that seems irrational.  But my recommendation is that you slug through the first 200 pages, as I did, and see if you reach a similar understanding. 

Here’s a real business-world scenario that fits the model.  Suppose you are a company with a successful, growing partnership with another supplier.  The supplier was small when you started the relationship, but it has been a good partnership. Each year your sales and profits have increased.  You work collaboratively and are always responsive to each others needs.  You have a mutual respect and understanding and have always been able to work things out, when you’ve had differences.  The relationship is now in its 10th year.  Mid-way through the year, your largest, most reviled competitor makes a successful hostile bid to acquire your partner, and you are discarded like a worn-out pair of socks.  What could you have done?

Here’s another scenario.  Your product development team makes excellent, high-quality products at good, if slowly declining margins.  You are never first to market with the latest feature, but you have a substantial installed base, and you don’t want to disrupt it with newer technologies that might accelerate the margin pressure.  Besides, change takes time.  You always see changes coming.  And any investment that you make for a skunk-works, leading-edge product would fail to meet your internal investment hurdle rates and have a high probability of failure.  Unfortunately, a more nimble competitor arises with a truly innovative approach that isn’t just better, but actually eliminates the requirement for your product, much like the laser printer and inkjet printer all but eliminated the need for typewriter ribbons. What could you have done?

In the first case, a black-swan bet in the form of an options grant would have mitigated the downside risk of a competitor’s acquisition.  In the latter, several black-swan bets on startups would have provided an outside-your-company marker to allow you to participate in the future, as-yet-unproven market.  Given what most companies are spending on R&D, I’m amazed at how little attention is paid to making small bets that have the potential for big returns.   In the case of the former, the time to negotiate options is at the beginning of the relationship with the partner.  This is not particularly difficult to do when tied to revenue-attainment objectives for the partner. On the latter, these bets almost always need to be made outside the existing company, to protect them from internal corporate politics.