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Saturday, February 14, 2009


I have been involved in the corporate budgeting exercise for the last two years (though in two different organizations). Numerous events have filled in this gap of one year between the period of the two budgets. One of them is the experience of acquainting myself with two books of Nissim Taleb – “Fooled by Randomness” & “The Black Swan”. You know you are influenced by a book when you feel the essence of book getting reflected in any other activity of your daily life and these books are so ornately designed to do that.

In these books, Taleb stresses the role of high impact, highly improbable events (which he calls black swans), which most people ignore (to make predictions and forecasts). He is against derivation of general rules from observations and stresses the incomputability of the probability of the consequential rare events from empirical observations. Taleb is known for his severe distrust of models. He is not against experiments and fact collecting but warns against generalizing into theories.

“We respect what has happened ignoring what could have happened. In other words we are naturally shallow and superficial and we don’t know it. We see the world as structured and comprehensible.”

We make our budgets, based on forecasts and backed up with sensitivity analysis models. Our sensitivity analysis is a model which rarely accommodates the possibility of a black swan. We trust the past. We seem to understand the present. In the absence of any black swan type of events, we tread the normal path….But in the event of a black swan…”who knows”.

My first budget experience never considered these events (I have started calling them black swans) which became visible only after they happened – the financial crash and the drastic fall of oil prices being two major ones. As I am in the process of preparing next year’s budget, I keep on wondering the black swans which will make their presence felt during the course of the year.

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