The Problem and Power of Induction

Nassim Nicholas Taleb’s The Black Swan: The Impact of the Highly Improbable, which has been a huge bestseller for some time, is getting renewed buzz in much of the frenzied analysis surrounding the Deepwater Horizon disaster.

It also has ramifications in the realm of Vested Outsourcing.

Briefly, Taleb describes a Black Swan as an event – either positive or negative – that while within the realm of possibility is considered highly improbable yet causes huge, game-changing consequences.

He posits, in an idiosyncratic way that Black Swan events explain almost everything about the world, but often we (experts included), are blind to them. Something that has always worked in the past suddenly doesn’t and what we have learned from our observations suddenly no longer makes sense, or is irrelevant or is grossly misleading.

An early section of his book illustrates this idea by discussing the ‘Problem of Induction’ (or the problem of inductive knowledge) and how to learn about this from a turkey’s experience and viewpoint. “How do we know that what we have observed from given objects and events suffices to enable us to figure out their other properties?” he asks.

Traps are built into “any kind of knowledge gained from observation.”

This is where the turkey comes in. A turkey is fed every day, he writes, and every feeding reinforces the belief that it is the “general rule of life to be fed every day by friendly members of the human race” that are looking out for its best interests. No ulterior motive is suspected or anticipated. But then comes the fateful day before Thanksgiving, when something incredibly unexpected and world changing happens, at least from the turkey’s perspective. Nothing that has happened prior to that day has prepared it for what will come. A turkey can learn quite a lot about tomorrow from the events of yesterday, Taleb continues, “but certainly a little less than it thinks, and it is just that little less that may make all the difference.

“The turkey problem can be generalized to any situation where the same hand that feeds you can be the one that wrings your neck.”

In other words the history of a process over days, months and years will often tell you – as the turkey so rudely discovers – nothing about what might happen next.

Taleb’s thinking is very resonant for Vested Outsourcing in a couple of respects. For one thing, I’d submit that Vested Outsourcing is a major break – both evolutionary and revolutionary – from the traditional approach to lowest-cost, transaction-based contracts. Because it’s not based on rote counting of transactions that are locked into a contract, Vested Outsourcing has more flexibility and capacity to adapt to sudden market shifts and unforeseen events.

Also, consider what happened during the Great Recession and the many demonstrations of Vested Outsourcing’s Penny Wise and Pound Foolish Ailment No. 1. An 800-pound gorilla company outsources based only on costs because that is the way it has always operated; it has the power to hammer its suppliers and has achieved success in doing so. Then it took full advantage of the downturn to browbeat desperate suppliers even further. But as the economy recovers and gains steam I predict that these 800-pound gorillas might well turn into turkeys when those badly squeezed and treated suppliers fire them and look for new, collaborative partners.

Those old companies won’t see it coming; the hands that have supplied them will turnabout and wring their necks.

That’s the power of induction.

Speak Your Mind