The Black Swan


For Christmas I received a copy of Nassim Nicholas Taleb’s “Skin in the Game”. Before I start it, though, I am reading through his previous works, collectively known as the “Incerto”. I had read “Anti-fragile” and “Fooled by Randomness” in the past and have just completed “The Black Swan”. In another upcoming post I will provide my reviews on them.

Today is a meditation on Black Swans and my life in telecom. People beleived that all swans were white; until they saw a rare black one. For Taleb, the Black Swans are the events that happen in areas where our thinking and mental models fail to realize that they follow fractal probability distributions and not those bell curves that they taught us in high school. His favourite example is the turkey, who is fed for 1000 days straight, and so continues to forecast that this pattern will continue…up until the day before Thanksgiving. His lesson ? Don’t be the turkey !

Fractal distributions are also known as power-law distributions and a popular version is the 80-20 rule. Eighty percent of your revenue will come from twenty percent of your customers and similar effects. We can see such models at work in lots of places; the distribution of incomes (no matter how much the left rails against “inequality”) the box office of movies, best seller books, the rise of the giants of Silicon Valley (Google, Amazon, Facebook, Netflix etc) where network effects and first mover advantage have the giants dominating their respective markets.

So how does one thrive in areas where the “winner take all” phenomena means that the lion’s share goes to a small number of players ? That is what got me thinking about my experience in telecom.

The first lesson, in working in such environments, is that first and foremost you must survive. As we saw in the financial crisis of 2008, companies like Long Term Capital Management thought they were risk averse by using sophisticated algorithms and models designed by academics. In reality they were very exposed to Black Swans that ended up taking them down and almost the entire financial system. Never risk everything, as survival is paramount.

I am proud that AurorA has been in operation for over 24 years. There have been four or five major pivots along the way, but the company has survived and thrived. This is also Nature’s model. Mother Nature has many strategies that have evolved to ensure survival, such as redundancy among our body parts which is not “optimal”. It is why we value the experience and wisdom of our elders; they have seen previous Black Swans and survived and can pass on that knowledge (if we are willing to listen).

The second lesson I took from this is that even though fractal distributions predominately reward a few, they also leave a long fat tail. In a multi-billion dollar industry like telecom, that means that there are plenty of niche opportunities in that fat tail that can be mined. That is precisely how I have operated AurorA , whether entirely consciously or not. AurorA specializes in international applications and specifically in the wholesale market; niches where I can exploit my competitive differentiators like quality and fraud mitigation to swim in a “blue ocean”. Those niches may be small, compared to the overall market, but they are plenty for AurorA to serve.

I am looking forward to reading “Skin in the Game” next and will report back to you with more detailed reviews of it and Taleb’s other books. Until then, keep reading !

The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: “On Robustness and Fragility”

Bundling – Who Benefits ?

We hear a lot of ads on the radio and TV about the benefits to you of bundling your phone, TV and Internet service (and sometimes even your cell phone) with one company. Of course Rogers and Bell tout all the advantages to you of their generous offers; the savings, the convenience, only one invoice a month. But is bundling really such a good deal ?

For the carrier it certainly is. They get to lock you in via a contract for years of steady revenue. They get to sell you more services than if you were to pick and choose the best services for you from whoever provided them. Also, bundling locks up the marketplace and deters entry by new competitors, keeping the established companies safe from competition.

From a customer’s standpoint, bundling your service needs means you may not be able to get the best service for what your individual needs are. A better fit for your Internet access may be from an independent ISP, especially when you find that your bundle provider has hard data caps that discourage you from watching Netflix. Or their throttling practices make gaming over the net frustrating for your teenagers.

You may find that the quality of one of the services in the bundle is not to your satisfaction. Or there isn’t the selection of channels that you prefer. Some services that are important to you, maybe international calling aren’t even included in the bundle and you are forced to pay higher additional rates above your bundle.

So buyer beware. Be an informed consumer and do your research. Sometimes the hidden costs of convenient discounts are more than we expect.