Can "Black Swans" Be Tamed?

A central goal of accounting forecasting is avoiding surprises. Unfortunately, said keynote speaker Kenneth Posner, we aren't always very good at it. In fact, he said, the subprime crash of 2007, which precipitated a worldwide economic meltdown, was the result of industry-wide forecasting failures.

Posner made his remarks during the 2010 Center for Accounting Research and Education (CARE) Conference, sponsored by the Mendoza College of Business at the University of Notre Dame on April 9-10 in Coral Gables, Fla.

Such large, unanticipated events — and they rarely are positive surprises — have become known as "black swans" after the bird discovered in Australia in 1697. The discovery threw Europeans into a tizzy because, having only seen white swans, it never occurred to them that black swans might exist. Posner, a former Morgan Stanley managing director and author of Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility, said this failure to anticipate all the possible outcomes, both good and bad, is an all-too-common human trait.

"Greed, foolishness and lax regulation are a constant," he told the audience, "so they aren't to blame. Forecasting is the problem."

Avoiding black swans, said Posner, means not relying solely on programs and rules. Computers provide faster speed and greater precision, but they don't recognize new variables or react to change. Accurate forecasting, he said, requires human judgment — "analyzing the analysis" — that is derived from ongoing search for causal variables, understanding black swan drivers, monitoring the competition, intuitive reaction to new data, and continual readjustment and learning.