Manage Risk By Building Antifragile Organizational Cultures

Although it’s been out for a couple years, I recently reread Nassim Nicholas Taleb’s books The Black Swan and Antifragile.  When they came in out the midst of the recession, they quickly caught the attention of readers looking for answers as to why we didn’t see the financial crisis coming and how can we protect ourselves in the future.

When I picked them up again recently, I realized that Taleb wasn’t focused specifically on finance. Rather, the applicability of his risk mitigation paradigm across disciplines and markets.  In this light, he offers some excellent insights that are especially useful for shaping and enhancing organizational cultures.

What is Fragility?

Taleb defines fragility as systems that are negatively impacted by shocks, disruption, and disorder.  At the opposite end of the spectrum, he invents the term antifragility (mainly because there is not word in the lexicon that captures this concept) to describe systems that grow and flourish when exposed to shocks, disruption, and disorder.  Sitting in between these extremes is robustness, where a system remains neutral and neither gain nor decline from random events.

The concepts of fragility, robustness, and antifragility ultimately come down to risk.

Fragility comes about when we assume too much risk in a particular area. This hinders our ability to adapt when risks become actualized.  As an example, Taleb points to the financial sector during the financial crisis where firms had invested significant portions of their portfolio in high risk areas. Since they had not changed their practices from previous crises, they were susceptible to the same issue areas.

All it took was one big shock and these organizations crumbled. Hence; “fragile.”

Conversely, antifragility occurs when we diversify our risks and use failures (which are small because risk is dispersed) as opportunities to learn and improve the system. Taleb uses the airline industry as an example of antifragility.

When accidents occur, the airlines conduct a thorough after-action review to determine the root cause of the failure.  They then take that information and use it to update their systems and practices in their existing and future fleets.  Although tragic, the accident serves to make every subsequent flight safer and improve the airline industry as a whole.

At the outset, the distinction may seem fairly simple: fragility occurs when we have concentrated risks, antifragility occurs when risks are dispersed. But Taleb points out another critical aspect of the equation:

We have no way of knowing (1) the real level of risk we have (Taleb is skeptical of models, especially since we rarely consider the assumptions and limits they are based on), and (2) when risks will come to fruition (Taleb believes in the inevitability of large, unpredictable “black swan” events).

We are largely working in the dark and must act as if we will be exposed to risk at any moment. Therefore, the ultimate goal of antifragility is to determine how to live, act, and thrive in a world we do not fully understand.

Building An Antifragile Culture

So far, we have outlined the central ideas within the fragility/antifragility framework.  Here’s a quick recap of what we’ve covered:

  • Risks are inevitable and we have no idea when they will happen
  • Fragility = bad for growth, results from concentrated risks and lack of feedback loops, crumbles under risk
  • Antifragility = good for growth, results from dispersed risks and active use of feedback loops, flourishes from risk

How can this concept foster resilient organizational cultures?

It is not a huge leap to think that organizations and their cultures can also be fragile or antifragile. Fragile cultures are those that are unable to adapt to changing environments and unforeseen risks.

Fragile cultures are characterized by:

  • Highly centralized organizational structure
  • Dominance of one or two departments in the decision making process (all departments become exposed to the risks inherent to the dominant groups)
  • Attitudes of risk avoidance and insulation from change
  • Unsupportive of “tinkering” with new ideas on a small scale
  • Lack of (or disinterest in) feedback loops to integrate lessons learned

Antifragile cultures are those that are well versed in change and use dispersed risks as opportunities to learn more about how their organization functions under pressure and implement improvements.

Antifragile cultures are characterized by:

  • Moderately decentralized (“lean” or “flat”) organizational structure
  • All departments have say in decision making process (departments are represented in key decisions and given autonomy internally)
  • Embraces risk as opportunities for learning, disperses risks across the organization so no one risk can have a significant impact
  • High support of “tinkering” as way to test and improve the system
  • Significant interest (and use of) formal and informal feedback loops to integrate lessons learned

To illustrate the differences in these types of cultures, we can point to two real world examples.

Most large firms lean more toward the fragile side of the spectrum. Many are characterized by rigid processes, interdepartmental conflict, risk avoidance, disinterest in new ideas, poor communication, and the consolidation of risk into one or two significant projects.

Startups, on the other hand, lean more toward the antifragile side of the spectrum.  Many are characterized by agile processes, manageable conflict, risk acceptance embracing new ideas, frequent communication within and across departments, and decentralized risks across a number of projects.

This is not to say that startups are more praiseworthy than large firms. At some point, most firms will mature and transition into formalized organizations. The challenge is making this transition without jeopardizing the firm’s ability to thrive under change.

How Your Organization Can Thrive

Here are some recommendations to foster antifragile practices within your growing organization:

  1. Keep Decision Making Local: People closest to a problem are often the most equipped to solve it.  In addition, this encourages experimentation with new ideas and strategies.
  2. Encourage Frequent and Open Communications: One of the major causes of distress within organizations is the inability to communicate information across departments.  Open communication sets a precedent that new ideas are welcome and establishes a feedback loop to incorporate lessons learned and best practices.
  3. Encourage Risk Taking on a Small Scale:  Many organizations focus on “avoiding” risks, but this may unnecessarily weaken the organization in the long run.  Avoiding risk prevents us from learning from our failures, risks accumulate and overtime may become systemic.  Dispersed risks enable organizations to try new ideas without putting the entire organization in jeopardy.
  4. Celebrate Failure: Every failure is a learning opportunity for everyone.  Failures enable us to identify the root causes of the issue, correct the issue, and improve the overall system.  As long as failures are small and dispersed, they serve to benefit the organization as a whole.
  5. Hedge Against the Future: It’s difficult to accurately predict what the market will look like 5-10 years down the road.  Organizations should be cautious of ventures which could be a liability if the market takes a sudden turn.

Risks aren’t confined to the financial world, and are inherent in all aspects of our organizations, including culture.  The way we approach risk heavily impacts whether we succeed or fail in the ever-evolving marketplace.

Fragility and antifragility are two ways of understanding and addressing organizational risks. By using antifragile practices to leverage small risks as opportunities,we can improve the way we manage our organizations and enhance our ability to thrive during periods of rapid change.

How does your organization manage risk through culture development?