TheStreet has been featuring Kenneth Posner’s new book Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility and his explanation of how “black swans” can be detected.
The concept of a “Black Swan,” was popularized by Nassim Nicholas Taleb and refers to a “a highly improbable event that seemingly could not have been anticipated by extrapolating from past data.” While the term gained currency to explain the dramatic global economic events of the past two years, there are also more “mundane swans, whipsawing individual stocks and sectors, even when the rest of the market is calm.”
Black Swans often come about as a result of information asymmetry or when one party has more information than another—a condition that can adversely affect investors who often rely on company managers and executives for data. How to mitigate information asymmetry? Posner writes:
There are broadly two strategies for mitigating information asymmetry. The first involves monitoring a company’s message for signs of cognitive dissonance. The second involves crafting interview questions to elicit information with diagnostic power.
Overcoming Information Asymmetry in Interviews
* Confine the agenda to critical issues
* Bring specific questions with diagnostic power
* Ask “how” and “why,” not “what”
* Pay attention to ducked questions and nonanswers
* Avoid debating your own views
Posner outlines other ways investors can become better judges of what they are being told by forcing company representatives to answer inconvenient questions and move away from scripted answers.