If Quandary didn’t wish to invest further funds after five years, the project could be abandoned at the end of the first five years for no further cost. If the outcome had been poor in the first five years, it will be poor in the second five also, irrespective of any attempt at enhancement.

　　The choices and outcomes are now:

　　The company’s game plan could now be as follows:

　　1. Assess the likely outcomes from the first five years. As far as has been forecast, this will either be a net profit of $5m (10 – 5) or a loss of $7.5m (-2.5 -5). The expected value of the first five years alone would result in break-even (0.6 x 5 – 0.4 x 7.5 = 0). Within that figure there is a high chance the loss will occur and the company should have a good hard look at whether it is robust enough to stand a loss of $7.5m (plus a bit more for headroom).

　　2. If Quandary Co embarks on the project and makes a loss in the first five years, then, to avoid further loss, the project can be abandoned. This option provides responsiveness.

　　3. If Quandary Co embarks on the project and makes a profit in the first five years, the company can reassess what it should do then. Its choices are:

　　- abandon the project. This could be done if the economy then looked very poor so that the company didn’t want to risk a further $4m or didn’t feel robust enough to do so

　　- spend $4m to earn $10m; a profit of $6m

　　- spend $8m in the hope of earning either $12m or $15m; profits of $4m or $7m. (The company would, in fact, presumably not spend $8m to earn $12m because that profit of $4m is less than the profit of $6m that the first option gives.)

　　These provide responsiveness and also resilience because Quandary Co has been able plan to spend to rebound if economies improve.

　　Of course, as it turned out, none of these happened. A black swan was sucked into the cooling inlet pipe of the local nuclear power station causing a meltdown of the core. All homes and businesses, including Quandary Co, within a radius of 20 km had to be abandoned.

　　Ken Garrett is a freelance lecturer and writer

　　References

　　(1) The Black Swan, Taleb NN, Penguin, 2010

　　(2) Chaotics, Kotler and Caslione, Chaotics, Amacom, 2009