The Third Fist

Guarding against the improbable

The Story

The Dayton’s Department Store in downtown Minneapolis opened in 1902 and remained a popular fixture in the community for well over a century. Its slow decline began in 1956, when the Dayton family opened a new regional mall in the nearby suburb of Edina. As suburbanization continued, other regional malls opened, drawing business and people away from the city. In 1968, Dayton’s merged with Detroit’s Hudson’s Department Stores to form the Dayton-Hudson Corporation, which then acquired Chicago’s Marshall Fields and rebranded under that name. Marshall Fields was acquired by the May Department Stores in 2004, and then May merged with Macys in 2005, and all their department stores became Macy’s department stores. The downtown Macy’s—formerly Dayton’s—in Minneapolis finally closed for business in 2017. A New York City-based real estate development firm called 601W Companies acquired the 1.2 million square foot building that same year for $40 million and began to draft renovation plans for a mix of uses, including office, retail, entertainment, and a food hall to be created by chef, restaurateur, and television and radio personality Andrew Zimmern. 601W companies had a reputation and track record for acquiring, renovating, and repositioning historically significant high-rise properties in big cities. They renamed the building “The Dayton’s Project,” acknowledging the deep historical connections Minnesotans have with the name. They finished renovations for a total project cost of $375 million and had just begun leasing in early 2020, but then came Covid, and it all fell apart. By 2024, nearly all of the 200,000 square feet of retail space and 80% of the office space remained vacant. The building went into receivership in the fall of 2024.¹

The Dayton’s Project was just one of many real estate ventures around the country and the world that were wrecked by COVID. The project was well-conceived and well-executed, and while no real estate project is without risk, the developers were experienced and had a long track record of success with similar projects. They did everything right, but they could not shield against an unexpected global pandemic that started in March and sent everyone home for almost two years, permanently changing the way we work, through the rise of “work-from-home,” and significantly reducing the demand for office space for the foreseeable future. No one could have anticipated COVID. Or could they have?

The Theory

In 2007, Nassim Taleb published a book called The Black Swan: The Impact of the Highly Improbable.² The idea is that highly improbable events are rare and hard to predict, but they can have huge impacts, and we need to find a better way to plan for them. The title is a reference to Enlightenment philosopher and empiricist David Hume, who said,

“No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”

It is also based upon the idea of the mythical black swan (aren’t all swans white?), which was demolished when black swans were discovered living happily in Australia and New Zealand. Taleb’s point is that just because we have never seen one doesn’t mean they don’t exist. This is his own explanation of his book:

“The central idea in The Black Swan is that: rare events cannot be estimated from empirical observation since they are rare.”

Taleb is outraged by Nobel prize-winning economists who design elegant models that leave out highly improbable yet highly impactful events because, well, they are too hard to predict. On a fat-tailed bell curve, these kinds of events are five or six standard deviations from the mean, so those Nobel prize-winning economists just cut the tails off the bell curves in their models—problem solved. Taleb wants people to understand that these kinds of events are bound to happen despite being difficult to predict, and we must be prepared, become more flexible, and, if possible, strive to become “anti-fragile”—the title of another of Taleb’s books.³ We need to learn to pay better attention and be flexible.

For example, many events that most people would call unpredictable were, indeed, predictable, and some people even predicted them. The Great Financial Crisis (GFC) of 2007, for example, was a complete shock to almost everyone involved: The federal government, lenders, developers, real estate agents, borrowers, and the investors who demanded ever more mortgage-backed securities, collateralized debt obligations, and credit default swaps. Yet some people saw it coming—and capitalized on it. Just read or watch Michael Lewis’s The Big Short⁴ to learn more about them. And the GFC wasn’t a total shock to those of us who are old enough to remember previous boom/bust cycles, either, because these things seem to happen now and then.

More recently, the COVID pandemic was just as predictable as the Great Financial Crisis, and in fact, epidemiologists have been predicting another “big one” for decades. The last big pandemic was the Spanish Flu of 1918, over a century ago, and scientists and doctors had been telling us for years that we were long overdue. More recently, there have been outbreaks of Avian Influenza, which can jump species and affect humans. In 2008, my wife and I were invited to dinner at the home of some friends. There were eight of us, four of whom were pediatric infectious disease doctors. Although “Bird Flu” was in the news that year, it was in the background and halfway around the world, so it hadn’t really gotten our attention. But that night, it was very unsettling, listening to those doctors talking in hushed tones about their fears of an outbreak. I am sure that none of them were surprised in the least by the 2020 COVID outbreak.

Here’s one last perspective on Black Swan events. A few years ago, I interviewed Andrés Duany, a well-known Miami-based planner and architect, about developers. He had grown up in Cuba, where his father and grandfather had both been residential developers, and he had come to understand the psychology of the developer through them. He claimed to have no stomach for development himself, and then he recalled how, “My father always talked about ‘the third fist.’” When I asked him what that was, he pantomimed boxing and said, “You can always watch and guard against your opponent’s two fists, which are in front of your face. But you cannot protect yourself from a third fist coming at you from beyond your angle of vision.” The point is that you can take all kinds of measures to guard against risk, but it is difficult to guard against highly improbable events. Then Duany gave the example of George Merrick, the developer of what is now the affluent Miami suburb of Coral Gables. Merrick began developing 3,000 acres in 1922 and spent $20 million to build 1,000 homes, but the hurricane of 1926 destroyed most of it, sending him into bankruptcy. After moving away for a decade, he returned to Coral Gables to serve as postmaster, only to die two years later. Says Duany, “Had he planned for the possibility of a hurricane, he might have been more careful with his debt load, and perhaps he could have survived a two- or three-year hiatus.” Taleb would agree with Duany’s conclusion: “The strategy is that if you anticipate the third fists, they cease to be threats because they are in front of you, where you can watch and guard against them.”⁵

The Lesson

Just because something seems improbable doesn’t mean it isn’t going to happen; it just means that it will be difficult to predict when it is going to happen, and its impact will likely be huge. That’s why you must do all that you can to guard against The Third Fist!

“We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness.”

- Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

“I know that history is going to be dominated by an improbable event, I just don’t know what that event will be.”

- Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

“People who think they know what is going to happen next are fools. Surprises - or what the brilliant author Nassim Taleb calls ‘Black Swans’ - are inevitable. Some are likely to be desperately unpleasant too.”

- Martin Wolf, British Economist, Journalist, and Commentator for the Financial Times

1. Wikipedia, Dayton’s, https://en.wikipedia.org/wiki/Dayton%27s

2. Taleb, Nassim Nicholas, The Black Swan: The Impact of the Highly Improbable, New York: Random House, 2007.

3. Taleb, Nassim Nichoals, Antifragile: Things that gain from disorder. New York: Random House, 2012.

4. Lewis, Michael, The Big Short: Inside the Doomsday Machine, New York: W.W. Norton, 2011.

5. For more on my discussion with Andrés Duany, see Brown, Peter Hendee, How Real Estate Developers Think: Design, Profits & Community, Philadelphia: Penn Press, 2015; For more on George Merrick, see Wikipedia, https://en.wikipedia.org/wiki/George_E._Merrick.