By Hélène Galy is Director of the Willis Research Network.
Our fascination with animals continued with the medieval bestiaries, and today analysts continue to describe market behaviour using animal metaphors: bull, bear markets or the lesser known bunny market.
In one of Aesop’s fables, the boy who cried wolf had a dreadful fate: a brutal lesson on risk communication. The boy lost his credibility by creating false alarms, whether intentionally or not, and so wasn’t listened to when the real event happened.
In the case of the Covid-19 pandemic, we actually had evidence that the wolf was already in the herd, if only the shepherd had taken a closer look. Warnings from a range of credible institutions should have been listened to. Without going through an extensive review of predictions and threat analysis reports, three examples stand out, showing that the crisis should not have come as a complete surprise.
Epidemiologists had warned in the 2019 Global Preparedness Monitoring Board report the chances of a global pandemic were growing and the world was unprepared for a fast-moving, virulent respiratory pathogen pandemic.
The latest UK National Risk register identified pandemic influenza as a top high impact, high likelihood event.
Then, in October 2019, the US-based Centre for Health Security organised an eerily prophetic pandemic simulation involving a coronavirus similar to COVID-19.
With these pre-existing expert scenarios, can we still call COVID-19 a black swan and why were those warnings missed?
Knowing your swans: Black, white or grey?
Nassim Taleb popularised the expression, defining the event as impossible to predict; having a major effect; and seems obvious in hindsight. A typical example would be the attacks on the Twin Towers on 11 September, 2001. This pure definition is problematic, as the prediction impossibility sets the bar really high.
Either we relax his definition and re-write his first condition as ‘an event that is difficult to predict’, to allow a stretch of imagination to spot some very low probability, very high impact risks. This watered-down definition recognises the difficulty to differentiate between the improbable and the impossible; and in estimating probabilities in general; and our natural propensity to dismiss events with a very low probability.
Or we accept that most black swans spotted by people nowadays are actually “grey swans”… renowned climate modellers Lin and Emmanuel (2015) define grey swan tropical cyclones as high-impact storms that would not be predicted based on history , but obviously by now, especially in a world affected by climate change, we know better than look at history to predict the future. Those grey swan tropical cyclones may be foreseeable using sophisticated climate models.
If COVID-19 is no black swan
Another animal you may encounter more and more is the ‘grey rhino’, coined by Michele Wucker, which is a cross between black swans and elephants in the room. Contrary to the low-probability black swan, the grey rhino is a high-impact, high-probability event usually ignored for various reasons. Climate change is a typical example, which until recently was discounted by investors, policy makers, corporates and wider society.
The grey rhino theory has many attractions. Rather than focusing on hindsight, it asks whether we will do something about it. This embraces the fact that many things that go wrong in business, policy and our personal lives are avoidable, if only we had paid enough attention. It recognises that it is generally not a case of if but when.
Your black swan may be someone else’s white swan
Having diverse, multi-disciplinary boards can ensure a less blinkered review of risks, especially if the organisational culture values the input of the ‘Tenth Man’ (or Devil’s Advocate).
‘Group think’ allows statements such as “impossible to predict”, so a risk register review by external advisors is a good idea, bringing fresh perspectives. Wargaming and red-teaming are also useful techniques successfully imported from battlefield to boardroom.
The past informs our predictions of the future
An extensive historical review, going back to 1000 AD underpins the taxonomy of threats behind the work of the Cambridge Centre for Risk Studies and their established Lloyd’s City Risk Index. Obviously, new threats (such as drones) need to be factored in.
Modelling allows us to go beyond the historical record. For climate change, General Circulation Models, in particular, are used to model the whole of the atmosphere and ocean system, and are key in understanding how global warming is impacting and could further impact the scale, intensity and frequency of extreme events like floods or tropical cyclones. Scenario planning is another useful technique to communicate the results of complex models to the public and decision makers.
The real black swans - the “unknown unknowns”
The best strategy to plan for these may be to maintain a constant state of preparedness, irrespective of the specific nature of the threat.
Increasing our ‘threat-agnostic’ resilience could be a good investment, allowing citizens, corporates and governments to prepare for a national crisis without knowing exactly what the contingencies will be.
Recognising that crises should be expected rather than the exception, robust business continuity plans are a sure way of improving resilience – designed properly, tested and updated regularly, they could prove versatile and may be your best insurance against the next ‘black swan’.
Learn to better spot grey rhinos
Grey rhinos are more common than black swans. Focusing on spotting them would promote a proactive rather than a fatalist approach to risk. A holistic approach to risk management and resilience is a good way of turning ‘grey rhino’ risks into opportunities, and corporates can ask their Chief Risk Officers to coordinate a cross-departmental approach. It should be cause for concern that most governments still do not have a national Chief Risk Officer, alongside their Chief Medical Officer and Chief Scientific Officer.
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