Black Swans and the Coronavirus
Guest Post by James Kline (first posted on CERM ® RISK INSIGHTS – reposted here with permission)
The term Black Swan has been used frequently. This is particularly so, with respect to the Coronavirus. In an earlier piece, I discussed the term Black Swan. Given the increased use of the term in the current circumstances, it is worth revisiting the concept.
The term Black Swan is derived from the idea prevalent in the Old World (Europe) that all swans were white. When a black swan was discovered, the name became synonymous for an unusual occurrence.
The term was popularized by Nassim Nicholas Taleb in his book “The Black Swan: The Impact of the Highly Improbable”. He describes a Black Swan as having three aspects. These are: 1. It is an outlier. It is outside normal expectation. 2. It carries extreme impact. 3. Despite its outlier status, after the fact analysis is conducted to make it understandable and predictable.
Let’s discuss these elements in turn.
What is normal expectation?
There are two ways of looking at a risk event to determine normality. (A risk event is something which can have either a positive or negative impact. It is generally referenced in terms of impacting the accomplishment of a goal or objective.) One is referred to as event based. The other is objective based.
Each approach views a risk as occurring during a specific time period. The event base approach views an event as occurring over a specified time frame, say every 100 years. The objective-based viewpoint views an event as a probability of occurrence in any given year. Thus, a hundred years event would have a current year probability of .01.
In risk assessment, the objective-based approach is preferred. There are three reasons for this. First, it focuses attention on the current year. Second, using a percentage of occurrence in the current year provides a common measurement against which all risks can be assessed. Lastly, there is a psychological tendency for decision makers to minimize the possibility of an event occurring today, when it is considered a 100-year event. That is particularly so when the event occurred just 2 years ago. Since the event just occurred, there is nothing to worry about for another 98 years.
Unfortunately, the world does not always cooperate. The City of Houston Texas was hit three times in a row by hurricanes which caused flood surges which were not supposed to occur except every 500 years. Another example is the title animal, the Black Swan. For the longest time in Europe, the Black Swan was viewed as a rarity. Something outside the norm. However, in Australia, Black Swans are commonplace. It is now recognized that they are separate species of swans. What constitutes a Black Swan is a matter of perspective and expectation of the norm.
What gives the Black Swan its power and makes it something decision makers must consider is its extreme impact. To show how extreme impact is tied to perspective, let’s use a far-out example, a comet impact. If one gazes at the moon at night one can see craters. These are the result of comets and asteroids entering our solar system and crashing into the moon. The earth has experienced similar collisions. For instance, around 300,000 years ago, a comet landed in the Gulf of Mexico. This impact likely caused the extinction of the dinosaurs.
Moving forward to an event that impacted homo sapiens. This is the Last Glacial Period, which occurred between 12,800 – 115,000 years ago. It was probably caused by the impacts of a fragmented comet on the North American and Greenland ice packs. The impact and resulting climate change probably wiped out the Clovis culture in North America. (The Clovis culture was a prehistoric people who traversed the continent between 11,500-11,000 years ago.) In addition, it either wiped out or contributed to the elimination of the megafauna in North America.
While the impact caused worldwide flooding and climate change, it did not destroy all homo sapiens. However, the consequences probably resulted in the memory and eventually myths related to a great flood. It is even speculated that during this time, the civilization of Atlantis was wiped out.
Obviously, these were catastrophic events. But, for who? For the dinosaurs who were wiped out, surely. But not for mammals and eventually homo sapiens. With the dinosaurs gone, mammals and eventually homo sapiens became the dominant species.
The Last Glacial Period event was bad for the Clovis culture and Atlantis, if there was such a civilization. But it was not for everyone on earth. Consequently, comet impact Black Swans had a significant impact, but the consequences depend on perspective. The perspective can be global, regional, local or corporate. The perspective becomes important when the third aspect comes into play.
Deconstructing the Event
The last aspect is the deconstruction of the event to make it understandable and predictable. This aspect is important because once a Black Swan has occurred, similar future events are understood and the probability of it occurring again can be estimated. By deconstructing the event, the elements that caused the event can be identified and mitigative actions identified.
An example of the deconstruction of a Black Swan is Deep Water Horizon. In 2010 there was an explosion on the BP Deep-Water Horizon oil platform. Eleven people were killed. The rig caught fire and eventually sank. Oil leaked into the Gulf of Mexico for 85 days.
The explosion and resulting oil spill had a significant impact on BP and the gulf states and local governments. BP was found guilty of 11 counts of manslaughter. It also agreed to pay the U.S. federal government $18.7 billion. This included $4.9 billion to settle claims made by five gulf states and $1 billion to 400 local governments.
One key finding of the after-action reports was that BP had a poor safety record. Specific to Deep -Water Horizon, workers complained that the culture on the platform was “Run It, Break It, Fix It”. A safety study of the rig determined many of the fail-safe valves failed inspection. Further, more than 25 systems were rated as being in poor condition.
When Black Swan events are deconstructed, it is often found that the cause was multiple failures in controllable activities. Further, while risks like fire, oil spills, and accidents are understood, as are the mitigative actions, the deconstruction often determines there was poor decision making.
A more deep-seated problem is the technology needed to mitigate the specific event is not available. Neither the Dinosaurs nor Neolithic humans had the technology capable of blasting a comet out the of sky. It is debatable whether we have that capability. In fact, the Coronavirus shows some of the technological limits.
The Coronavirus is a pandemic. It is a reoccurring event. The last pandemic of this magnitude was the 1918 Spanish Flu. There are three differences between the Coronavirus and the Spanish Flu. These are: 1. The speed the pandemic spread worldwide. This reflects the speed of global travel. While the Spanish Flu spread worldwide, the mode of international transportation at that time was by ship, not airplane. 2. The extreme contagiousness. There may be two variants of the virus. One more deadly and another more contagious. We do not know which is in the United States. Nor do we know for certain if there are two variants. In addition, despite believing ourselves to be technology sophisticated, the pandemic has challenged the world’s medical capabilities. We do not have a vaccine for it, or most of its predecessors. It also takes time to ramp up production of necessary equipment and the development of a vaccine. All the while people are getting infected and dying. 3. The extreme economic impact. Within a few months it shut down economic activity worldwide. This shut down adversely impacted nations, state and local governments, corporations and small businesses. Its impact is catastrophic.
As for deconstruction, it is currently happening. However, instead of a sober after-action analysis, the effort looks like political finger pointing. There are going to be a lot of questions that need to be answered. The answers will determine future mitigation efforts and how risk assessment is factored into future decision making? Because of the importance of these answers, politics should be kept to a minimum.
James J. Kline, Ph.D., CERM, is the author of numerous articles on quality in government and risk analysis. He is a senior member of the American Society for Quality. A Manager of Quality/Organizational Excellence and a Six Sigma Green Belt. He has consulted for the private sector and local governments. His recent book, Enterprise Risk Management in Government: Implementing ISO 31000:2018, is available on Amazon. He can be reached at email@example.com.