Preparing for black swan and grey swan events

“It took us 12 years to build Airbnb, and we lost almost everything in four to six weeks,” Brian Chesky, the CEO of Airbnb, said in an interview on CNBC, indicating that the company was preparing to go public this year, and now that is up in the air. He is just one of the countless entrepreneurs who now face an uncertain future due to the global pandemic that is wreaking disruption in all facets of life.

This is the nature of events like the coronavirus pandemic, which has low probability of occurring but producing high to extremely high impact globally. Such occurrences, called grey swans, can be positive or negative and significantly alter the way the world operates. Other examples of grey swan events are population growth, climate change, a stock market crash, and Brexit.

Grey swan is a by-product of black swan, a term popularized by Nassim Nicholas Taleb in his best-selling book with the same title. He described a black swan as an extremely unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan examples he cited include the rise of the internet, the personal computer, World War I, the dissolution of the Soviet Union, and the 9/11 terrorist attacks.

Since black swan and grey swan events have zero to low probability of occurring but may give rise to high to extremely high positive or negative consequence, businesses and governments need to prepare for and manage their potential impact. For positive black and grey swans, like the rise of the internet and the growth of the personal computer, entrepreneurs need to detect the early signs to take advantage of the opportunities, like how Bill Gates, Steve Jobs, and Jeff Bezos created and grew their enterprises in response to such positive black swans.

On the other hand, businesses and governments need to manage and prepare for the risks associated with negative black swans and grey swans, such as the impact of coronavirus pandemic and the 9/11 attack. Experts are already warning us on emerging grey swans, such as the potential war between Pakistan and India, Apple possibly buying Disney, and another global pandemic. Already, scientists are warning us on a strain of swine flu virus in China that may trigger another pandemic.

Hence, organizations need to prepare for and manage grey swan and black swan events through a risk-based approach, where risk is a function of the likelihood of event occurrence and the resulting consequences. Since “black swan events are not foreseeable by the usual statistics of correlation, regression, standard deviation or return periods,” as averred by author Avinash M. Nafday. Further, the “inability to estimate the likelihood of occurrence for Black Swan events precludes the application of risk management” and that “the development of strategies to manage their consequences is of paramount importance.” These strategies are likewise applicable in managing the consequence of grey swans.

Prevention strategies. These are strategies that preclude the untoward consequences to the organization or business. These include hazard avoidance through site selection of the organization’s infrastructure, such as selecting sites outside earthquake-prone areas; hazard avoidance using barriers, such as setting up security systems against cyber-attacks; hazard avoidance using event detection such as the early signs of the explosion of Taal Volcano; hazard avoidance from operational procedures by incorporating safety and response procedures in the operating manuals; and hazard avoidance through education and training.

Risk-reduction strategies. This includes breaking down into smaller risk chunks for easier management and control; reducing risk by using system response control such as auto-shut down of systems in times of disaster; and use of technological devices such as the use of isolation systems to counteract earthquake loads.

Risk transfer strategies. This include the use of insurance against consequences of hazard or through contract clauses.

Designed-based strategies. This include implementing inherently safe design principles such as reducing the failure point of a system such as reducing the number of valves, pumps, heating, ventilating, and cooling units in the design of nuclear power plants; system resilience through robustness by increasing the tolerance of a system from damage, to prevent disproportionate consequences, and to avoid progressive failures; and system resilience through redundancy by providing redundant design and alternative load paths to ensure that loss of a single component would not lead to overall system collapse.

Business executives, entrepreneurs, and government leaders need to be cognizant of black swan and grey swan events, and their attendant potential consequences in order to prepare for and manage their impact to business, communities, nations, and the global community as a whole.

 

Reynaldo C. Lugtu, Jr. is CEO of Hungry Workhorse Consulting, a digital and culture transformation consulting firm. He is the Chairman of the ICT Committee of the Financial Executives Institute of the Philippines (Finex). He is the Country Representative of the Institute of Change and Transformation Professionals Asia (ICTPA) and Fellow at the US-based Institute for Digital Transformation. He teaches strategic management in the MBA Program of De La Salle University.

rey.lugtu@hungryworkhorse.com

Source: https://www.bworldonline.com/preparing-for-black-swan-and-grey-swan-events/

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