Of Black Swans and Grey Rhinos
Wisdom Letter #28 | The One About Risk
Have you ever seen a black swan? Its quite rare. Here, take a look.
Although we are not talking about black swan the bird, or even Black Swan the movie.
We are actually talking about the concept of Black Swan Events.
Its a term used to define highly improbable events, impossible to predict, which have a massive impact on the world, but which seem obvious in hindsight.
The term is coined by philosopher writer Nassim Nicholas Taleb in his 2007 book âThe Black Swanâ. The term has an interesting origin story about the western worldâs discovery of black swans in Australia, read it on Wikipedia.
Its a good way to think about the risk of the unknown unknowns that an unpredictable future brings.
Speaking of risk, humans hardly understand it properly, and rarely account for it in there decision making. Before taking any decision there are factors which are known knowns that we can calculate and analyze, there are factors which are known unknowns that we can estimate and try to predict, and then there are unknown unknowns that we canât make head or tail of. Its these factors that pose the largest risk in any decision.
Take a look at this cool 7 minute video to gauge our understanding of risk associated with unknown unknowns.
Black swan theory is essentially the study of the impact of unknown unknowns or even of unknowable unknowns.
Some say the dinosaurs were wiped off the planet in a once in lifetime Black Swan event of a meteor strike. The event changed the course of the life of this planet since.
Its speculated that some day humanity can also be wiped off with such a black swan event. It can be another meteor strike, or a massive volcanic eruption or even a global viral outbreak.
Anyways, on an unrelated note, the ongoing Novel CoronaVirus pandemic has also been touted as a black swan event of 2020 by big-shot VC funds. It certainly is having a large impact on the whole world, and itâs set to change life for all of us.
Our hygiene standards are definitely going to improve once we are through this, we might learn to hedge our material production away from China as well, and we might actually end up cracking the enigma that is WFH(work from home)
But is it obvious in hindsight? Do we have enough evidence to say that COVID-19 was inevitable, and if it was then could it really have not been predicted beforehand?
Related:
How to Deal with Black Swan Blindness | Wisdom Letter #81
The Gray Rhino Effect | Wisdom Letter #82
Today on The Wisdom Project, we go down deep into the rabbit hole of Black Swan events, we learn what we can from our history, we meet other black swans, both positive and negative, both global and personal.
And yes, we say hi to an entirely new creature - THE GREY RHINO.
Read On.
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#1
The Highly Improbable
Nassim Taleb is a controversial provocative character. He has made multiple careers out of studying and analyzing risk and uncertainty, mostly in the financial markets. He has been a writer, a professor and an options trader.
The markets are a good place to study risk because numbers are inherent to the system. And the lessons learned from there can also be applied to life outside in general.
He published his book - âThe Black Swanâ in 2007, and with it he published the prologue in The New York Times that year that explains the concept nicely.
The more I read about the concept the more I realize that the world is defined by numerous such events. You think of 9/11 and how it changed geo-politics forever. Or how the 2008 Financial meltdown changed the world of money.
Closer home in India, I think the 2016 Demonetization disaster was a positive black swan event for a digital wallet like PayTM. Nobody could have predicted it, it had a massive impact, and it somewhat seems obvious in hindsight once you analyse the craziness of the countryâs leadership.
Checkout this article, it is an excellent primer on the concept and it gives a good framework to think about unpredictable but impactful events.
The Black Swan: The Impact of the Highly Improbable
(13 mins)
Watch this short video where he explains the concept. Checkout the slide at â1:36â that he uses to enumerate the various black swan events in history. It includes the founding of Islam, the invention of the computer, the oxford English dictionary, the attacks of 9/11, the Harry Potter books, and even the humble neck-tie. Intriguing!
What is a âBlack Swanâ?
(4 mins)
The website âFarnam Streetâ does an excellent job of deconstructing such complex intellectual concepts and mental models. Check out their post on Black Swans.(1 min)
And they also propose methods to prevent oneself from the risk of negative black swans through developing margin of safety(7 mins) and redundancy (10 mins) in our systems.
#2
Nothing is inevitable
The Great Depression of 1929 caused 89% of stock market wealth to be wiped out. During that period American births declined by 17%, divorce rates rose by a third and suicides rose by a half.
It was truly a depressing time in history, sandwiched between the two world wars. Its seeds were perhaps sown in the end of the first world war and the depression itself perhaps sowed the seeds of the second world war.
Historians studying these events in hindsight are easily able to string together theories of why the events happened and how they were kind of obvious.
Yet, if we study the public sentiment leading up to the great depression there wasnât any trace of the imminent disaster. The people had no clue this was going to happen. The experts of the time, the intellectuals, the professors, the thinkers, the professional predictors hadnât a slightest idea of where the world was going.
Morgan Housel of âCollab Fundâ has gone through the newspaper clippings of the decade leading upto the depression of 1929 to gauge the popular mood of the time. Its a fascinating read and a wonderful way to understand a Black Swan event.
It also makes you wonder what are we so oblivious about today in our society?
Check it outâ
History is only interesting because nothing is inevitable
(14 mins)
#3
Two Grey Rhinos
A Gray Rhino is a term used to define a danger thatâs slow moving, obvious and yet is conveniently ignored. Somewhat of an opposite of a Black Swan.
Its argued that the Climate Crisis is one such event. Its a slow moving, massive danger that can have a huge impact yet its largely getting ignored by the decision makers of the world.
Thereâs a theory that the measures we will end up taking to prevent the spread of CoronaVirus will also help us fight climate change. Be it cutting down unnecessary flights or unnecessary work commutes. The need for social distancing will effectively reduce factory production leading to less industrial pollution. It will have economic impact of course, but the impact will be easier to bear fighting a virus than fighting climate change.
Thereâs another theory that government officials and the âexpertsâ of the world should have seen the viral pandemic coming. It was a Grey Rhino for them, they kept ignoring it and eventually it became a Black Swan.
The climate crisis may also hurt us like this one day.
There are plenty of parallels that can be drawn between COVID-19 and climate change.
This article from âAxiosâ brings out these parallels and also explains how both of these events are Grey Rhinos that we brought upon ourselves. The are obvious risks we ignore.
Check it outâ
Coronavirus and climate change are obvious risks we ignore
(3 mins)
#4
So, is COVID-19 really a Grey Rhino ?
In November last year, the guys at Vox released an episode of their series âExplainedâ titled - âThe Next Pandemicâ.
Thereâs a line in the episode that goes something like this â âThere are only 3 things that are inevitable in this world: death, taxes and flu pandemicsâ.
There they argued that why we are almost on the verge of a viral outbreak. They looked at the 2003 SARS outbreak which started from the wet markets of China and how the next such pandemic could also start from there.
The episode feels eerily accurate when we watch it today in the times of Corona, as now we know for sure that it started in the wet markets of Wuhan, Hubei in China.
Checkout the show on Netflix.
The Next Pandemic:Explained
(20 mins)
Watch the trailer on Youtube.
They also posted a video on Youtube which specifically covers COVID-19 and goes into the politics behind the wild animal rearing in China and the lobbying behind the wet markets.
Check it outâ
Why new diseases keep appearing in China
(9 mins)
#5
Signing off for the week hereâs a quote that describes the current times quite well â
There are decades when nothing happens, then there are weeks when decades happen - Vladimir Lenin
The last few weeks feel like that. The pandemic, the oil price wars, the global markets crashing. We have wiped out stock market wealth close to the 2008 recession levels. The measures needed to fight the pandemic will ensure the global economy grounds to a halt in the upcoming months.
If thereâs one thing we can learn from multiple black swans hitting us is to learn to deal with them at a personal level. Its important to realize that global black swans cannot have as much impact on our lives as our very own personal black swans can.
And its important that we learn to identify our personal black swans in time.
Death is the ultimate inevitability yet most of us are under-insured. Medical procedures cost more than ever today yet we donât buy enough health insurance, and neither do we exercise enough or stay away from junk food.
We still donât wear seat-belts while driving or helmets while biking. We still do drugs and are chain smokers and tobacco chewers, and alcohol addicts.
A woman in India gets acid thrown on her face or gets gang-raped as a matter of course. Its a black swan event in her life, but as a nation on the whole, its a grey rhino we are rearing in our own backyard.
Look around, examine your life, your daily routines, the society we live in, the culture we have become, inadvertently we are rearing grey rhinos that will knock us down one day like black swans.
Think about it.
Related:
Swans, Rhinos & The Elephant in the Room -- Wisdom Letter #47
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Aditi & Ayush
This was Wisdom Letter #28. In case you want to revisit any of the previous 27 letters, checkout our entire archive.
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