Reputed news agencies (Example 1, Example 2), and consultancies (Example 1, Example 2, Example 3, Example 4) claim that COVID-19 is a Black Swan event. However, the ongoing pandemic is not a Black Swan event. It is in fact, a fat-tail event, which blind-sided most organizations. One may wonder what difference it makes, for a rose is a rose by any other name. Yet, this seemingly small technicality is important because it will determine how we deal with COVID-19 in the present and how we prepare for risks in the future.
What is a Black Swan event?
In 1697, Dutch explorers were the first Europeans to sight a black swan, when they landed in Western Australia. Until then, the existence of such a bird was deemed unimaginable. In fact, the term ‘black swan’ was used as a metaphor in Europe to indicate an impossibility, with its oldest known usage in 2nd Century, by a Roman poet, Juvenal. Nevertheless, it took just one sighting of a black swan to shatter a belief that had been construed as a fact for at least 15 centuries.
Based on this occurrence, Nassim Nicholas Taleb, developed the Black Swan theory. This theory explains the term ‘Black Swan’ as an event that comes as a complete surprise and has a huge impact on the observer. Although the word ‘impact’ here, alludes to a financial impact specifically, it could also be used to allude to the effects on the observer’s worldview or life style. An observer may be an individual, organization or the government.
Taleb identifies three essential features that characterize a Black Swan event. They are:
Examples of Black Swan events include inventions of the radio, the computer, the internet, as well as World Events like the First World War, dissolution of Soviet Union and the 9/11 Terror Attacks. Each of these events were complete surprises and had a major impact (positive or negative) on the observers. The degree of the impact varies depending on who the observer is. For instance, the 9/11 attacks meant entering a long-drawn war for the US and Afghan governments, investing on flight security for the airline industry and reaping huge profits for the companies that manufacture arms and safety devices.
Why is COVID-19 not a black swan event
Let us assesses if COVID-19 has the three essential characteristics of a Black Swan Event. To begin with, it unarguably has a major impact on almost all observers in the world. Secondly, some of us (including this blog) seem to be rationalizing the event with the benefit of hindsight. Thus, two characteristics of black swan event are satisfied but let us examine the most important characteristic, of it being a complete surprise.
The First World War is considered as Black Swan event for Europe, however the Second World War is not. Why? This is because an event with a precedent can never be a complete surprise. Similarly, while a number of analysts and governments want us to believe that COVID-19 is unprecedented, many pandemics are hardly new to the world. Furthermore, every such pandemic, including the Spanish flu were tackled using similar measures like large-scale lockdowns and quarantines.
Clearly, neither the pandemic nor its repercussions were a complete surprise to the world. There were enough warnings of a plausible pandemic, not only from epidemiologists but also from famous entities such as George Bush, Barack Obama, Bill Gates and even Nassim Nicholas Taleb. Apart from the natural causes for the pandemic, we were also warned about the possibility of a bio-war. With all this information being publicly available, the governments and large corporates cannot claim that this event is a complete surprise. On the contrary, many countries like the USA have been conducting pandemic mock drills at regular intervals and many large companies have identified pandemics as a risk in their Business Continuity Management (BCM).
Even Taleb himself says COVID-19 is not a Black Swan Event. Yet, everyone wants to hide behind the term, ‘a Black Swan event’, as it allows for renunciation from the responsibility of one’s failure to manage the risk. This is also in a way, resorting to fatalism, “since this is a black swan event, there is nothing we possibly can do about it now or in the future.” This attitude can result in inefficient handling of the current crisis and inadequate preparation for future risks.
The graph above captures a list of major pandemics/epidemics that were part of the recorded history and had a minimum death toll of 1 million. From this graph, it is clear that such events have been occurring at least once a century if not more frequently in the recent period. Thus pandemic is not a black swan event, but a fat tail event meaning an event with high impact and higher probability than a normal curve would indicate.
Blindside in Risk Management
When another vehicle at a blind spot to the driver hits a car, we can say that the car is being blindsided. While this accident is obviously a complete surprise to the driver, the driver cannot claim to be unaware of the risks of a blind spot. In fact, the driver was at fault because they did not take the required precaution of looking over their shoulder. While, there is no merit in assigning blame to the driver, it is important that they learn from this experience to avoid similar situations in future.
Similarly, most organizations and the governments should have taken enough precautionary steps to face pandemics. This could have avoided the situation we are currently in. Instead, the risk was not recognized or inaccurately assessed by some organizations. Others did not implement appropriate mitigants. We will understand each of these issues in detail in the next blog.
To summarize lesson 1 – Identifying COVID-19 as a black swan event is shirking responsibility or resorting to fatalism. Instead, organizations should learn from this mistake and strengthen our Risk Management.