On Friday, Jeremy Hunt suggested that ‘the UK has been dealing with economic headwinds caused by a decade of black swan events’, but what is a black swan event?
Black swan events are referred to more and more frequently, yet do people actually understand what these are?
Jeremy Hunt vs Nassim Nicholas Taleb
Lets look first at what Jeremy Hunt suggests are black swan events…’a financial crisis, a pandemic and then an international energy crisis’
Taleb’s seminal text, The Black Swan, introduced the concept of black swan events as follows:
‘First, it is an outlier, as it lays outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.‘ Taleb then summarises ‘rarity, extreme impact and retrospective (though not prospective) predictability’
In 2017, the National Risk Register stated that the ’emergence of new infectious diseases is unpredictable but evidence indicate it may become more frequent’ and that ‘the likelihood of this risk has increased since 2015’.
Now I do note that the earlier risk registers referred to ‘pandemic influenza’; it appears that Covid 19, despite it being a respiratory disease, has to be assessed completely differently! However, the 2020 risk register lists ‘pandemics’ and ‘High consequence infectious disease outbreaks’ separately, with Covid excluded from both!
Not withstanding the differences in terminology, possibly due to a poor approach to the derivation of the risk register, can we honestly say that ‘nothing in the past can convincingly point to its possibility‘. I therefore question whether a pandemic can truly been seen as a black swan event.
Lets move on to financial crises. Having set up Cambridge Risk Solutions during the 2007-2008 global financial crisis, I am acutely aware that financial crises are nothing new. We can go back to the first ‘credit crunch‘ of 1430-80, the ‘great frost’ of 1709 or, more recently, the recession of early 80’s, and these all demonstrate the financial crisis are events that occur, often linked to circumstances, such as war or environmental issues.
Given the war in Ukraine, soaring energy bills, the cost of Covid, can we honestly say that the current financial situation is ‘an outlier, as it lays outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility‘.
Energy crises are also nothing new. Take, for example, oil shortages in 1973 and other more localised issues in California and Asia. Of more relevance to today’s situation, consider the oil pricing issues as a result of the Gulf War in 1990. Energy price problems following a war? Who’d have thought?
Now, I do note that the third of Taleb’s criteria is ‘human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable‘. However, Hunt’s Black Swans were all identified risks prior to the event; events that have occurred before and, for some, events that has been assessed for likelihood and impact.
Black Swan Events vs Known Unknowns.
I suspect that it has become too easy to simply declare events as Black Swans to be able to justify an inadequate response to entirely predictable events.
It is possibly worth considering an alternate approach. Donald Rumsfeld was much derided by his Defence Department briefing when he stated that ”There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know‘.
This statement is, possibly, much more applicable. Perhaps Covid, financial crisis and energy issues are ‘known unknowns’; we know that they will occur, but we do not know when or how they will impact. Perhaps this is a better way of discussing known risks rather than simply dismissing them as ‘Black Swan events’ in an attempt to explain an inability to deal with the outcome.