Black Swans and risk blindness
I’ve noticed something unusual lately. There seems to be an increase in the number of events people are declaring Black Swans and the ensuing philosophic tug-of-war of detractors saying they’re wrong. At first, I thought people were just going for clickbait headlines, but I now feel something else is going on. We are experiencing a sort of collective risk blindness: we’re unable or unwilling to see emerging risk in front of us.
Keep in mind that the Black Swan is not a metaphor for sudden, surprise, high impact/low probability or catastrophic events. It’s a metaphor for risk blindness. Recall the parable of the Thanksgiving turkey:
Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”
- Nassim Taleb, “The Black Swan”
The Thanksgiving turkey is blind to risk. Cognitive bias, over-reliance on historical data, and not considering new, emerging risk led to it being surprised when it was served for dinner.
Both risk in general and Black Swans are observer-dependent. It’s in the eye of the beholder. 9/11 was a Black Swan to most of us, but not to John O’Neill. An accidental half-billion dollar wire transfer, Texas power outages, Gamestop stock volatility, and COVID-19 have all recently been declared Black Swans by some, but to others, the above examples were no surprise at all.
It’s no wonder that we’re starting to resemble Thanksgiving turkeys, unable to spot emerging risk. Risk blindness is why we are starting to see Black Swans everywhere. It seems tied to COVID-19 and all the recent political and social turmoil that’s happening. Every new big event seems surprising, and it shouldn’t be. Fighting cognitive bias, separating possible from probable, and looking beyond historical trends to see emerging threats takes work.
I’m tired. We’re all tired.
How do we ensure we’re not blind risk turkeys?
Recognize your built-in biases. Confirmation bias, anchoring, the availability effect, and overconfidence are present in every person. They cloud the decision-making process - especially when risk is involved. The corresponding Wikipedia article has a great list. Bias is an impediment to rational decision-making under uncertainty.
Diversification: Diversify your risk-seeking behavior. In other words, don’t put all your eggs in one basket.
Resiliency: Identify areas where you tend to be risk-averse and ensure you have resiliency. This could be extra liquidity, a plan B, some proactive measures, or just a recognition that you are overexposed in a particular area.
Think about how any of the above applies in your personal and professional life, weigh it against current events, what’s to come, and how you can take steps to reduce risk. For me, this is avoiding speculative investments, diversification, thinking about where I live and the risk that comes with it, thinking about insurance (do I have the right kind, in the right amounts), and ensuring that I have a plan B for critical decisions.
Footnote
I did a quick on-a-napkin brainstorming session of signficant 30-year risks that are top of mind. I’m thinking about each one and considering the following: a) how might my cognitive bias prevent me from seeing other risks? b) am I resilient to these risks, and c) if not, would diversification help me?
30 year Black Swan List (2021-2031)
(Risks that the collective “we” are blind to)
Cryptographic protocols go poof: A significant number of computer-based cryptographic protocols are unexpectedly and suddenly cracked or broken, leading to substantial financial, societal, and governmental repercussions. This could be from some kind of universal vulnerability, a monumental leap forward in computing power, artificial intelligence capabilities, or something else.
West Coast US Tsunami: Devastating tsunami on the US West Coast, most likely from an earthquake on the Cascadia subduction zone.
Extraterrestrial life is discovered: I don’t think microbe fossils on Mars would cause an adverse event, but if proof of extraterrestrial life is found to a degree that it causes large groups of people to question their religious views, there could be financial market shockwaves, panic selling, civic unrest, etc.
Another pandemic: COVID-19 scale pandemics are generally considered 100-year events, so another one in the next 30 years would shock many people. (Although those versed in probability theory know that another pandemic can happen today and still could be a 100-year event).
Twin pandemics: Speaking of pandemics, another one right now or two at the same time in the next 30 years is plausible.
Cryptocurrency is vaporized: Overnight (or very suddenly), the value of cryptocurrency (e.g. Bitcoin) plummets to near nothing. It could be from sudden government regulation, some kind of intentional devaluing, panic selling, the first event I listed (cryptographic protocols are broken), coordinated cyberattack/theft, or something else.
“Derecho” enters the popular lexicon: Devastating straight-line wind storms (as opposed to rotating - e.g. tornado, hurricane) become more frequent, extreme, damaging, and appear in places we’re not accustomed to seeing them. This is part of a trend of an increase in extreme weather globally.
Insurrection in the US: January 6, 2021 was just the beginning. Right-wing extremists perpetuate violent uprisings or terrorist attacks. Both the violence and subsequent law enforcement/military response cause financial, commerce, and civic repercussions.