Black swans and ash refugees
This past month has been one of the more interesting for a while. For a change, the exasperating entertainment that is our local political circus was bumped off the lead story by a force of nature that would usually only garner a sidebar mention. An unpronounceable volcano in the relatively unknown giant island of Iceland doesn’t often command global attention. But by April 15, it was headline news in 90% of the world’s news media.
The reason for this unprecedented attention had nothing to do with the eruption that shot molten lava 30 stories high above the volcano’s crater through an ice cap, spectacular as it was. It had nothing to do with the astonishing fact that in the first three days alone, the volcano dispersed 140 million cubic metres of matter as high as 13 kilometres into the atmosphere. It had nothing to do with the disruption to the lives of the 600 local residents who had to be evacuated. No-one was killed or injured, and no great environmental disaster was unleashed upon the world (unlike the Gulf of Mexico oil rig catastrophe).
The real reason it commanded such immediate and compelling global attention was a side effect of the eruption that disrupted the daily patterns of tens of millions of people all over the world. Five million air travellers were left stranded across Europe and elsewhere, completely overshadowing the air traffic chaos in the aftermath of the September 11 attacks in the US. The eruption grounded 100,000 flights into and out of UK & European destinations, with the airline industry losing more than US$2 billion and counting. The economic impact on that industry alone is devastating: in 2009, the global airline industry lost US$9.4 billion, with forecast losses of US$2.8 billion in 2010 - before Eyjafjallajoekull. The knock-on effect of such disastrous events as this are near impossible to measure, with the disruption affecting millions of businesses and hundreds of millions of lives. If your stock portfolio or pension fund has any investments in the aviation industry, you’re going to feel it too. And if your portfolio has any interests in vendors of video conferencing software, you might not.
Nassim Nicholas Taleb is a middle aged Lebanese empiricist, hedge fund manager, philosopher and activist whose primary focus is understanding and measuring risk. Taleb is an extraordinarily smart man whose life and life’s work was shaped by the sudden and violent onset of the Lebanese civil war. Taleb was the teenage grandson of the deputy Prime Minister; his family owned vast tracts of land and was very wealthy and politically connected in the intricate web that is Middle Eastern politics. In six months his country turned from “paradise to hell”. Taleb escaped to the US while his grandfather spent his remaining years in a dingy flat in Athens, his estate worthless.
Taleb is the author of several books, one of which (Fooled by Randomness) to quote Malcolm Gladwell, “is to conventional Wall Street wisdom what Martin Luther’s Ninety-Five Theses were to the Catholic Church”[1]. His third book, The Black Swan, deals with the phenomenon of events that are characterised by low predictability and high impact. The essence of Taleb’s approach to risk is neatly encapsulated in this quote from the 18th century empiricist David Hume: “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”
The eruption of Eyjafjallajoekull could arguably be identified as a Black Swan. It was certainly unforeseen and the consequences far reaching. Taleb probably wouldn’t classify it as such though, at least not yet. Considering that the volcano’s previous eruption in 1821 lasted nearly two years during which time it spewed countless millions of cubic metres of debris into the atmosphere, the real threat is that it repeats this behaviour. Imagine if it continued erupting and spewing giant ash clouds into European, Asian and North American airspace? Consider for a moment that if a week’s worth of partial European airspace shutdown caused so much chaos, how much damage is possible from six months of shutdown over North America, Europe and central Asia? Now that’s catastrophic.
The great irony of course is that we are utterly powerless over nature, in spite of all our scientific knowhow, technological measuring capabilities and mathematical probability models. Volcanic eruptions, tsunamis, meteor strikes and other such natural phenomena perhaps serve a purpose in reminding us that we’re actually not in control. These are critical lessons for mankind, despite our propensity for retentive deficiency in matters non-repetitive.
Yet Black Swans are repetitive, and it appears, increasingly so. Natural disasters of the past decade alone are of interest in that their frequency appears to be on the increase, as does the frequency of man-made disasters. Recent natural disasters include the Indian Ocean tsunami, hurricane Katrina, the Haiti earthquake and now Eyjafjallajoekull. Black Swans include the September 11 terror attacks, the Lehman Brothers bankruptcy and the presently hatching European sovereign debt crisis. All of these events bear the hallmarks of Taleb’s theory: that they are rare, have a massive impact and are almost entirely predictable in retrospect.
Taleb is scornful of predictability models as they are invariably based on Gaussian bell curves, modelled on a continuous probability distribution method. The problem with continuous probability is that it excludes the possibility of a massive deviation from the norm. This is precisely why Osama Bin Laden’s attack on the US was so ingenious. It is also precisely why almost nobody foresaw the subprime mortgage crisis. Risk strategies are thus doomed to failure at the worst possible time – precisely when they are supposed to work.
The fascinating thing about Black Swans is that, unlike natural disasters, they are not always catastrophic. Indeed they are as often constructive as they are destructive. Take the advent and phenomenal growth of the internet. How many businesses were actually crashed by it, and how many new businesses were actually created by it? Google is an eleven year old business that only went public 5 years ago. It is already the 39th largest company in the world by market cap[2] (for a point of comparison, Coca Cola is 25th, Unilever is 66th and Nike is 266th). In half a decade a tech stock has leapfrogged hundreds of businesses that have taken decades and centuries to build. That’s astonishingly quick by all measures and as disruptive as they come.
The point I’m belabouring is that Black Swans are a reality and an increasingly frequent one too. This uncertainty, this propensity for random chaos, this rare but devastating deviation from the norm is fast becoming a distinguishing feature of the early 21st century. How do we prepare for this in our business?
As champions of Disruption, we are better positioned than any other agency to deal with such change. But we need to be far, far better at it tomorrow than we are today to remain there. For as defining as Disruption is for TBWA\, it can easily become the norm if we don’t push it constantly, evolve it and even disrupt it. A part of your job is to think about that, every day, and to continuously seek ways of pushing the envelope. After all, that determines how your stock counter moves in relation to the norm.
