Lo and behold – it is 2017! What a wild year 2016 was! When we started 2016, who could have predicted that the United Kingdom would vote to leave the European Union? Who’d have thought an outsider like Donald Trump would snatch away the election from an established Hillary Clinton? And with Namibia’s growth on a high, who would have thought we’d enter the next year under the cloud of a technical recession?
We’ve lived through a year full of what economists term ‘black swan events.’ In 16th century London, it was common knowledge that all swans were white – after all, no black swans had ever been seen. Thus, claiming something was a ‘black swan’ was to say it did not exist. But then, in 1697, Willem de Vlamingh saw black swans in Western Australia, and the term ‘black swan’ became known as something that seemed impossible, only to later be shown otherwise.
It is thus an unknown unknown – something we don’t know, that we also don’t realise we don’t have knowledge of. I myself prefer calling it an Outside Context Problem, as referred to by writer Iain M Banks in his Culture novels. As he put it, it’s a problem you’d encounter “rather in the same way a sentence encountered a full stop.”
“The usual example given to illustrate an Outside Context Problem was imagining you were a tribe on a largish, fertile island; you'd tamed the land, invented the wheel or writing or whatever, the neighbours were cooperative or enslaved but at any rate peaceful and you were busy raising temples to yourself with all the excess productive capacity you had, you were in a position of near-absolute power and control which your hallowed ancestors could hardly have dreamed of and the whole situation was just running along nicely like a canoe on wet grass... when suddenly this bristling lump of iron appears sail-less and trailing steam in the bay and these guys carrying long funny-looking sticks come ashore and announce you've just been discovered, you're all subjects of the Emperor now, he's keen on presents called tax and these bright-eyed holy men would like a word with your priests.”
Or as Nassim Taleb put it, “First, [the event] is an outlier, as it lies 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.”
Nassim Taleb, in fact, first brought the term as applicable to risk management to the forefront, most notably in his 2007 book, The Black Swan. His points make sense, after some rumination. Too often we expect the normal everyday life to continue, with the bits of randomness so prevalent in life to be the same kind of randomness you often find in games – a perfectly normal randomness, in other words.
But as the past year has shown us, this ‘normal’ Bell-curve randomness results in us actually discounting events with very small probabilities of occurring as they are extreme outliers. And additionally, we’ll never expect events to occur that we didn’t even CONSIDER to be possibilities at all! How do you prepare to mitigate that? Taleb, luckily, has some ideas. Key amongst these is the concept of anti-fragility. In order words, institutions should implement strategies that can capitalize on positive outside context problems, and become stronger due to negative ones.
He provides several guidelines as to how to achieves this. “What is fragile should break early while it is still small.” In other words, don’t have any institution that is too big to fail. Anything critical should be tested early and often, so that it can fail and show its weaknesses before it becomes critical. “Don’t let someone making an incentive bonus manage risk.” Bonuses don’t accommodate critical collapses. You don’t want to cut corners to show a profit on safety.
“Only fraud should depend on confidence. Governments should never need to restore confidence.” No one will ever be able to contain the spread of rumours. Instead, our government should be able to shrug off rumours and operate in the face of them. “Do not give an addict more drugs if he has withdrawal pains.” Or, don’t use the same methods to try and solve the problem as the ones that caused it. After all, the definition of insanity is doing the same thing over and over again and expecting different results. “Make an omelette with the broken eggs.” We might be tempted to fix what is broken, but a better solution would be to take the pieces of what is broken, and build something new that cannot be broken as easily.
It is quite an interesting facet of risk management to examine, and I heartily recommend that those interested do so – after all, it seems more and more that the unthinkable becomes reality. Globally, we’re going to see even more potentially unthinkable scenario’s that could become reality – France deciding to exit the European Union and NATO, a new Italian banking crisis that could precipitate a new banking crisis, Venezuela going into default, a potential trade war between China and the USA, or the USA and Mexico, a successful North Korean nuclear test… These all seem like low-probability events, but ones with far-reaching consequences.
Locally, we face the possibility of a recession that could stretch into a true depression. We have a drought that may be extended and a possibility of a water crisis. The SWAPO conference is this year as well and that could drastically change the face of our political landscape. We have South Africa that seems teetering on the edge of a political or economic crisis. All of these have the potential to have massive consequences for our nation.
But there could be outsized positive events as well. The United States could reach a lasting peace with Russia, significantly reducing the chance of war. Namibia could experience immense rainfall, and experience a burgeoning agricultural sector. Our Harambee Prosperity Plan could have a sudden, impactful success, that catapults our economy to new highs. We need to be prepared for that as well.
But all of this we can see. It’s quite probably things will happen that we’d never have seen coming, that will change our lives forevermore. A true Outside Context Problem. And that is what will test our resolve. That will reveal if the foundations of this Namibian House we’re building remains strong enough to weather any storm, and to grow in times of rain. We should be ever vigilant, and ensure the foundations of truth, loyalty, kindness, generosity, joviality and friendship permeate our society. When the waves break on our shores, we must be ready.