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.
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