Is the COVID-19 pandemic a black swan or a grey rhino?
You might have encountered headlines about experts describing the pandemic as a “black swan” or a “gray rhino.” These two theories have figured prominently in the news in trying to explain the pandemic. What are black swan and gray rhino theories? How do they apply to the Covid-19 and risk management?
The term “black swan” was coined by the economist Nassim Taleb in 2001. It was inspired by a 2nd-century Roman poet who postulated that such a bird does not exist. To put it in context, a black swan is a high profile, but hard to predict and rare event that is beyond the realm of normal expectations in science, technology, finance, and history.
A black swan can occur as a result of the convergence of events that are in itself rare. When this happens, it has a magnitude impact. One example of this theory is the economic meltdown of 2008. Experts suggest that because of its nature, there is not much we can do about it.
Many experts believe that the pandemic is a black swan. However, economists begged to differ. They are quick to point out that we should be thinking more of the event as a gray rhino because thinking of it as a black swan would mean that we are encouraging fatalism and a nod to willful ignorance and short-termism.
Hence, they suggest seeing it as a gray rhino.
Gray rhino is a phrase coined by Michele Wucker in 2016 in her book, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore. It is a metaphor for “missing out a big, obvious thing that is coming at you.”
A gray rhino is a mammoth two-horned animal that you can see coming at you. In this situation, you have two choices: do something about it or not. This metaphor refers to the fact that many things could go wrong in our business, policy, and personal lives that we can avoid. It is just that we tend to ignore the problems right in front of us.
Why COVID 19 is More of a Gray Rhino and Not a Black Swan
Taking into account recent events. The COVID-19 pandemic has taught us one of the biggest lessons: ignoring gray rhinos. Everybody has ignored the warnings about the highly -likely, high-impact risks it will bring. We should have been thinking in terms of when and not if. Credible warnings have been ignored by many governments. As a result, the world was poorly prepared for the pandemic.
Policymakers did not pay closer attention to other unknowns and other potential problems like climate change, asset bubbles, poorly managed debts, and rising inequality.
These are gray rhinos that are heading in our direction and with massive weight. They are clearly visible and we can predict its impact.
We cannot call the impact of the COVID 19 pandemic black swans because they are not unpredictable and highly improbable.
However, if leaders see them as gray rhinos, they can replace the black-swan fatalism with a more proactive approach of grey-rhino constructive pragmatism.
The Gray Rhino Framework
The good news about gray rhinos is, while many prefer not to think about it, we can expect warning signs that they are coming. Recognising the gray rhinos is the first step in dealing with them. The solutions might be debated upon but becoming more aware of the dangers these risks can create is good.
Once we see the gray rhinos, what should we do?
Businesses can apply the Gray Rhino theories to problems, situations, and risks of all types and sizes. Its metaphor and framework can help the leaders and their team to take a fresh threat and analyze them to the highly probable threats that they might be ignoring. It could be over-expansion, falling revenues, turnover, succession planning, cybersecurity, or digital disruption.
One of the biggest threats in business is what they call meta gray rhino. This is a problem that gets in the way of solving or recognising a specific problem. They cited several examples of big companies who ignored the gray rhinos and paid a steep price for it. We can start with Volkswagen and its emission scandals, Blackberry and Kodak for failing to embrace technology, and GM with its problematic ignition switch.
All these cases showed that the gray rhino concept is very useful for businesses. They need to look ahead at the challenges coming towards them, instead of looking at the rear-view mirror in the way the black swans are used.
They can wrangle the gray rhinos successfully with their leadership, cost-benefit analysis, risk management, and decision making.
Other Risk Response Strategies to Consider
After you and your team have identified, assessed, and analysed the risks and opportunities, the next question that will naturally come up is now what?
The best choice, of course, is avoiding or reducing the risk. It is a common misnomer about risk management that it is about avoiding failure or minimising the risk. However, it is not always the case. It can sometimes lead to failure.
Here are response strategies on different levels of risk management. There are several factors in the organisation that could influence the choice and the risk response strategy can change over time depending on the conditions.
There is no need for further explanation on this response. It simply means, quitting a particular action or opting not to go ahead at all is a response to risk. Avoiding a risk will cut off any possibility of it posing a threat to your enterprise. During the height of the coronavirus, employers decided the risk of their employees getting it. They adopted the work from home model. Another example is selling a division of a company or halting the production of a particular product.
Another way to approach a potential risk is to mitigate its impact or loss. If the risk is slightly beyond your tolerance level, you can reduce its impact with a reasonable strategy. An accurate example here is wearing a seatbelt while driving. Although it will not prevent an accident from happening, it can reduce the potential impact of the accident.
Compared to the first two options, this strategy will not eliminate or reduce the chances of the risk from occurring. However, we can transfer or delegate the risk to another party. A classic example is getting insurance for your home. It will not stop or reduce the impact of a storm, but it will provide you with financial protection should damages occur.
In business, one common method of transferring risks is the inclusion of indemnity clauses in executing contractual agreements. These are common in service and construction contracts, rental agreements, lease agreements, and many more.
Some risks are outside of your tolerance level, and none of the options above are applied as the impact is low. It would not make sense to avoid, reduce or transfer the risk. The only way to go is to accept it. It is a passive action and requires no action from you.
#5. Take risks
For such a long time, we have been looking at risks as something negative, hence, we have come up with different strategies to help your organisation avert failure.
What if you have a goal and have known the risks for achieving it? The initial reaction would be to avoid the risk altogether. But doing this will not help you achieve your goal. Those decision-makers have to step in here and decide to take on the risks. By doing so, you are facing the risk head-on but with preparations. A game plan will not reduce the severity of the risk or will prevent it from occurring. It will simply make the actions of your organisation more integrated and smoother.
For example, with all the scary headlines about cyber security, you have to reduce, transfer, or avoid this kind of risk as much as possible. But your company needs an app to modernise your services. What should you do? Although you know the risks of a data breach, you decided to push forward with the decision, otherwise, you will be displaced by your competition, who is willing to take the risk.
Many of us have this lingering question in our minds: Why are so many warnings about the Covid-19 went ignored? Otherwise, we could have mitigated risks?
The gray rhino counters two metaphors: the elephant in the room and the black swan. Both are disastrous. The elephant in the room and the black swan. The former is saying and doing nothing, while the former is a cop-out excuse for ignoring the signs (gray rhinos). Many of the problems on a personal and policy level could have been prevented if not ignored.