Preparing For The Black Swan

It is called the Black Swan phenomenon.

There was a time when everybody thought all swans were white. Then one day somebody discovered a black swan in Australia.

In historical terms a Black Swan is an event that is unpredicted, unprecedented, unexpected and consequential.

The Sept.11 attack on the Twin Towers was a Black Swan.

Another was the financial crisis of 2007/08 that almost brought down the world’s banking system. Regulators, bankers and investors never saw it coming even as it stared them in the face.

In our everyday lives and on a lesser scale, a Black Swan could be a sudden illness that financially ruins a family, an Ondoy that in two hours devastates a nation.

People assume that all future events can be predicted from past experience. Those who do not learn from the lessons of history are bound to repeat its mistakes, it is said. So we live our lives based on our knowledge and study of events gone by.

Similarly governments, they behave as if tomorrow is simply an extension of yesterday, our future an extrapolation of antecedents.

Which is fine until, one day, a black swan appears.

Until one day a disgruntled ex-Senior Inspector of police takes hostage a bus of tourists. Until one day a motley of untrained and unequipped rescuers bungles negotiations with the hostage taker. Until one day a Government admits that yes indeed they did not know how to deal with the event. Until one day eight innocent lives are lost as a result.

So there is the finger pointing. It was the media’s fault, it was the police’s fault, and where was Noynoy all along, grandstand the politicians and the pundits. The answer is that they were all there, outside their comfort and experience zone, winging it as they went along, unsure.

For nobody was prepared for the unexpected, for the Black Swan. Unfortunately nor will they be prepared for the next one.

Sure, there will be the special commission as to what happened, the “high level” probe, the report that 3 months later will tell us that, well, we screwed up. Actually we know that already.

So we will not have learnt. For in 3 months, not even, other events will overtake us, overshadow the recent tragedy. That is the nature of our instant, twitter, Facebook society, a happening a minute, no time to recall.

To forestall our loss of memory, the Government should, as the recent tragedy is still fresh in our minds, prepare itself for future Black Swans.

These Black Swans could come in various forms. It could be another hostage taking this time of larger proportions; it could be a major attack on or a bombing of a densely populated site; it could be a follow up world financial crisis that will dry up sovereign credit markets, forcing us to default; it could be a natural disaster of unprecedented proportions: it could be a devastating consequence of global warming that will imperil our food and water supply. It could be anything, we just need to be aware.

For this the Government should establish a Risk Management Team, an inter-agency group within the Presidential Management Staff, that will conjure all possible scare scenarios and develop the appropriate responses.

Banks and major corporations have these risk management groups within their organizations. The U.S. and Europe have just completed bank stress tests that analyzed the impact on their viability of various scenarios.

So the Government should be prepared. We live in uncertain and volatile times where past models, paradigms and experiences are no longer predictors of the future.

The hostage event of these last days is a harbinger of the future. It was not a Black Swan of epic proportions but the next one could be.

We just have to be ready.

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About Leo Alejandrino

The blog is principally a commentary on Philippine politics and economics.
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