What is a black swan event?
Thinking the unthinkable and applying black swan event theory to risk management.
Introduction
The history of black swan theory
Characteristics of Black Swan Events
Applying black swan theory to risk management
Risk management and tunnel vision
How to prevent tunnel vision
Quantifying the value of risk management
Summary
Introduction
A Black Swan event is an event that is unplanned and is beyond what is a normally expected outcome in a given situation.
Black Swan events are events of low or unlikely probability that result in catastrophic consequences.
They usually have a major impact on an organisation, individuals, the planet or society and are often rationalized after the fact with the benefit of hindsight.
Famous examples of black swan events include:
Technical events:
The sinking of Titanic - 1912
Chernobyl nuclear disaster - 1986
Fukushima nuclear disaster – 2011
Economic events:
The Wall Street Crash of - 1929 and the great depression
Dot com bubble collapse – 2000 and the adoption of the world wide web
The Fall of Lehman Brothers 2008 leading to world-wide recession
The examples above are global events but organisations are just as likely to encounter black swan events during day-to-day activities.
A more recent example of a Black Swan event is Brexit – 2016.
News of the British referendum’s decision to leave the European Union caught many by surprise. It caused the British pound to drop sharply to a 31-year low against the US dollar.
The Brexit vote also wiped out nearly $2 trillion of value in global markets.
The history of black swan theory
In 1500s London, a black swan was used to describe something considered impossible. Theory being that there is no such thing as a black swan. By the 1600’s, black swans had been discovered in Australia by a Dutch explorer and out went the assumption that all swans were white.
Don’t not rule out the existence of a black swan just because we have only seen white swans before.
Which when applied to risk associated with health and safety can be expressed as:
Just because it hasn’t happened before, doesn’t mean it won’t happen in the future.
Characteristics of Black Swan Events
Black swan events are rare and unexpected events with severe consequences and will often lead to an organisation fundamentally changing its systems or processes to eliminate the now foreseeable event from ever occurring again.
Three factors associated with black swan events:
An event that is unpredictable.
A black swan event will result in severe and widespread catastrophic consequences.
After the occurrence of a black swan event, people will rationalize the event as having been predictable (known as hindsight bias)
Hindsight bias is the common tendency for people to perceive past events as having been more predictable than they were.
Applying black swan theory to risk management
Risk cannot be managed unless it is first identified. The steps outlined below will help to reduce the likelihood of a black swan event and reduce risk. However, failure to see the bigger picture within any organisational process or project can lead to risk oversight.
Plan Risk Management:
Determine the methodology to be used for risk management on a project and may differ from project to project.
Identify risks and opportunities:
The identification of individual organisation or project risks and opportunities in a manner which makes analysis possible.
Perform qualitative risk analysis:
Assess and prioritise organisational and project risks for further analysis or action. This should be based on the probability of occurrence and potential consequences.
Perform quantitative risk analysis:
The process of performing numerical analysis to determine the most likely outcome of identified high priority risks and opportunities. Numerical analysis won’t reduce risk in itself but it does give a measurable metric.
Plan risk responses:
The development of risk reduction options, strategy selection, and agreement on preventive and contingency actions to reduce overall organisational or project risk exposure. Consider Disaster and Emergency Systems Management planning (DEMS)
Implement risk responses:
The process of implementing agreed-upon risk response plans by organisation, according to the agreed timeline. Consider Disaster and Emergency Systems Management planning (DEMS)
Monitor risks:
Monitor the progress with the implementation of agreed-upon risk response plans, identify and analyse new risks, and evaluate risk process effectiveness.
Risk management and tunnel vision
Tunnel vision when considering risk is a failure to see the bigger picture. It can cause managers to focus on known risks and to filter all information and evidence through the vision projected by the known risks.
This may result in an organisation and its management team concentrating on known risks whilst excluding the possibility of other possible risks.
Black Swan events often exist as risks that sit as outliers beyond the scope of assumed or perceived risk.
Tunnel vision and Black Swan risks (Adapted from Rolstadås et al, 2010)
How to prevent tunnel vision
An organisation can work towards preventing tunnel vision by involving stakeholders that are outside the organisations management team and by involving outside experts in regular risk review processes.
Risk review does not mean that you should only review risks identified during the initial risk identification process. Risk review should also be used as an opportunity to identify new and emerging risks and this will often lead into steps to reduce organisational risk or project complexity.
Quantifying the value of risk management
It’s difficult to quantify the value added to an organisation though applying black swan event theory to an organisation when managing risk.
If an event never occurs, how do you know the true potential cost?
To try and quantify this in some way, we need to consider direct and indirect cost when looking at risk management and accident prevention.
Value to the organisation should be viewed as value added that is beyond the scope of cost.
Such as:
Reputation
Staff retention
New clients/ orders/ projects
Reduced premiums
Lower absenteeism
Reduced risk
Reduced accident rates
Peer recognition
Corporate social responsibility
Staff wellbeing
Summary
Black Swan events can be significant game changers for organisations, projects and individuals and due to their unpredictability. Traditional methods of risk management must be adopted to include new and emerging risks within and organisation, as well as those risks that an organisation may perceive as known, traditional or foreseeable.
Yorkshire Health and Safety can assist you in the successful implementation of risk management systems and processes.
We build strong relationships with clients based on communication, collaboration, commitment, trust and aligning with your key safety performance goals.
If you require further assistance with any of the topics raised in this post or please get in touch.
Yorkshire Health and Safety