Where Black Swans Live

The World Economic Forum in Davos is going on, so I checked out their ‘Global Risks 2013‘ report online a bit.

Thousands of business leaders, top politicians, scientists and other smart people have convened to figure out what ails the world. They’ve produced a list of 50 major risks and voted as to how likely they are to happen and how large of an impact there would be if they did happen.

Here’s what they came up with:

world-economic-forum-global-risks-2013-1
(click image to enlarge)

I have only labeled some of the 50 items, but the purple ones are Technological risks, the blue ones are Financial risks, green are Environmental, orange are Geopolitical, and red are Societal.

It is interesting to me to see that most of the low likelihood – low impact events that the Davos people identified are of a Technological nature and the high likelihood – high impact items are of a Financial nature. (Maybe that’s because it’s the World Economic Forum and the not the World Technological Forum. I guess if it were the World Myrmecological Forum the biggest risk would have been an attack of 50-foot-tall killer ants.)

One thing strange I see is that the cloud of points tends to run up and to the right. I work for a company whose slogan is ‘Managing Risk‘ and, in my personal experience so far, risks normally run the other direction. High Impact events tend to be low Likelihood. And events that happen frequently (high Likelihood) tend to be of low global Impact.

Instead, the leaders and other smart people at Davos have identified two major kinds of risk – things that are high Likelihood and high Impact (You might call these ‘Obvious Risks’) and those that are low Likelihood and low Impact (‘Unimportant risks’).

But there are two more quadrants to the diagram. There should be a lot of points in the lower-right corner – events that happen frequently but are low impact. (I call these ‘the sand in the gears’ – the little stuff that just happens as part of normal life). It’s understandable why a list limited to 50 items would exclude these.

But the most interesting quadrant to me is the upper left – what Donald Rumsfeld called ‘unknown unknowns’. The events that are low Likelihood but high Impact. Nicolas Nassim Taleb has an expression for these kinds of risks. He calls them ‘Black Swans‘.

world-economic-forum-global-risks-2013-2

(click image to enlarge)

Despite Taleb’s warnings, the number of Black Swans on the chart are few, if any.

The risks that seemed obvious to be likely and high impact after they have occurred, but not before. I guess that’s why global economic systemic risk features so prominently after 2008, but not before.

I’m not criticizing the list of items. But maybe the Davos folks have mis-judged some of the likelihoods and impacts. A major solar flare would be devastating. So would a year-long winter like the one caused by Krakatoa.

And maybe the Davos folks do have too many “bad” things – weapons and diseases and financial panics. “Good” things can also have major negative impacts in the short term – see Google’s influence on newspaper advertising and Amazon’s effect on some retailers.

Driverless cars would cause millions of professional drivers (truck drivers, taxi drivers) to become unemployed (and perhaps unemployable). Widespread 3D printing could cause the same to happen to millions of factory workers in rapidly developing countries.

But at this point I’d just like them to explain to me why their risks all seem to run in the wrong direction.

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