Fat tails and the structural opportunities post COVID19
We don’t know how little we know about rare events — its outcomes, and the consequences of these outcomes. For Australian households, GFC in 2008 induced a significant increase in household savings, although Australia and its market did not face substantial disruption due to the crisis.
Retrospection helps in pattern recognition, and in patterns, we often find meanings. These meanings form narratives to make sense of the world which we share with the others, consciously in orations or subconsciously in actions. Global events such as COVID19, 9/11, and GFC are social and economic disasters. Common knowledge of the way we deal with emergencies is in three folds — Prevention Preparedness, Response and Recovery. The first step, prevention preparedness, often gets lost in known unknowns, because events like these don’t come with an alarm or signals — which means we do not have enough data or information to make decisions. The response and recovery part of the disaster management gets shadowed by retrospective distortions. We as humans try to rationalise decisions, combined with the ability to assign responsibility to others when things go wrong.
Even when we are the decision-maker, we miscalculate the facts available to us as the decision-maker. The pain of retrospective distortions (also known as hindsight bias) is omnipresent — country’s budget, hiring in organisations, public procurements, project management, or disaster recovery plans. Risk engineers and probabilists recommend adjusting for the forward passage of time to reduce the ambiguity of decision making with no or lack of evidence. So, how do we change for the future? We make calculated risks. We focus on mitigating the risk than taking significant risks. We make ourselves adaptable. At Grand Company, we devised a strategy to understand and help our young Australians more adaptable. Here is the link to the procedure: [link]
I am no Nostradamus, however, here’re five things that come to my mind when I think of the emerging antifragility as blessings in disguise due to this pandemic. Post COVID19, these five areas will change the way we live our lives: 1) Virtual Economy, 2) Role of the universities, 3) Fractal Localism, 4) Agility of the government, and 5) Future of Entreprises. These areas are part of my day to day life. They are my personal experiences and observations of the world we might want to live one day. Several other trends are emerging in this pandemic such as manufacturing ventures adapting their assembly lines to produce safety equipment right from Tesla, creating ventilators to Bundaberg distillery making hand sanitisers. This phenomenon is often known as “making lemons out of lemonade” in a famous George Akerlof fashion but reverse.
Fractal Localism: Kirkpatrick Sale wrote Human Scale in 1980 wherein he used his knowledge of epidemiology to understand human behaviour and promoted the term “Bioregionalism” coined by Allen Van Newkirk, founder of the Institute for Bioregional Research. He mentioned that Scale, Economy, Politics, and Society are the four basic building blocks of any organised civilisation. He (Sale. K., 1980) used the bioregionalism concept to explain that if you look closely into nature, you will find it is patterned. Therefore, political leaders, when thinking of scaling economic and social outcomes for a region, should think of it as a homogenous economy. Wherein political boundaries match with ecological limits, consumption of local foods and other raw material is encouraged, and sustainability is paramount to the region. Sociology tells us that we’re all more alike than different. Nicholas Christakis, in his book Blueprint: The Evolutionary Origins of a Good Society, says, “The human ability to construct societies has become an instinct. It is not just something we can do — it is something we must do.” The idea here is to build multiscale self-reliant autonomous regions (Scale, Economy, Politics, and Society) which work for the people, by the people, and with the people. Multiscale Localism puts focus on civic empowerment by strengthening communities and families to adapt and survive.
Fractal Localism can only be achieved by the decentralisation of power, which means we need to give more power to the younger generation & diversity of opinions. I hope, and I am confident that we will build a society in which crony capitalism and corrupt politicians will not be allowed to run for office to bailout banker friends. At the same time, teachers, nurses, and carers struggle to survive. The biggest problem with centralisation is that it becomes distant and out of touch due to multiscale bureaucracy. The future belongs to the regions, the locale.
Virtual Economy: Twice in my life, I was hired over the phone and Skype, across two different continents. It was a massive trust leap for both the hiring organisations and me. Despite the digital layers that existed in the decision-making processes, trust was distributed and less diluted. And, last week I received a WhatsApp message from my family back in India about my two nieces 5 and 7 years old sitting in front of a desktop fiddling with Microsoft Teams and attending their school hours from the comfort of their living room. In essence, COVID19 did expedite digital delivery. The pandemic worked as a catalyst for schools and pupils to take the trust leap in a century-old practice of teaching and learning. My view of the future world is where the word virtual is not a conceptual synonym for digital and remote, but it is known and practised as distributed and decentralised and glued by mutual trust. The element of virtuality must offer autonomy, respect and belongingness to tackle the challenges the social and economic engines face with productivity, trust, and coordination. I guess, trust is the strongest equaliser when we unbundle decentralised systems. The concept of “desktop” might recede overtime, i.e. chained to one location — like my nieces attending schools from home, and millions of others remotely working from home. The physical (desk and chairs) will not go away, but the placements will. The importance and emergence of the Virtual Economy will depend on the transformation of trust. Surveillance capitalism with an ethical dilemma will coexist with digital dominance and its distributed trust. The current accelerated adaption of the virtual Economy won’t die after the C-19 crisis. All we have to do is trust the decentralised systems.
The physical world will come back. The learning we gained will not get used in the same fashion, but we will have developed better solutions that can coexist with our physical reality. New business models and logic of businesses that we have grown to face this crisis will also prevail afterwards. So, whatever “virtual” you are building will coexist as a multiplier with your physical world, and with your distributed trust.
Future of Enterprises: Australia is known for its entrepreneurialism. “Entrepreneurial Quality” is my research areas, and I would like to stay away from this particular phenomenon for this writeup. However, Australia’s entrepreneurial culture should be about encouraging the formation of high quality, high growth companies. Public financing bodies and other institutions supporting the activities of entrepreneurship and innovation should stop promoting the creation of the “typical” startup and focus on mission-oriented policies and business with growth potential. We all know that governments are not equipped at “picking winners” and it is hard to identify startups with a low probability of generating “jobs & growth” and if they are at all predisposed to enhancing social and economic growth. By focusing on the problem and broader horizon map (manufacturing, robotics, pharma, logistics, etc.), governments can ignore these low probability companies, and policymakers can improve the average performance of new businesses. Apart from the quality of the companies (management, innovation, skills, etc.), the future of enterprises will be about homegrown innovation. It will be about purpose-led business models and high impact ventures that will not only return value to their stakeholder but also encourage communities to get involved in advancing humanity. (Read Ricardo Semler’s book called Maverick).
If you are an enterprise that makes lemonade out of lemons and has the optionality to make lemons out of the lemonade when the time comes — will survive in future. For example, Bundaberg making hand sanitisers, Dyson and Tesla building ventilators, local universities are manufacturing masks and PPEs. In essence, you are creating more pathways to your goals and thereby reducing your exposure to uncertainty. A common belief and now a testament that the world is becoming increasingly volatile (VUCA) and unpredictable and therefore if your organisational strategy listens to the “future predictions” (market, Economy, etc.), the organisation becomes fragile, and fragility is not sustainable.
Role of the Universities: We all know the role education plays in our lives, and we do understand that quality and inclusive education for all and lifelong learning is crucial for sustainable developments. Education has always been about awareness, skills, knowledge, wisdom, and applications. It was never about status, lifestyle, money, or changing lives. Unfortunately, the latter is more dominant in the post-industrial Economy — ivy league colleges, lifestyle choices within university campuses, emphasis on theory than practice and more. Never forget that education, agriculture, and environmental health is one of the biggest victims of the industrial age. Kindy to schools, to the university, is not a default choice and it shouldn’t finish at university or university should not be the ultimate goal for education in one’s life. However, universities are one of the most steady sources of innovation and talents. It would surprise me if, in the next decade, universities are not already the epicentre of research and innovation. The core offering of the university might just be pure and applied basic research along with micro-credentialing, short courses, and certificates. Staying away from what is going to be redundant within university lifecycle of a student is only wise. In essence, radically speaking universities will specialise in “applied research” to generate innovation, economic, and social benefit for a region/nation.
Education will transform into a network of curious apprentices and skilled mentors built up over time where theory and practice will go hand in hand. Schools should provide resilience training to the students, and risk literacy as a compulsory domain in various aspects of life; DIY skills like sewing, painting, crafting, and building should be made mandatory. The education industry should eliminate the corporatisation of education. Doctors should also study about food and nutrition and not just course funded and designed by the pharma companies. No formal education can prepare you for black, white or grey swan events — you can only enhance the robustness by adding skills and increasing your adaptability for future-self. The current situation has shown how universities can quickly adapt to change.
The role of the universities will be something other than what we have today, considering the universities of the past are no longer the university of the present, and will no longer be the university we probably will need in the new normal. For leaders amongst us, it is once in a lifetime opportunity to think about the future or the higher education and universities. Never forget, students and pupils pay for degrees and credentialing not for “education”. The problem indeed is far more complicated than we see it today. It is a Berkson’s paradox when education sometimes causes incompetencies. That is in many fields; the competence will be inversely related to the qualification because in most cases, it is not the practitioners who teach the course; it is the academics. Education has become a tool for signalling, not skill-building.
The agility of the governments: The COVID-19 pandemic is the unprecedented global health crisis of our time, and it is the most significant social and economic challenge we have faced since World War II. All nations got their acts together and got prepared to respond and recover. Some of them did well than others. Austria, Australia, Cambodia, Denmark, New Zealand, Norway, Switzerland, Sri Lanka, Vietnam are just a handful of examples which did well. From developed to developing nations, they showed that countries, governments, and the public offices could be agile and move quickly to solve a problem — in this case, they were fighting the pandemic. And, I do agree that it was a case of life and death which led the government to act quickly. However, in a post-COVID world, governments can be agile too, they can build, test, and launch policies and processes that can help boost the productivity of the nation along with social and economic benefits for its citizen. Australian government created the fully functional telehealth infrastructure within a week. That is like building the entire Medicare system; the Indian government used one of the most effective behavioural science tool “foot in the door” to launch a 41-day lockdown, i.e. requesting 1.4 billion people to stay indoors. Above all, Singapore’s response to fight COVID-19 is now considered as the gold standard to fight pandemics. South Korea, Taiwan and other Asian nations have done well for several different reasons — prior experience with SARS, community acceptance of masks, and relatively better personal hygiene among its people.
There are several examples of the agile and resilient economies (read communities) who responded well in this pandemic. Will it continue to be the case post-COVID-19? Will the governments of the world be agile enough to respond to social and economic changes? Australia struggles with economic complexity, global innovation and competitiveness, research and industry collaboration, business and government investments into research and development, and many other indices that make an economy resilient, responsive and antifragile. It is not the response that makes you exceptional, it is the recovery and robustness that you build afterwards. How soon Australia recovers from this pandemic and how robust it becomes in the coming years will define the growth trajectory for the next two decades.
In sum:
Fractal Localism — It is time for interdependence and coordination
Virtual Economy — It is time for radical openness
Future of Entreprises — It is time for product innovation
Role of the Universities — It is time to pivot the purpose
The agility of the governments — Its time to change the present
