Chai with Aditya #3

Coronavirus, resilience and black swan events

Aditya

Published in

Pharmacist’s Cafe

Sent as a

Newsletter

6 min readApr 14, 2020

“COVID-19 might be just a wake-up call: let’s use it to rebuild our systems into something more resilient” — Ian Boyd, former Chief Scientific Adviser at the Department for Environment, Food and Rural Affairs

Takeaway Chai

The coronavirus has been both a demand and supply shock
As a system, we have been sacrificing resilience for efficiency
Contrary to popular belief, the coronavirus is not a black swan event, as a flu-like pandemic had been predicted as early as 2007
The case for a flu-like pandemic was never if, but when
The Centre for Disease Control knew the system was woefully underprepared to handle a flu-like pandemic in 2015
Collectively we can build resilience capability by including a margin of safety into the definition of optimal efficiency.

Introduction

The effect of the coronavirus (COVID-19) on our normal way of living is nothing short of profound. Economically, COVID-19 is causing both a demand shock and supply shock depending on the service or product. For example, India has reduced exports of medicines, causing a supply shock and increased prices, while has simultaneously seen a reduction in the purchases for sugar, causing a demand shock.This got me thinking, have we been sacrificing resilience for efficiency?

Efficiency versus resilience

If you’re building a bridge to carry a five ton truck, it would be efficient to build the bridge to handle five tons. This would require the least equipment while allowing for the vehicle to pass. The resilient option is to build the bridge to handle 10 tons or 12 tons, allowing for a 40–50% margin of safety. Imagine you were driving the truck, which bridge would you prefer to drive over?

Was COVID-19 a black swan event?

In a world where resources are finite, is stockpiling efficient to maintain resilience through a pandemic? This depends on the probability of a pandemic occurring and its predicted severity. COVID-19 has been likened by many to be a black swan event (Sequoia example, Negotiator example). Popularised by Nassim Nicholas Taleb in his book: The Black Swan: The Impact of the Highly Improbable, a black swan event is an unpredictable incident that is beyond what is normally expected of a situation and has potentially severe consequences.

Was COVID-19 a black swan event? The short answer is no. The question of a pandemic was always when, not if. Published in 2007, Taleb’s The Black Swan had this line “As we travel more on this planet, epidemics will be more acute”, see below for an excerpt.

In 2015, from his reading on epidemics, Bill Gates published an article, We’re not ready for the next epidemic’, which also includes his famous TED talk on the subject. A stark point from his article is:

Also, last month I was lucky enough to have an in-depth discussion with Tom Frieden and his team at the Centers for Disease Control and Prevention in Atlanta.
What I’ve learned is very sobering. As awful as this epidemic has been, the next one could be much worse. The world is simply not prepared to deal with a disease — an especially virulent flu, for example — that infects large numbers of people very quickly. Of all the things that could kill 10 million people or more, by far the most likely is an epidemic.

The quote shows awareness for how underprepared we were (and still are) for a pandemic. The probability of a flu-like pandemic occurring may have been low, but it wasn’t zero. Therefore, COVID-19 is not a black swan event. In fact, in a recent interview with Bloomberg TV, Taleb referred to COVID-19 as a “white swan”, while defining 9/11 as a true black swan event. In his book, Taleb defines a white swan event as a highly certain event with three principal characteristics: it is certain; it carries an impact that can easily be estimated; and, after the fact, we concoct an explanation that recognizes the certainty of occurrence, but shifts the focus to errors in judgment or some other human form of causation. The financial crash of 2007/8 was also not a black swan event, the tell signs were there — excuberrent greed leading to poor financial resilience.

Can a COVID-19 type pandemic be planned for?

The answer for this is more complicated. In a post by the Collaborative Fund, the below was said:

Think of risk the way California thinks of earthquakes. California knows a major earthquake will happen. But it has no idea when, where, or of what magnitude. Emergency crews are prepared despite no specific forecast. Buildings are designed to withstand earthquakes that may not occur for a century or more.
Risk gets ugly when you think it requires a specific forecast before you start preparing for it. It’s better to have expectations that risk will arrive but you don’t know when or where than to rely exclusively on forecasts — almost all of which are either nonsense or about things that are well known.

In the case for many organisations, it’d be interesting to know how many supply chains were tested for resilience to a pandemic, especially one which strongly impacted the manufacturing of exporting countries.

The complication with this however is justifying to the public or shareholders, that every penny is being spent efficiently. How do you justify increased production costs, resulting in goods being priced less competitively for the same margin? However this hides the real question, can your organisation afford to have little/poor resilience? If in the future, there was a different situation in China or Germany, forcing all factories to close for a month or longer, how would this impact your organisation?

So how do you build resilience?

Ensuring there is a sufficient margin of safety. Enabling economic efficiency sounds great from a political perspective, but practically this provides for little resilience when things outside of your control do inevitably go wrong.

Conclusion

The COVID-19 pandemic has shown the world’s reliance on a tiny minority of countries to function, and many organisations have seen the cost this has had on them, with some going out of business. In the future, I suspect companies will build a margin of safety by no longer accepting that a function is simply outsourced but explore deeper, their exposure to certain regions.

One can hope that we learn.

As Warren Buffett said, “It’s only when the tide goes out that you learn who’s been swimming naked.” And the tide has just gone out like never before. — Paul Graham