The discussion about COVID-19 and the risk of such outbreaks has gone to the swans, the black ones. Black swans are singular, highly unlikely events you are not prepared for. Especially at the stock markets around the world, the poor animal is blamed for the coronavirus to do so much damage. But a pandemic like the current is far from being an unexpected black swan. It is a grey rhino.
Patrick Meschenmoser (Vienna)
Before March 11, 2011, no one had believed in the possibility of such an unfortunate series of events that eventually lead to the accident at the Fukushima nuclear power station. Of course, earthquakes were a clear and present danger in Japan and the construction of the power plant had been hardened accordingly. The designers of the plant also had considered that problems with the power supply for the reactor cooling might occur. If the reactors were shut down and stopped producing power, electricity could be supplied from the outside via the power grid. If this option should fail, too, several diesel generators were available for emergency power supply. In the almost impossible case that all emergency generators failed at once, there was another layer of defence: a system that was meant to supply the reactors with cooling water by means of condensation and gravity until the diesel generators would be started. Only the batteries that had been installed as another redundant power supply system were needed to activate it. Last but not least, as it is located by the sea, the plant was equipped with a protection wall to withstand tsunamis. The wall had even been heightened before disaster struck. Fukushima was prepared for all eventualities. However, one thing was completely unexpected: all risks occurred simultaneously and some turned out to be way bigger than expected.
The Black Swan Landed in Fukushima
The 2011 earthquake reached 9.0 on the Richter scale. In Japan, there had been no stronger one since records began. As foreseen, the quake triggered the emergency shutdown of the reactors. Now, the power plant no longer produced electricity. Additionally, the destructive seismic waves destroyed the transmission lines connecting the plant with the power grid. Consequently, the diesels did what they were supposed to do and started up. They did their job reliably until the tsunami that had been triggered by the earthquake flooded the power plant. The protective wall was designed not hold back waves up to 5.7 meteres. When the tsunami hit Fukushima, it was well over 10 meters high. Waves of such a size were unheard of even in Japan's rich history of tsunamis. The diesel generators and batteries were flooded and failed subsequently. A meltdown was practically inevitable now. The black swan had landed.
The option trader and risk analyst Nassim Nicholas Taleb was the first to name such an unforeseen event a black swan. In the 2007 book of the same name, he explains that the possible existence of black swans was never even thought of in Europe before sailors discovered such specimens in Australia in the 17th century. Black swans simply hadn't appeared in the past or been described in historical documents, similar to the great tsunami of 2011.
Why COVID-19 is Different From Fukushima
None of this has anything to do with the new coronavirus. Pandemics have long been listed in the top group of all global "risk charts". One don't even have to take the 1918 Spanish flu as an example, which is estimated to have killed up to 50 million people worldwide, as it could be argued that medical care has made great progress in fighting such outbreaks since then. So is the risk really so high, still? Yes, because latest since the SARS pandemic in 2002/03 it was obvious that a virus, in a globalized world, can spread around the globe in no time. The SARS pandemic, although it did not kill anywhere near as many people as the Spanish flu, impressively showed, how much damage a virus could cause, as it didn't only infect humans. When I got my first job with Lufthansa right after graduation, I was more than just lucky because, actually, there was a hiring freeze there. The airline group was still struggling with the huge impact of SARS and a virtually collapsed air traffic, especially to and from Asia. Even then, major events were cancelled, currencies such as the Singapore Dollar devalued and travel warnings issued. With “only” around 8,000 officially reported infections in humans, SARS had also infected the socio-economic system. Large influenza pandemics such as the "swine flu" (H1N1) in 2009, which accounted for at least one million registered infected people and around 18,500 deaths worldwide, impressively made clear that large numbers of people could be affected quickly, too. As always with such outbreaks, the number of unreported cases for the H1N1 epidemic was many times higher.
In short: COVID-19 is not a black swan. Not only did we know about the major pandemics of the past, we also witnessed how fast a virus can spread in an interconnected, globalized world. We already had to learn the hard way how sensitive the economy reacts to such events, too. Additionally, organizations like the WHO regularly publish extensive reports warning of the risk of pandemics. Everyone who wants to know knows.
When a threat is so obvious, historically proven and has such a high likelihood to occur, risk experts speak of a grey rhino. As there are not too many non-grey rhinos, a grey one is something you obviously should expect. The American political scientist Michele Wucker was the first to postulate the idea of the grey pachyderms in 2013. Grey rhino risks have in common that they have a high damage potential, that they are extremely likely to occur and that they are, nevertheless, consistently ignored.
It is therefore not so much authorities and companies that spoke of a black swan event after the outbreak of the coronavirus. They had mostly learned their lessons from past pandemics. Emergency plans had been complemented, adapted or drawn up. Of course, we will never be perfectly prepared for such an event. With such rapidly developing diseases, a certain amount of improvisation will always be required, depending on the type of pathogen. But take a look at the aviation industry which cut capacity early on, or at health authorities like in Austria, which can operate today on legal foundations that had been adjusted based on the lessons learned from the swine and avian flu, and you can see a lot of effective preparedness.
Beware of the Grey Rhino
No, the black coronaswan was spotted on the trading floors of the stock exchanges, i.e. in the financial world Taleb and Wucker belong to. It seems that some in the community don't understand the basic concepts of the two authors. That a pandemic would shake the global financial market when it infected socio-economic life had been clear since SARS. And it really doesn’t need a crystal ball to predict that the oil price will drop if the economy suffers globally. It was also well known that there are disputes among oil producing countries that could escalate, especially in such challenging times. The financial market has simply not learned its lessons from the past like others did. What these lessons should be and if we are confident that the market will, at some point, learn them on its own is a completely different discussion. One thing is important, though: COVID-19 is actually a grey rhino and not a black swan that is simply made the scapegoat by the unprepared. Therefore, if you hear someone say “This is absolutely unlikely!” when you discuss your risk map or emergency preparedness arrangements next time, take a closer look. The grey rhino may already be sitting at your table.