On Coronavirus and Risk Management
if we base our pandemic response plans on flawed academic models, people die. And they will.
-Nicholas Nassem Taleb, March 25th 2020
Risk Management failed to prevent Coronavirus. Risk Management, a principle of the insurance industry that has wormed its way into the organizational culture of the civilized world, failed to prepare us for the Coronavirus. Our mitigation of the Coronavirus should have been more effective, why did we fail so badly? Follow the money.
[I] don't believe much in conspiracy theories. Why? The "geniuses" at the top have proven time and time again they're too stupid to pull anyting that elaborate off…
-Nicholas Nassem Taleb, March 27th 2020
When people say follow the money, they often mean, in some conspiratorial tone, that someone will reap the reward for a nefarious deed. A forensic account of the money trail will lead to the evil-doer. Or worse, we will uncover the secret truth of a man-made Coronavirus coming from Wuhan Institute of Virology.
That is not what I mean here. Instead, more generally, we should look for man's stronger motivations over his higher motivations and follow that strong motivator to understand why one choice was made over another.
We did not prepare for Pandemic because preparation is expensive. We did not respond effectively in the early days of the Coronavirus because we are more likely to be held accountable for what we choose to do than what we choose not to do.
Was any one airport director responsible to stop flights from overseas when doing so would have saved thousands of lives?
No.
They were not authorized to do so.
Who would provide that authorization? National authorities.
What were National authorities waiting for? Orders.
While Nero fiddles, the firemen wait, Rome burns.
...And that makes any “normal” cost/benefit analysis obsolete. If you get the preliminary risk assessment wrong, the consequences are so far-reaching that your only realistic option is extreme carefulness (precautionary principle).
-Yves Smith, April 16th 2020
Meanwhile Risk Management plans are given cursory review by the Board of Directors every year or gather dust on the shelves of a government agency.
The true cost to prepare is obscured by a false sense of security. They might believe that scenarios, probabilities and consequences can be computed. Organizational leaders act as if they can measure a risk appetite and act accordingly. Hubris in the face of incomputable risk will kill many before this is over. We avoided paying the cost of preparation by pretending that situations with unknown outcomes like Pandemics have a known probability distribution. That they are so improbable as to be essentially impossible. Sadly,we cannot know the probability distribution (likelihood of occurrence) of the future. We can only predict probability for events that have occured in the past. For example motor vehicle accidents rates across an entire country. These events are frequent and we have lots of data. Over the years we can predict more or less what to expect in terms of average number and average severity of car crashes within a reasonably predictable range, or standard deviation. This predictability does not apply to very rare events. Taleb proves this in the Black Swan. Low probability events are not predictable in the bell curve fashion. Everyone knows it but still the bell curve remains in every risk management plan. To be fair, Taleb has said that the Coronavirus is not a Black Swan, it was predicted but ignored. As Taleb says, Thanksgiving is a Black Swan event for the Turkey but not for the butcher.
Lets be fair, Risk Management is a serious tool kit for managing a public or private enterprise. Risk Management and ERM are active areas of quantitative management studies, even pioneering Artificial Intelligence as a means to apply Risk Management to IT. (Although our hope for AI is probably another form of hubris). This not to dismiss Risk Management but to recognize its application has been weak at best.
Canada's 2009 Pandemic Plan stated it would take decisive action early and balance health outcomes with economic factors:
Public health measures should be chosen according to the pandemic's anticipated impact and should be implemented early in a targeted and layered manner to be most effective.
The public health benefits of any given measure must be weighed against the economic and social costs of its implementation.
Were measures implemented early? No.
It is easy to write an aspiration to control risk and pretend that they are plans that we can expect to achieve. To state that we will make losses predictable. It is far harder to live up to plans. Especially as these plans grow in length and multiply. As Hayek stated: “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. “ We can and will blame our leaders but we should look within. Our leaders are merely a reflection of us. We do not care about risk. How many of us save six months of salary for a rainy day. How many of us take on debts we can barely manage under the best case conditions. We stake our future on wishful hope. Should we expect any better of our leaders. We could have prepared but we assumed we could compute the odds and that the odds were ever in our favour. Instead the odds are for our fever.
Notes:
Rather than bog down the text with academic nerdiness I have tried to confine it mostly to the notes below.
Counterpoint:
There are many uses for imagined worlds that open us to views of experience that are routinely ignored or dismissed. I have been particularly attracted to Nietzsche and his use of aphoristic statements to wake up his reader. That can even be useful in a discussion of probability, but it does not replace empirics and logic in demonstration of correct statements regarding lived experience (“hard” reasoning). Many statements in the document regarding the actual world have neither empirical nor logical evidence to support them.
Consider that insurers, casinos, and investors have demonstrated use of hard reasoning in the predictability of outcomes by their financial success. There are “soft” modes of reasoning that also produce demonstrable success. An example is the semi-quantitative rules for investment in both predictable outcomes and those for which there are no bases for certainty – but a high reward for being correct. An example for such a rule would be to invest 90% in certainty and 10% in uncertain outcomes which might produce huge rewards. Never ignore intuition but do not stake your future on it – unless the game is worth the cost of failure.
An important example of “soft” reasoning is choosing to plan for a “worst case” event. You have no knowledge regarding your death, but you know it could occur at any time and cause harsh financial consequences for your spouse and the children. A reasonable action allows a person to guard against that worst case by purchase of Life Insurance. You have a modest ability to calculate an actuarial table for yourself, but there is a subjective factor (your concern for your family) that will determine the value of insurance to you. There was a similar decision on a larger scale made regarding “National Defense”, which will always follow from subjective determination. Another example in this category is preparation for natural disaster, such as the current pandemic. When costs are “reasonable”, then they are often accepted in order to avoid a worst case scenario that is “unacceptable”.
Risk Management - Were this an article written for a prestigious academic journal that statement would need a mountain of proof, but since this is merely an expression of opinion, I will instead be brief. Risk Management and Pandemic Preparedness have grown in scope over the 21st century since their formal beginnings in the later 20th century. Risk Management grew from a segment of insurance buyers in large companies focused on chance of loss to an ideal of an organizational culture encompassing every possible effect of uncertainty on objectives. This approach, called, Enterprise Risk Management, encompassing every possible activity (formally financial, strategic and operational risks, in addition to risks associated with accidental (or hazard) losses) and seeks to understand and control risk for shareholders, management, workers and "persons that can affect, be affected by, or perceive themselves to be affected by a decision or activity"
Summary Definition of Risk Management
Radical Opposition to mitigating the Coronavirus
Summary of Taleb on Coronavirus
Here Trotsky and Hayek (Arch-Communist and Arch-Libertarian) agree on the weaknesses of bureaucratic planning:
But why are the living conditions bad? In explanation the papers refer to “the contemptuous (!) attitude to the questions relating to the living conditions of the workers and to providing them with the necessities of life” With this single phrase the Stalinist press has said more than it had intended. A “contemptuous attitude” to the needs of the workers in the workers’ state is possible only on the part of an arrogant and uncontrolled bureaucracy.
This risky explanation was made necessary, no doubt, in order to hide the basic fact: the lack of material goods to supply the workers. The national income is incorrectly distributed. Economic tasks are being set without any account being taken of the actual means. An increasingly inhuman load is being dumped on the shoulders of the workers.
Marshall on Economics:
Economics is a study of men as they live and move and think in the ordinary business of life. But it concerns itself chiefly with those motives which affect, most powerfully and most steadily, man's conduct in the business part of his life. Everyone who is worth anything carries his higher nature with him into business; and, there as elsewhere, he is influenced by his personal affections, by his conceptions of duty and his reverence for high ideals. And it is true that the best energies of the ablest inventors and organizers of improved methods and appliances are stimulated by a noble emulation more than by any love of wealth for its own sake. But, for all that, the steadiest motive to ordinary business work is the desire for the pay which is the material reward of work. The pay may be on its way to be spent selfishly or unselfishly, for noble or base ends; and here the variety of human nature comes into play. But the motive is supplied by a definite amount of money: and it is this definite and exact money measurement of the steadiest motives in business life, which has enabled economics far to outrun every other branch of the study of man.
Follow the Money:
In "The Big Lebowski", the main character, the Dude, tries, and fails, to deliver a quote from Lenin:
It's like Lenin said, you look for the person who will benefit... And, uh... You know, you'll, uh... You know what I mean.
This is the real quote from Lenin: There is a Latin phrase "cui prodest?" meaning “who stands to gain?” When it is not immediately apparent which political or social groups, forces or alignments advocate certain proposals, measures, etc., one should always ask: “Who stands to gain?”
Risk Definitions:
ISO 31000: effect of uncertainty on objectives
Note 1: An effect is a deviation from the expected – positive or negative.
Note 2: Objectives can have different aspects (such as financial, health and safety, and environmental goals) and can apply at different levels (such as strategic, organization-wide, project, product and process).
Note 3: Risk is often characterized by reference to potential events and consequences or a combination of these.
Note 4: Risk is often expressed in terms of a combination of the consequences of an event (including changes in circumstances) and the associated likelihood of occurrence.
Note 5: Uncertainty is the state, even partial, of deficiency of information related to, understanding or knowledge of, an event, its consequence, or likelihood.
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