It’s All Connected…Grey Rhinos and Black Swans…

Of course, we could be referring to Gaia Theory, but we are not. Rather, it is the time of year when the World Economic Forum’s (WEF) Global Risks Report (GRR) appears (, containing graphics that look like bricks in a wall or psychedelic mandalas.

In fact, the document is a useful one in a number of ways. Firstly, it provides some evidence of how others are thinking about risk; secondly, it contains an extensive catalogue of risks in terms of their potential impact and severity; and, thirdly, it allows the reader to consider not only whether he or she agrees with what is set out, but also what may have been missed or mis-categorized. There is always the danger of being caught by “framing” issues and failing to think beyond the Report’s contents; but, at Awbury, we aim to challenge the “usual approaches” and assumptions.

The Report does emphasize a key point; namely that one should not look at risks in isolation. This may be a truism, but the tendency towards “silos” within the (re)insurance industry (and many others) appears to be as strong as ever. In one sense, that is rational, as focused expertise should produce better outcomes in a particular business. However, an unwillingness also to consider factors beyond those clearly a component of a particular risk can lead to unfortunate outcomes, as connections or linkages are missed, often because of our cognitive biases.

For example, on the one hand we may obsess about a perceived risk because it comes immediately to mind and worry about Black Swan Risks which, by definition are not predictable, while on the other discounting Grey Rhino Risks (a term given recent currency by author Michele Wucker). The latter are risks which should be obvious (but are often neglected), can appear swiftly and are high-impact. The potential fragility of the PRC’s financial and housing markets is certainly one “rhino” that gives its government pause, but the question remains as to whether it will be willing to tackle the underlying causes effectively, or employ the tactics of another member of the financial menagerie, the Ostrich.

Rising income inequality is another “rhino” candidate. One can argue that the period following World War II was an aberration in terms of a more equal wealth and income distribution and the reduction in absolute levels of poverty. However, in our inter-connected world perceptions matter, because they can now be transmitted (and acted upon) almost instantaneously. Political systems appear to be stable and predictable (all those “checks and balances” and “social contracts”, or long-standing autocratic norms), until they are not.

And what of the fact that it is still “too quiet out there”? In the face of repeated surprises and shocks, one might expect financial market volatility to be higher, yet many measures remain at or near their lows, and equity indices march ever upward, beckoning more momentum trades, or Fear of Missing Out. If new narratives have to be developed to explain the “reasons” (remember the Dotcom Bubble?), it is unlikely to end well once sentiment changes, giving a different meaning to The Thundering Herd.

One needs to avoid availability bias (things that immediately come to mind, or are recent) and remember Sun Tzu’s aphorism: “If you know yourself and know your enemy, you need not fear the result of a hundred battles”. Risks do not usually exist in isolation, nor arise in convenient sequence, so one always needs to maintain vigilance and look for the connection between the seemingly disparate.

The Awbury team is definitely battled-tested, and we would welcome the opportunity to share our ideas.

The Awbury Team


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