“This isn’t about growth, it’s about fragility”
by Eric Garland
We couldn’t love Nassim Nicholas Taleb’s work any more here at CompFutures. His book The Black Swan has become an instant classic for its application of scenario planning to financial markets, showing us that humility and constant skepticism are our constant allies when thinking about future. His work shows us that past performance is not necessarily future reality, and that we probably aren’t as smart as we think we are when making predictions about an ultra-complex, superconnected world.
Plus, he called the financial crisis well before 2008. It’s a small group of contrarians who got that one right. (Ahem.)
For a while, Taleb was in a self-imposed media blackout, terribly weary of having expressed the same ideas time and time again about how “eternal growth” isn’t the only scenario nations and companies should expect. Black swans, he contended in endless interviews, were still on the horizon, circling with plans to challenge the orthodoxies of Keynesianism, Hayekian free markets, or any other old fashioned 20th century notions.
With the new round of economic stimulus, bailouts, and other such faith-based superstitious economic rituals, Taleb is back on the scene to discuss why, contra Krugman, debt-based stimulus packages are making us less safe, giving us growth wrapped in a dangerous package of fragility.
A wonderful, weary, frank interview.
BP’s oil spill is the wildcard scenario, defined
In studies of the future, we typically define for leaders a number of potential outcomes. Obviously, nobody can be certain of the exact future, but through rigorous study of strategic trends, we can at least understand many of the major uncertainties, and plan ahead accordingly. These uncertainties are often boiled down into “scenarios,” a tool with which many people are familiar.
Scenarios must be defined and presented in a certain way if they are to inspire leaders to consider all the possibilities. There are risks if scenarios are done wrong. Present only one scenario, and the rest is considered blasphemy. Present two, and people are forced to take “sides,” both of which may be misleading. Present three scenarios, and people will usually fixate on the “moderate” scenario, even though it is no more reasonable or reliable than one with more impacts. For these reasons, we recommend no fewer than four scenarios, a broader set of uncertainties that stimulate discussion as to our course of action.
The image at right gives only one way of presenting a variety of scenarios, though probably my favorite way. The impact of these potential futures vary from mild, to wild. Note particularly the “wildcard scenario” – low probability, high impact. It probably won’t come to pass- but if it does, all bets are off. In our experience, wildcards are often discarded as too improbable to be worth the potential lost time discussing some doomsday scenario. Many executives avoid a serious consideration of wildcards, preferring to focus on scenarios with brighter upsides.
The BP spill, now in its 43rd day, is the definition of the wildcard, and the best possible argument for why they should be considered in advance.
True, planning for low-probability, high-impact events is not the quickest way to juice up revenue and profit. But it could mean the survival of the company.
Update: Scenarios for Greece
Egads, Reuters has a really great set of scenarios for how the Greek crisis could play out.
Good stuff, very positive to see in major media.
Sovereign debt underlies a new era
We’ve been sitting back, examining the situation of sovereign debt in Europe and watching its impact on global markets.
Today, Greek debt is reduced to junk bond status, and a two-year bond’s yield has reached 26%. It was 18% yesterday.
As much as European officials say that this won’t have any systemic impact, that is often what people say when they don’t want it to have impact.
Think of multiple scenarios for this outcome. Use game theory, scenario planning, or old-fashioned guessing – but think it through.
Consequences
The reason we study trends, forecasts, and scenarios is that our actions have consequences. Our decisions or lackthereof will impact the fate of nations, of men, of our ecosystem, of life itself. Small or large, immediate or delayed, our in actions in a complex system have real effect.
Take Iceland. This financial calamity is causing the first net migration of Icelanders from their island since 1887.
Anna Margret Bjoernsdottir never thought she would be forced to leave her once wealthy homeland, but after 18 months of economic upheaval she has decided to join the biggest emigration wave from Iceland in more than a century.
“I just don’t see any future here. There isn’t going to be any future in this country for the next 20 years, everything is going backwards,” lamented the 46-year-old single mother, who plans to move to Norway in June.
The cause of the upheaval is the country’s integration into a global financial structure that even New York, London and Zurich scarcely understood.
Like many other Icelanders who have seen their worlds collapse since the financial turmoil began, Bjoernsdottir’s predicament stems from the decision, on advice from her banker, to take up a loan in foreign currency.
Repayments on her loan, in yens and Swiss francs, became insurmountable after the Icelandic krona nose-dived following the banking sector implosion.
“My loans are twice as high as they were,” she said, shaking her head in disgust. “The payments keep going higher and higher, so I have to leave, I’m forced to!”
We have lived in a period of relative peace and prosperity in the West, and if we read about emigrants fleeing their home country, it’s usually from some place like Cambodia or Guatemala, a place that that has never succeeded in our First World economics. Turning the page back a few years, we see immigration from Ireland and Italy due to extreme hardship. It is hard to imagine the new home of software development companies and luxury goods returning to a state of hardship.
Then again, it’s difficult to imagine recalcitrant Icelanders leaving for the shores of Norway.
That is why we look at scenarios – because these things are possible within a lifetime.
Assuming a bright future – pensions drag down General Motors
by Eric Garland
One of our more accurate predictions at the end of 2008 was the soon-to-be-discovered catastrophe of unfunded pensions. As 2010 develops, we see that many of the current hotspots in the ill-defined “financial crisis” are tied to this one issue of having overvalued the future at the expense of the present.
California is sitting on around $500 billion (!) in liability. The state of Illinois is short $78 billion for it’s pensions. Now, here comes The New General Motors, still losing billions after a taxpayer bailout. The Government Accountability Office has recently released a report about how pensions will likely drag the ailing manufacturer down starting in 2012 or so. (h/t to Megan McArdle at The Atlantic for quality analysis here – also, the comments section is a stitch)
What happens in 2012? The bulk of the Boomers start cashing in those defined-benefit pension plans, heading to the doctor’s more often, and generally turning 65 at the rate of 7000 per day. Aren’t forecasts useful? This is why we call it a megatrend – it will impact car companies, state governments, universities, national governments, baseball teams, travel agencies – everybody.
Nothing is more dangerous than a business decision based entirely on, “sunny, bright scenarios of fantastic success at 8% returns for all of our investors, forever!”
Why don’t we listen to doom scenarios more?
by Eric Garland
A couple years after the world financial system quite predictably melted down, it seems some of the more mainstream journalists are becoming interested in what we call “wildcard scenarios.” Kevin Drum sat down with Reuters’ Felix Salmon and learned:
We should all be more worried about the potential of a mass casualty event — an epidemic, a gigantic earthquake, a massive hurricane, etc. — to annihilate the insurance industry and take out the rest of the financial system as a side effect. The AIDS epidemic nearly did it, Felix says, and missed only because most of its victims weren’t insured. A really big hurricane hitting Long Island could do it, though.
Yes indeed, why don’t we think more about low-probability, high-impact scenarios? It’s not because these are new concepts, oh no. Herman Kahn from RAND Corporation introduced scenario analysis in a modern context to deal with the possibility of nuclear war. He made his entire reputation by bringing leaders unwanted outcomes (notably, destroying the planet) and walking them backward (“backcasting“) toward ways to avoid negative consequences (such as everybody dying). We’ve had fifty years to absorb Kahn’s messages.
Why don’t we think more about wildcard scenarios? It’s not that they haven’t become popular in the business world. Shell’s scenario group supposedly got on the right side of the oil crisis of the 1970s and built the next forty years of success on their understanding of probable outcomes. Those responsible published heavily and built wonderful speaking careers telling others about how to think in terms of scenarios.
Heck, I even wrote a book about how anyone, from a high school kid up to a CEO, can use trend analysis, scenarios and implications for anything. Why didn’t I end up on Oprah’s couch, telling everybody how to save the world with scenario analysis? Now available to the masses in non-jargony language and using the future of beer as a case study! Fun for the whole family!
Let me ask you the reader – how prevalent is scenario thinking in your organization? How many of your senior leaders are willing to entertain the possibility – however slight and “wildcard-y” – that the world may turn out in a way that could make their decisions the wrong thing to do?
And, a better question, what percentage of executives would take such intellectual exploration – hypothetical, mind you! – as a direct challenge to their authority?
How many public relations and communications staffers would find conjecture about potential futures, turning up unfiltered on social media ,as a direct challenge to the message they are trying to craft?
These are the cultural questions of bureaucracy we in the intelligence and strategy world need to deal with before turning out anymore 1500-page analyses of potential world events. We should save the toner cartridges until we deal with how organizations actually work.
2009: Collective disaster / 2010: Individual success
by Eric Garland
Psychologically, many are glad to have 2009 behind us. It is difficult for people to work in conditions where so much seems out of control, ready to collapse at any moment. The moment seems to have passed. The one facet of 2009 that was clear was the willingness, often at great long-term cost, for government policymakers to keep the status quo with our major institutions. For 2010 – 2020, we can use this political reality, and make more solid plans.
This is not to say that we think that everything is back to “normal.” Have a look at our strategic outlook last year on the major drivers of disruption; none of them are fundamentally different.
Disruption will continue to be the theme of 2010 -2020; those megatrends still hold. Still, the likely stability of 2010 is something you can use.
We have one lesson for clients about studying the future: Just because there is a crisis doesn’t make it a crisis for everyone. When you make solid strategies, disruption can become massive opportunity. In the past decade, the music industry has melted down. It is not a catastrophe for Apple, who launched billion-dollar devices that changed the landscape of media, and then followed up by becoming the world’s largest music retailer. The oil crisis of the 1970s took Shell to the top of the petrochemical industry. Look ahead, think differently, make bold decisions and catastrophe for some can mean success for you.
Perhaps last year many were attempting to avoid the collective catastrophe that comes when all of our institutions catch on fire at the same time. This year, choose your own success.
Evaluating scenarios in the 2010 – 2020 economy
Earlier this week we examined how to evaluate forecasts, a skill that will be required as 2010 approaches and people get curious about 2020. Forecasts are a component of a much more useful tool, strategic scenarios. Via Zero Hedge
SocGen – Worst Case Debt Scenario
Gregor MacDonald: It’s a coal world, we just live in it
Not a happy scenario, but one you must consider:
“The November issue of Gregor.us Monthly, Coal World, has now been published and it carries an unhappy message. I am forecasting that the world will not successfully transition from oil to a broad basket of renewable energy and power sources over the next twenty years. Instead, I strongly favor an outcome in which oil, the construction fuel for the global buildout of new power generation, becomes so expensive that the world becomes energy poor, and turns instead back to coal. In case you hadn’t noticed, the process of energy impoverishment has already begun.”
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.Connect with us
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