Grey Swans: The Impact of the Not-So-Improbable

Grey Swans: The Impact of the Not-So-Improbable

TLDR: Don’t spend your time looking for black swans. Enough other people are doing that, and there is more value in managing the white swans, while making sure you take action when a true black swan is in its “grey zone”



What we’re talking about: Nassim Nicholas Taleb rightly opened our eyes to Black Swans, high profile, hard to predict events that throw off conventional forecasts. But while it is important to be open to changing realities it is also important to avoid what we call “macro nihilism” – inaction as a result of the belief that macro risks are unknowable.


A key problem in this area is that much energy is spent on thinking of the next big unpredictable event that will upend the world, while missing how the world is changing. Black swans often have a time period when they go from unpredictable events to high probability outcomes (by that we mean >10% probability) – we call this the “grey swan zone”. This is the window in which competitive advantage can be gained by not watching from the sidelines but rather creating strategy. Let us explain what we mean by the example of the US-China trade war.


PRISM's origin story is tied closely to the 2016-2017 period - aka the first half of the Trump administration. We (PRISM's founders, Johan and George) stood up an initiative called Trade Wargaming that was subsequent brought to dozens of clients. We warned companies against a range of trade scenarios, focused on China ("they rape our country”) and NAFTA ("the worst trade-deal in history”). The China trade war started in June 2018 and still today in the midst of a global pandemic we are at an impasse with 25% tariffs on almost all Chinese imports to the United States. To our astonishment many, if not most, companies were caught unprepared. Some companies even missed the deadline to apply for tariff exemptions that they were eligible for, costing them millions of dollars in some cases. This is just the most tactical error, not addressing strategic options that were available with two and half years of advance warning.


Some may dispute the two and a half years warning – there was plenty of uncertainty on trade policy when Donald Trump tore up the Trans-Pacific Partnership agreement on his third day in office. True. But trade policy is a slow moving regulatory process and ahead of any actual imposition of tariffs, it is preceded by months of bureaucratic churning in Washington. That machinery went into gear in August 2017 and was a clear sign that risks were high and rising. Still, ten months’ worth of flashing warning lights was often wasted.


To tie this back to the grey swan concept – in the beginning of 2015, before Trump’s famous ride down that golden escalator, a US-China trade war was as much a black swan of an event as a Trump presidency. Anyone who predicted that either had the power of an oracle (we lift our hats to The Simpsons) or should consider taking their luck to Las Vegas or Macau. But when Trump won New Hampshire, secured the GOP nomination, won the general election, and was inaugurated as the 45th President of the United States, a trade war risk had metamorphosed from a black to a decidedly grey swan. But in the minds of most people it remained black. 



Advance warning is of course not true for all events. Some black swan events are sudden and hit us without much warning. The terrorist attacks on 9/11 is such a calamity, the collapse of Lehman Brothers, or Superstorm Sandy others. Sure, there are often people who will have been able to envision events before they happened, economist Nouriel Roubini called the 2008 crash, futurist Ryan Matthews saw an attack on the WTC as probable, and climate scientists had for years predicted catastrophic hurricanes. But for the consensus view, they were still improbable until moments before they struck. 


Lessons to learn: While not all events have a “grey swan zone”, many do. The “grey swan zone” was large for Brexit – while unexpected, a very real possibility once the vote was called. And for the election of Trump – a double digit chance once he won the nomination. Coronavirus was predicted as a major global outbreak by experts as early as early January. For these macro risks, however big a surprise the event was, there was a window of opportunity to take action before the worst happens, in ways that will often provide great advantage over slower moving competitors, locking in alternate supply sources, lower costs, and other such benefits. 


There are numerous ways to get ahead of risks without needing to be superforecaster if you use the “grey swan zone” effectively.


Post script

Even viruses can be grey swans. See our post on COVID19 here.


Risk mitigation

Core Principles