Lutfey Siddiqi: So what is a gray rhino, and how is it different from the black swan? Michele Wucker: The gray rhino is the obvious, probable danger that gets neglected, downplayed, or outright ignored, despite, and often because of, its size and obviousness. The black swan, the highly improbable, high impact event that is impossible to picture ahead of time, became popular during the subprime mortgage induced crisis of 2008-2009. The intention of the concept was good: to make people aware that they were more vulnerable than they thought to surprises. But policy makers and investors abused the black swan. First, many of them used it as a cop-out: “Oh, we never saw it coming,” even when many people did warn of dangers and were ignored. Second, there is a lot of money to be made from the idea that any bad thing that happens is a surprise. Behind nearly every black swan is a crash of gray rhinos, crash being the zoologically correct term for a group or herd. And both metaphors help to engage emotions. Siddiqi: Once you've recognized a gray rhino, it's still not easy to wrangle. What strategies do you recommend to manage them? Wucker: How to manage a gray rhino depends on both how close the danger is, on where people are in their emotional and strategic responses to it, and why they are reacting the way they do. A good response depends on communication, decision-making processes, and the right incentive structures. It’s important to understand how key stakeholders are reacting and why. This includes both people who are most affected by risks and people who hold the power to make decisions to mitigate those risks. In researching and developing the gray rhino concept, I identified five stages: denial, muddling, diagnosing, panic, and action. You start with the questions: who needs to do what to head off this danger, and what does it take to get them from the denial or muddling stages to choosing a solution and finding the urgency to act? Siddiqi: Which gray rhino risks worry you the most these days? Wucker: The Big Three gray rhinos for me are economic inequality, the unintended consequences of the last decade’s monetary policy, and climate change. All three are related. Very loose monetary policy since the last financial crisis has created worrisome side effects: financial fragilities, economic inefficiencies, and increasing inequality. Low interest rates have pushed global corporate and government debt to astronomical levels. They also have fueled financial speculation that has created dangerous market bubbles while concentrating wealth and drawing money out of the real economy into financial markets. That has contributed to the populist surges and social unrest around the world. In the past few months, central banks have been warning that climate change has the potential to contribute to a new financial crisis because the risks involved have been mis-priced. That includes real estate in coastal areas prone to floods and inland areas vulnerable to droughts and wildfires, supply chain disruptions, and investors and companies that are exposed. The consequences of climate change add to inequality, since the people who are affected most tend to be poorer populations who contributed the least to the problem. Siddiqi: How do the risk conversations differ in the countries you've visited recently? Wucker: I have been overwhelmed by the response to the gray rhino in Asia, where central banks in China and the Philippines have used the metaphor to frame financial risk. Policy makers and commentators have applied gray rhino theory to everything from digital disruption to sprawling conglomerates to real estate to urban safety. In the United States, the gray rhino has many “super-fans” in the financial planning and policy communities. But I also get pushback from people who don’t want to accept that Americans do not know it all nor have the answers to everything. They think that if something is obvious, we must be dealing with it. But my point is that once we accept that the very obviousness of a problem makes us vulnerable to ignoring it, we can do so much more to head off preventable surprises. Siddiqi: Why are approaches to risk so distinct, particularly between the West and Asia? Wucker: That’s a question I’m researching in my next book, and it goes to the very heart of how societies are shaped, and the feedback loop between cultural and individual influences on risk attitudes. Many factors come into play: what citizens expect their governments to do, how much protection people feel they have to allow them to take both healthy risks or dangerous ones, how much power governments and their citizens feel they have in face of an obvious danger, and collectivist versus individualist values. Trying to manage risks is risky in and of itself. Often, the most anyone can do is to make a crisis less intense than it would have been otherwise. Decision makers are afraid to get blamed that they didn’t fix a problem even when they did better than expected. So risk management requires a lot of courage. Siddiqi: Are risk attitudes and behaviors set in stone? Wucker: Risk responses are like a muscle: they need exercise to become strong. But not everyone is born with the same muscle strength. In risk terms, that is to say that each of us has distinct innate abilities to be calm under pressure, or to use reason instead of acting impulsively. Being conscious of our personalities, attitudes, and risk responses is a start. Once we are self-aware, we can change how we manage our responses so that we can take more good risks and fewer reckless risks. But that’s a much longer conversation. Siddiqi: Thank you Michele.
|