A parlour game for tracking Black Swans

Written by Gordon Woo, Catastrophist, Risk Management Solutions

Risk managers are wary of unusual events that may be so rare and surprising as to be labelled as ‘Black Swans’.  We may be resigned to occasional events occurring that catch risk managers by surprise, but how can we be better at tracking Black Swans, and anticipating them?  Rather than wait for them to take us by surprise, we can attempt to track them in a systematic manner through undertaking the following downward counterfactual thought experiment [1], which can be played as a parlour game amongst risk stakeholders.

The umpire of this parlour game gathers players around a table.  Sequentially around the table, players are asked to come up with ways in which the loss from a specified significant historical event might have been incrementally (e.g. 10%) worse. So the first player has to come up with a counterfactual where the loss was 10% worse; if this is done, then the second player has to explain how the loss might have been 20% worse.  If this is achieved, the third player has to construct a counterfactual where the loss was 30% worse etc..

This procedure is repeated for N progressively challenging steps until nobody can think of a further downward counterfactual.  The exercise of deliberately thinking about how things might have been worse is one that is rarely undertaken, but would be rewarding for the insights gained into remote corners of the risk landscape that are poorly explored.    

The epitome of a Black Swan was 9/11. This most unforeseeable of events might actually have been arrived at via the following counterfactual thought experiment.  Less than two years before 9/11, on 31 October, 1999, an EgyptAir pilot, Gameel al Batouti, flying out of JFK to Cairo, deliberately crashed his plane into the Atlantic, killing everyone on board. The loss outcome would have been worse if the plane had crashed near the coast, killing some local fishermen.  It would have been worse still, if the plane had crashed into a village inland; and even worse if it had crashed into a town, killing dozens of people on the ground.

A further downward counterfactual would have had the pilot turn back to New York City and crash the plane into a skyscraper, the worst outcome being a strike on the World Trade Centre.  Who would have had such a downward counterfactual thought?  No less a person than Osama bin Laden had this thought, when informed of the Halloween 1999 EgyptAir crash – and of course the rest is history. 

[1] A downward counterfactual thought is one where things turned for the worse.