Hurricane Sandy: Setting the Stage for Black Swans

When Hurricane Sandy hit New York I was immediately reminded of Nicholas Nassim Taleb’s concept of black swan events.

Writing in the Wall Street Journal yesterday Taleb explained them:

Several years before the financial crisis descended on us, I put forward the concept of "black swans": large events that are both unexpected and highly consequential. We never see black swans coming, but when they do arrive, they profoundly shape our world: Think of World War I, 9/11, the Internet, the rise of Google

Obviously, Taleb does not limit black swans to great calamities. His definition comprises events that remake our world in ways that we cannot predict.

In his words:

In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term. Still, through some mental bias, people think in hindsight that they "sort of" considered the possibility of such events; this gives them confidence in continuing to formulate predictions. But our tools for forecasting and risk measurement cannot begin to capture black swans. Indeed, our faith in these tools make it more likely that we will continue to take dangerous, uninformed risks.

How then are we to prepare for unpredictable events? Or better, Taleb asks, why do we find ourselves so unprepared for great natural disasters?

He responds by saying that our ability to respond effectively to such events has been compromised by our love of security. We have tried to wring the stress out of life and thus we have become so rigid that when stress arrives we are unprepared.

Taleb applies the principle to everyday life and also to Alan Greenspan’s efforts to use the power of the Fed to smooth out the business cycle:

In his words:

We all know that the stressors of exercise are necessary for good health, but people don't translate this insight into other domains of physical and mental well-being. We also benefit, it turns out, from occasional and intermittent hunger, short-term protein deprivation, physical discomfort and exposure to extreme cold or heat. Newspapers discuss post-traumatic stress disorder, but nobody seems to account for post-traumatic growth. Walking on smooth surfaces with "comfortable" shoes injures our feet and back musculature: We need variations in terrain.

Modernity has been obsessed with comfort and cosmetic stability, but by making ourselves too comfortable and eliminating all volatility from our lives, we do to our bodies and souls what Mr. Greenspan did to the U.S. economy: We make them fragile. 

Inflexibility makes you rigid. Too much inflexibility makes you brittle. 

Flexibility makes you resilient. Too much flexibility makes you mush. 

If you have learned how to deal with minor stresses you will be much more competent to deal with major stresses.

Taleb is not arguing for constant stress or for complete insecurity. He seems to be seeking a middle ground between two extremes—complete security and complete insecurity.

As one of the commenters on the Journal site remarked, we need to find what Aristotle called the mean between two extreme positions.

In the matter of Hurricane Sandy the Huffington Post offered an excellent article explaining how failed government policies made the storm much worse than it had to be.

On the one extreme, governments allowed developers to build anything they wanted on vulnerable beachfront property. Overbuilding in storm areas and flood zones always causes excessive damage.

On the other extreme, the government became so excessively rigid that it could not take the steps necessary to protect the city by burying electrical cables or building sea walls.

As for disaster preparation, government officials knew that the storm was coming but they seriously underestimated the damage that it could cause.

The Huffington Post reports:

Despite ample warning from forecasters that conditions were set for a record storm surge, when Sandy finally swept ashore on the eastern seaboard two weeks ago it still caught many officials and residents badly off guard. Evacuations stumbled in places like Atlantic City, where mixed messages from city and state leaders convinced many to ride out the storm with little understanding of its expected severity.

New York City, which saw the most deaths directly linked to the surge, also faltered in its efforts to get residents to safety. City officials waited until the day before the storm hit to order a mandatory evacuation of flood zones, then told 40 city-run elderly and adult care facilities in mandatory evacuation zones to ignore the order and ride out the storm.

Some residents said the last-minute evacuation order and the decision not to evacuate the city's nursing homes fed a belief that the storm would not be much more severe than Hurricane Irene, which caused only moderate flooding in the city.

Having exposed far too many homeowners to catastrophe and having failed to take steps it could have taken to protect the city, government officials tended to underestimate the storm’s potential to damage the city.