麻豆传媒

News — Watching a news conference on the tragic wildfires affecting the Los Angeles area, I was struck by a comment made that those wildfires were “unprecedented.” We’ve heard that word uttered time and again to describe any number of natural and man-made disasters over the years from bank CEOs after the 2008 Global Financial Crisis (GFC), health officials describing the pandemic and company executives briefing investors on the Salt Typhoon cyber-attack on telecom and internet service providers. And yet all of these events, though rare, should have been anticipated with effective risk warning systems, resources and mitigation plans put in place in advance.

Such events have been described at times as “Black Swans” or even “Gray Rhinos,” but in fact they are more akin to “Killer Bees,” with deaths from Africanized honeybee stings a rarity but possible. Being able to distinguish Killer Bees from their less dangerous European honeybee cousins could save your life if you have severe allergies to insect stings. Applying the same mentality to managing risk from rare but possibly devastating events could avoid one day having to tell constituents, investors or regulators in the aftermath of a major risk event that it was unprecedented.

Killer Bees, Black Swans and Gray Rhinos

Nassim Taleb’s Black Swan theory, first described in his book “Fooled by Randomness,” posited that such events are extremely rare and unpredictable. The 2008 GFC was to become the poster child of Taleb’s Black Swan theory. Years later Michele Wucker introduced the world to her Gray Rhino theory to explain events such as the 2008 GFC or major natural disasters that had a high likelihood of occurring and were predictable but for whatever reason were ignored.

Both theories have merit trying to explain major crises and disasters but do not adequately characterize the subtleties in how such crises relate to other similar but less severe events.  The 2008 GFC was a low probability event consistent with the Black Swan theory due to its severity, however, it was also possible and consistent with the Gray Rhino theory.

We had seen asset bubbles form and pop in the past, perhaps not at the scale and scope as the mortgage crisis in 2008, but we had evidence of prior regional downturns in housing such as the 1980’s collapse in the oil patch states that was used by Freddie Mac and Fannie Mae as stress tests in the years prior to the 2008 GFC.

The 2008 GFC isn’t the only risk event that can’t fully be explained by either theory alone. The pandemic of 2020 was a low probability event that also was possible. Health organizations for years leading up to that pandemic had been expecting such an event, and there was the 1918 influenza pandemic that killed millions of people worldwide. Natural hazard events such as the LA wildfires or man-made disasters such as massive cyber attacks also don’t fit neatly into either theory, which while being low probability events are possible based on previous events of lesser severity.

Such low-probability, high-severity events are more akin to Killer Bees. They’re characterized by outcomes that we’ve seen perhaps before in different and more benign circumstances – less likely for sure, but deadlier than what we’ve seen in the past.

Unless you are an entomologist, a Killer Bee looks very similar to a regular honeybee.

However, while the sting and venom of a Killer Bee is about the same as a honeybee, their aggressive hive behavior tends to send swarms of bees out in search of intruders to attack. When they strike, the amount of venom delivered could put someone into anaphylactic shock. Moreover, the range of Killer Bees has moved westward in the U.S., having initially shown up in Texas in the 1990s. So, what looks like a regular honeybee in California could be a Killer Bee.

While it is unlikely that you encounter a Killer Bee on a walk in San Diego, your agriculture extension office is likely to know about their existence and potential harm, information that is available and should increase awareness of this risk for vulnerable people. The Killer Bee theory describing low-probability events that are possible based on similar events in the past with less severity explains major man-made and natural disasters such as the 2008 GFC, 2020 pandemic and LA wildfires.

Armed with this theory of major risk events, what can risk managers do to guard against such extreme outcomes?

Guarding Against Anaphylactic Shock to Your Organization

People who suffer from severe allergies to insect stings, including bees, must take special precautions from the rest of us when venturing outside, particularly where bees are active. Avoiding flowering bushes and colorful clothing and carrying an EpiPen are clearly good risk management strategies when it comes to bee sting preparedness. Being aware that Killer Bees might be in the area if you are allergic to them only heightens the need to take actions to reduce the possibility of being stung multiple times.

Analogously, banks in 2005 that had huge exposures to mortgage credit risk or those in 2023 that were exposed to huge unrealized losses in their securities portfolios were severely “allergic” to the potential for massive losses though they were ostensibly low probability events.

There were other periods in the past when banks suffered large losses from mortgages or rate-sensitive securities that should have alerted them to the potential for a severe risk event given the buildup of those risks in their portfolios. Such exposures should have made them more sensitive to the possibility, even if, remotely, a major “sting” could kill them. Yet, instead of sidestepping the potential danger these companies rather hit the “hive” with a stick and forgot to bring their EpiPen.

The same holds for public officials in California that observed wildfires for decades fanned by the Santa Ana winds, though the likelihood of such widespread damaging wildfires was low.

What is unprecedented about each of these risk events is their severity.  That is, the likelihood of such high-severity events is low, but similar, less-severe events have been observed in the past which should at least heighten managers’ sensitivity to high-risk scenarios.

Risk managers cannot afford to be myopic when it comes to the potential for severe events to manifest. Developing playbooks for “worst case” scenarios is critical in order to bring awareness to the possibility of such events and to build support for resources that might be needed for events of greater severity. Organizations that have unique risk exposures and concentrations have even greater reasons to harden their risk management capabilities against low probability, high-severity events.

Parting Thoughts

The vast majority of so-called “unprecedented” events are actually more extreme versions of past events that bear some but not exact similarity to them. They appear out of the blue but are possible.  Much like Killer Bees that look like ordinary honeybees, severe risk events may be unlikely. But as Mark Twain said, “history doesn’t repeat itself but often rhymes.”

is the Academic Director of the at the University of Maryland (UMD) and a Professor of the Practice and Executive-in-Residence at UMD’s Robert H. Smith School of Business. Before joining academia, he spent 25-plus years in the financial sector, as both a C-level risk executive at several top financial institutions and a federal banking regulator. He is the former managing director and CRO of Citigroup’s Consumer Lending Group.