Mother Nature Wins - Again

For the third time in less than twelve months, nature has inflicted massive disruption upon humans whose grand conceit is that they are in charge of the world.

In April 2010, an Icelandic volcano with an unpronounceable name (Eyjafjallajojull) disrupted air travel - particularly air freight - across the Atlantic Ocean. Then a series of unusually severe winter storms disrupted air and ground transportation throughout Europe during December.

The consequences of these two natural events were serious but mostly as a result of stranding unfortunate travelers and, for a relatively short time, closing down supply chains that were dependent on air freight. This time, however, an earthquake of magnitude 8.9 or 9.0 (it depends on the reports) off the coast of Japan, followed by a series of tsunamis, has caused major damage to infrastructure, homes, industry, roads and power stations.

Many major factories - among them manufacturers of semi-conductors, exported automobile engines and parts, aircraft engine and structural parts, home appliances, elevators and power-generation systems - are severely damaged and will take weeks, if not months or years, to bring back into full production. The consequences to the global supply chain are not yet known but will not be trivial.

The partial destruction of a major nuclear power station complex has resulted in electricity shortages that are likely to result in rationing by rolling blackout. Since many production processes can neither be started up nor shut down quickly, the use of backup generators will necessarily be extensive while energy related costs will increase significantly.

The result, then, will be reduced supply, increased prices, and lost business. For companies, if not for the Japanese inhabitants of the region, the situation is probably uncomfortable but not devastating.

The lesson that needs to be learned is the one described in Nassim Taleb's book 'The Black Swan': far worse things, albeit of low probability, than we ever really expect are likely to happen. The standard method of analyzing risk combines consequences with probability but when the consequences are devastating or existential, such a simplistic analysis entirely misses the point.

A few businesses are good at worst case scenario planning but most regard the expenditure of time on such matters to be a symptom of negativity. Since the career prospects of negative-thinking employees are dim, the consequence, in most organizations, is that relentlessly positive short term attitudes survive and real dangers are ignored.

The ancient Greek myth of Cassandra, able to foretell the future accurately but doomed never to be believed, is a lesson upon which politicians and senior executives should reflect. More important, however, is Warren Buffet's Noah Rule:

"predicting rain doesn't count, building Arks does."

Just because the probability of an event is low, does not make it any the less dangerous when it does take place. The reality is that, at the end of any given period, an event either happened or it did not. If the event does not happen, there is no problem but if it does, even if the probability was one in ten thousand years, the consequences are one hundred percent real.