Black Swans and Brexit – Managing the Unknown-Unknown

Atula Abeysekera

…there are also unknown unknowns — the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is [in this] category that tend to be the difficult ones.”
(Donald Rumsfeld, 2002)

Sometimes, from seemingly harmless causes come harmful effects. When those effects make themselves known, it seems obvious that the effect was always going to happen. Such events are Black Swans. A Black Swan Event has three key characteristics:

(i) it occurs outside projected expectations (a fat tail to a distribution curve);

(ii) it carries an extreme impact;

iii) it seems explicable after the fact.

Good examples of Black Swans are Urban Unrest (2011), Volcanic Ash Cloud (2010) and the Fukushima Disaster, Japan (2011). Complex interdependencies in modern societies make it more likely that emergencies will require a greater degree of co-ordination across government. The Brexit process will test this to the maximum.

The government has made a reasonable start on this. A good example is the developments to civil contingencies planning which is the extensive contingency plan to prepare for extreme flooding in England. But the Government has not always been so proactive.

Business offers some useful ideas which can lead to meaningful progress in this area. Recent Black Swan events such as the financial crisis, the BP oil spill in the Gulf of Mexico and the preparation for Brexit have prompted businesses to plan for extreme events and revisit their risk architecture. A holistic governance structure and enterprise risk management are required to proactively manage ‘unknown-unknown’ risks. A more robust architecture is needed to mitigate the effects of such occurrences.

We recommend a strengthening of the government’s resilience planning:

1) Create an independent oversight by creating an Office of Risk Management (ORM) with external expertise. The model for the ORM should be similar to the Office for Budget Responsibility (OBR). The OBR was created in 2010 to provide independent and authoritative analysis of the UK’s public finances. Similarly, ORM will encourage the capture and escalation of emerging risks at the grass root level to analyse and identify potential and emerging Black Swans;

2) Develop quantitative capabilities to analyse emerging Black Swans. The Foresight Horizon Scanning Centre should be expanded and, given its strategic importance, be moved permanently to the newly formed ORM. This will ensure that the study of emerging risks is coordinated centrally;

3) Develop a stress-testing program to simulate extreme events involving UK’s civil, economic and national security risks. The point of this exercise would be to design with several scenarios that could significantly impact the country and then design an effective contingency plan to mitigate the effect of these risks. Business modeling techniques could contribute to a better understanding of risk interactions quantitatively.

In summary, we propose that the government implement the changes to the
(i) way risk management systems are overseen and;

(ii) quantitative capabilities of the UK government when managing civil, economic and national security risks.

It is important that the government acts to reform its risk management framework. It must do so swiftly, as what is at stake is the life of the nation during the Brexit negotiations.

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