• EconAfterHours

Is COVID- 19 really a Black Swan event?

Written by Riya Mathur


This article seeks to argue one of the most prominent reasons why the Coronavirus has become a crisis of such scale. We’ll take a look at the events leading up to the global pandemic, and further explore where those who are predominant public commentators went grossly wrong vis-à-vis the experts. Instead of faulting communities, this article aims to address the elephant in the room. Perhaps the problem is deeper than we all think: something that affects underlying principles of economics, finance and human behaviour rather directly, and ultimately culminating into a classic fat tail crisis.


Just as the number of casualties circling the globe rose, so did concern about lax and delayed responses of many governments. As William Hanage, Associate Professor of Epidemiology and member of the Center for Communicable Disease Dynamics at the Harvard T.H. Chan School of Public Health puts it,

“We were not outwitted, outpaced or outflanked. We knew what was coming. We just twiddled our thumbs as the coronavirus waltzed in.”

Due to lack of adequate testing kits, red tape, uncoordinated leadership efforts and exponential growth in the number of deaths, every economy, no matter how great, is now reduced to a downright mess. If then, in some utopian image which is long gone, we had all come together at the earliest to form a united front against the Coronavirus, the world might have been in a much better position than it is in today.


NOT A BLACK SWAN


Blunt truth be told, real data shows a far greater number of occurrences of extremes than most models would suggest. Plagues and epidemics have long been a part of history than we would like. In fact, historic evidence dates back to as far as 30th Century BC with the prehistoric epidemic of circa 3000 BC, then followed by other major devastating events like the Antonine Plague (165-180 AD), the Plague of Cyprian (250 -271 AD) and the Justinian Plague (541-542 AD) which went on for overwhelmingly long durations.


Maybe these tales are way too old to be deemed important today as civilisations must not have been as grand and capable. But then again, the plagues of America (the 1500s), London (1600s), Marseille and Russia (1700s), and the spread of other fatal diseases like the Spanish flu (1918-20), the Asian flu (1957-58), the epidemics of AIDS (late 20th century), Swine flu (2009-10), Ebola (2014-16) and Zika (2015-17) are just some of the few we know which struck the world more recently. The point here is dauntingly simple- just like financial crises, prominent fields of study continue to grossly underestimate the chances of health crises gripping the world economy. Thus, this ‘Black Swan event’, as it being called, might just be a white one.


However, there is more to the curious case of the Coronavirus than a long history of health crises. While a Black Swan event can broadly be described as something that is downright unimaginable, the current pandemic took shape in front of everyone’s eyes. So while the Coronavirus can be compared to other devastating occurrences of such magnitude in terms of its rarity, it is not a typical Black Swan event; its defining factors being the rate of its transmission and the mere fact that we, in a nutshell, saw it coming.


While there is indeed a number of similarities between the virus and the flu, there was also ample overwhelming evidence of its characteristic fatal traits. That is, mankind failed to act or even panic early. Ever since it surfaced in November, the dynamic nature of the risk of the Coronavirus has been blatantly undermined. Indeed, what sets the Coronavirus crisis apart is its nature, that of an infectious and highly communicable disease. This failure of people and governments to act on these signs contributed to the convexity, or the exponentially rise, of affected cases.



THE FLAWS IN THE SYSTEM


There are significant flaws in the fundamentals of the very subjects which are supposed to guide us in times of such crisis. Consider Economics and Finance, based on theoretical models but two of the most widely used subjects in fields ranging from international trade, to speculation, to stock management. Most of these models work on the innocuous assumption of stability, and maybe that’s where the problem lies. In layman's terms, this means all’s well with a few exceptional moments of crises, which seems rather optimistic for a complex mathematical model.


Nassim Taleb and Mark Spitznagel describe it rather well,

“The same flaw found in risk models that helped cause the financial meltdown is present in current models invoked by ‘experts’. Anyone relying on them for conclusions is deluded.”

The tendency of economists to grossly discount the future repeatedly leaves the system in no place to deal with pandemics. As a consequence of such ignorance, the economy turns out to be ill prepared. No doubt, it is tempting to see such economic clashes as happenings which are isolated -after all, they do not happen every day. But that is missing the point. Simply put, inherent properties such as an underlying ‘stable equilibrium’ tend to discount the importance and probability of events like major crises, i.e. the state of near- perfect balance tends to undermine risk.


THE WORLD SHOULDN’T BE A TURKEY


A similar argument has been brought out by Taleb when he introduced the concept of Extremistan, the state where outliers can drastically affect the aggregate in ways Mediocristan cannot comprehend. In layman terms, while inequalities in Mediocristan do not affect the collective substantially, the opposite is true for Extremistan, a state where “inequalities are such that one single observation can disproportionately impact the aggregate, or the total.” This is to say that events involving fatter tails like the Covid-19 pandemic which belong to Extremistan can not be compared to those associated with Mediocristan. In a section called "The Strange Country of Extremistan”, Taleb details how using analytical tools for situations from Mediocristan while not really being in it will lead to great ‘surprises’ which frankly, we will not be ready for. Like the little turkey feeling loved until its head was chopped off all of a sudden.


The interesting thing about the argument is its nature, which was not philosophical. The model of Mediocristan goes on to include instruments of analysis like the bell curve and the normal distribution. Furthermore, Taleb’s four quadrant system, where he points out the importance of the much ignored fourth quadrant, marked with uncertainty. Taleb further argues how a majority of attention must be allocated towards the last quadrant for the sake of the economy itself. Creating our own rendition of the renowned Pareto 80-20 principle could perhaps make the idea easier to absorb. When as little as 20% of our inputs could decide the fate of as much as 80% of our outcomes, models in the future must explore the possibility of shifting this 20% towards the fourth quadrant which has been left ignored or quite some time now.



The low probability of such an event taking place must not overpower the ability to foresee the consequences if at all it occurs, which can indeed be destructive for any economy, as clearly visible. It just takes one such occurrence to have a disproportionate effect on the entirety of the system. Graphically, a low probability refers to the tail segment of our traditional distributions. When all these systems in the world are taken together, the tails are then much fatter than anticipated. In layman’s terms, the chances of this black swan event are actually higher than these models make out to be.


In a nutshell, applying everyday statistics to be able to ‘predict’ the importance of the fourth quadrant is an idea so ill conceived, it is frightening. The mentality of brushing aside the past with the confidence that the worst is over forever has never worked in history and will not even after the Coronavirus pandemic ends.


DISCOUNTING HEALTH IN THE FUTURE


In a nutshell, our way of perceiving the future leaves little to no space for crisis accommodation. These events are just rare, unexpected and thus do not occupy a larger share even in some of the most common theories we see in practice today. Consider the global economy like an intelligent child, one who has sorted all of his commitments out, given the little white assumption that things will go as planned, near cent percent. More often than not, they do. But the issue lies in the fact that the coping mechanism in case they don’t is not strong at all. This high potential child might just struggle to stay afloat in a pool of dejection and never recover, if at all tragedy strikes, for he has never focused a lot on how to deal with failures. Or like a sportsman who has spent all his life honing his attack skills, but his defence remains poor.


The phenomenon of discounting the future seems too common to be given thought to, let alone form lengthy theories about. Bring in Owen Cotton-Barratt’s Discounting for uncertainty in health’, which specifies in great detail the predominant reasons why we humans tend to discount the future. The first and most easy to absorb being the time difference; which is the preference shown by every human in receiving benefits sooner than later. Opportunity costs refer to the trade-off between allocating resources in the future instead of today, which is seen like an additional cost. And finally, the uncertainty factor, because it will be a shame to tie up a hefty amount of time and resources for something that never happened.


While these factors can be applied to any decision between today and a time in the near future, the matter of health is rather sensitive. Should the debate be as objective when it is the health of the people that is concerned? The main argument against this is quite straightforward: the gains from good health tomorrow must not be compared to capital gains as in cases of wealth. After all, the health of the people and thus that of the country is priceless. Nobody wants to see people dying on the streets due to anything, natural or otherwise. Nonetheless, good health today being exactly equal to good health a year from now does not seem to fit either. Those supportive of discounting matters of health do agree with one thing unanimously- failure to discount health properly will skew costs and expected benefits to a great extent, affecting health insurances, costs of prolonged treatment as well as the average citizen’s tendency to seek medical care and treatment when necessary. As an immediate result of poor costing and health management systems, future improvement and maintenance will be inefficient and companies (or organisations) may end up following ill-conceived policies including but not limited to cost cutting and investment decisions. Furthermore, the inefficiency of the health market provides very little incentive to providers to improve upon their practices.

As a consequence, when difficult times ensue, no matter how strong a system may seem, it will always be under-prepared, leading to a larger volume of adversities than could have been.


BOTTOM LINE


What’s the parallel here with respect to the Coronavirus pandemic? We just weren’t ready. Partly because nobody saw it coming, but for a major chunk of its timeline, mostly because we just concluded we didn’t need to. Actions were delayed, governments smug and horrifyingly complacent with their great capacities to handle any catastrophe that may come their way.


The tendency to discount future consequences doesn’t raise many alarms, in fact we relate to it (for example, the mother of your spectacled author kept warning her against binge watching on Netflix every night). But when countries are involved and it’s a global health emergency, that’s just waiting for impending disaster to strike.

The simple existence of a system cannot be proof of its robustness in terms of efficiency and relevance.

In the famous words of A. N. Whitehead,

“There is no more common error than to assume that, because prolonged and accurate mathematical calculations have been made, the application of the result to some fact of nature is absolutely certain.”

The truth is not subject to convenience, if worldly data signals such inadequacies of popular models, brushing them under the carpet can only work for so long.


THE NEW NORMAL


All of this being said, what is the new normal being proposed here? Tedious as it may be, we need stronger strategy for the planned course of action in case such conventionally classified rare events do strike. On a national, international level this means greater allocation of time and funds towards this task.


Now, here is the thing. The reason such events are gladly considered to be rare is not just a peace of mind. This question, elaborated in great depth in David Orrell’s ‘Economyths: 11 ways economics gets it wrong’, brings out the trade-off between ‘stability and efficiency.’ In order to ensure greater stability in times of crisis, there will be a shift of attention from the current state of the economy to a possible future where things would go haywire. Naturally, there is far too big an opportunity cost involved here, thanks to how little such exceptionally rare events add up to in the scheme of things. Is it wise to set aside a greater amount of resources for a future that might just never come? Could this idle capital, power, time be used to tend to other (equally, if not more) important and immediate matters of concern? Even if the government decides to, will the public accept such a rationale?


The effects of this virus will be etched in our minds for a while, so it is crucial that we start acting now. Introduction and regulation of new health products, in terms of technology, availability and pricing is mandatory for a country which houses as large a population as India does. It is tragic that people start dying of a disease because they did not have access to facilities which are in fact present in the country at that very moment. In terms of regulation, it isn’t just a question of making necessities available, but also putting an end to whatever shoddy illegal practices are going on out there. After all, times of catastrophe are gold mines for shady activities to thrive. As an example, the 2009 swine flu epidemic wasn’t all that the U.S. government had to tackle. Curbing the proliferation of as many as 120 products which claimed to cure or even better, prevent the disease altogether was a huge task for the US Food and Drug Administration (USFDA). The only thing worse than spreading panic among the people in case of a public health issue would be to allow the spread of such businesses which would not just feed off the vulnerable but also make it more of a nuisance for them to seek professional medical advice. Regulation, opposed by free and efficient market thinkers vehemently, is the need of the hour. Because, well again, there is no free and efficient market to think about.


Taking the conversation forward, revamped cost management including value measurement of unforeseen crises like the one we are facing right now could go a long way. Symptoms of coronavirus have been linked to several other common cases like the flu, malaria etc. As a potential future policy, better measurement of outcomes is integral to fight against such viral health crises. Depending on the condition of the patient, the entire ordeal of reaching the concerned organisation first to start treatment to follow-up routines, makes the process strenuously complex. With growing advancements in tech, surely, the health system as we know today cannot just be made more efficient but perhaps more resilient to global pandemics, if any more.


In reality, the no fat tails approach had to have affected our lives. Nobody will come out unscathed out of this pandemic, and despite optimistic opinions, the way of life is not going to go back to the way it was anytime soon. Perhaps, this continued ignorance has persisted because we haven’t been trained to look for it. Nobody can predict the future, but we can surely be better prepared. The way our routine life has been disrupted, what humanity needs is a call for a fundamental shift in the way we perceive our future.


The functioning of any economy remains greatly affected by extremes and it is only when these forces are not in play that ‘equilibrium’ can be obtained. The real economy is not the stable textbook economy, and it had definitely not been in any great equilibrium as far as health is considered, even before Corona wreaked havoc. It is high time intellectuals see the reality for what it is, not what it might just be.


Sources

  1. Nassim Nicholas Taleb, “The Black Swan: The Impact of the Highly Improbable”, Penguin Random House LLC, 2007

  2. David Orrell, Economyths: 11 ways Economics gets it wrong, Icon Books and John Wiley & Sons, 2010

  3. William Hanage, “Testing for the coronavirus might have stopped it. Now it’s too late”, The Washington Post, March 6, 2020, https://www.washingtonpost.com/outlook/coronavirus-testing-united-states/2020/03/05/a6ced5aa-5f0f-11ea-9055-5fa12981bbbf_story.html

  4. Olga Khazan,“The 4 Key Reasons the U.S. Is So Behind on Coronavirus Testing”, The Atlantic, March 13, 2020, https://www.theatlantic.com/health/archive/2020/03/why-coronavirus-testing-us-so-delayed/607954/

  5. David J. Torgerson & James Raftery, “Discounting”, US National Library of Medicine, The National Center for Biotechnology Information, National Institutes of Health, 1999, PMCID: PMC1116731, PMID: 10506056 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1116731

  6. Owen Jarus, “20 of the worst epidemics and pandemics in history”, LiveSCIENCE, March 20 2020 https://www.livescience.com/worst-epidemics-and-pandemics-in-history.html

  7. The Global Priorities Project, Discounting for uncertainty in health Owen Cotton-Barratt, 2014 http://globalprioritiesproject.org/wp-content/uploads/2015/05/DiscountingHealth.pdf

  8. Robert S. Kaplan and Michael E. Porter, “The Big Idea: How to Solve the Cost Crisis in Health Care”, September 2011, HBR https://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care

  9. David Siegel, “Extremistan”, The Medium, Aug 20, 2019 https://medium.com/@pullnews/extremistan-e55dae7b4f1d

(Picture 1 sourced from https://www.siasat.pk/forums/threads/the-black-swan-event.675276/)

(Cover Picture sourced from http://rothbardbrasil.com/en/making-sense-of-the-black-swan//)


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