The Future Depends on Your Risk Attitude
Michele Wucker, policy analyst, CEO and founder of business strategy and development company Gray Rhino & Company, and author of the top English-language bestseller in China, The Gray Rhino, teaches us how to be prepared for the significant threats that we may fail to recognize.
Standing right next to the “black swan”, a popular term which refers to improbable and unforeseeable events, is the “gray rhino”, an expression coined by Michele Wucker to represents describe highly probable threats that have a potentially high impact yet are often ignored.
Why do leaders and decision makers so often fail to address obvious dangers before they spiral out of control? That is the topic of Wucker’s book, TheGray Rhino, which is essential reading for managers, investors, planners, policy makers, and anyone else who wants to understand how to avoid getting trampled in an increasingly changing world.
In this interview, Wucker discusses how to avoid “gray rhinos” in both our professional and personal lives, how people should train themselves to recognize risks and do “small but right things,” and what entrepreneurs can do to protect themselves from “gray rhino” events such as the US-China trade war.
Q. The gray rhino theory tells people to avoid obvious risks, but some people feel the need to take risks in the hope of making a breakthrough in innovation. How do we balance these two ideas?
A. There are two kinds of risks. There are positive risks and negative risks. The first involves people doing things that no one else has ever done before and therefore creating something new. That’s the risk that you want to promote. What you don’t want is the second kind of risk, the one that’s taken without adequate consideration. Such as when people see markets going up, they often decide to borrow money to invest in more shares and push the market up further, when in actual fact they don’t really understanding what’s going on at all. That’s something that we’ve been seeing in the United States. In the last ten years, the markets went way up because of cheap money and a lot of gullible people being pulled in at a time when the smart money and institutional money were starting to pull out.
Q. How do you differentiate between healthy risks and bad ones?
A. The problem with evaluating risk is that the answer is not necessarily obvious at first. But some of the questions to ask are: am I trying to create something new? Have I thought about the possible scenarios that could happen? Have I come up with ideas of what I would do in each of those scenarios? If you see a stock market that has gone up by 300% and it has been going almost straight up for 18 months in a row, and you know the interest rates are about to turn, does it really make sense to borrow money to buy more stocks? On the other hand, there are a lot of entrepreneurs who are all about taking risks, but not all of those risks necessarily pay out. You have to realize that some failures are steps on a path towards success. So it’s very difficult because you may take a risk thinking you have a decent chance at success. And you may be wrong. But that doesn’t necessarily mean that it was a bad risk to take.
Q. There is general consensus on many of the bad risks in the world, such as water shortages and global warming, but some people choose not to worry about them because they’re not seen as immediate risks. Why do people usually wait for leaders and policy makers to enforce a change before making a change themselves?
A. I created the gray rhino as a metaphor in the hopes of getting people to focus on those long-term risks. Of course, many people think that those risks are centuries away and that they’re not close enough to see and therefore they don’t have to worry about them.
Policy is about affecting the behavior of many people. We shouldn’t wait for policies to change before we do the right thing. In Chicago, for example, a new tax on plastic bags was introduced. It didn’t really affect me because I already carried re-useable bags when I went to the grocery store. But why should we wait for a bag tax before we do the right thing? Realizing that you can make changes ahead of time is very important.
One person can have a much bigger impact than you think. A snowstorm is made up of lots of snowflakes, after all. One of the reasons I think people don’t always do the right thing is because they don’t feel like they have the power to change anything. When you think about the fact that it takes hundreds or thousands or in many cases millions of people to curb gas emissions, it shouldn’t diminish you, it should encourage you. You have the potential to join your power with the power of so many other people.
Q. Besides the big issues, what are some other typical gray rhinos that we come across in our daily lives that we should be aware of, and how can we prepare for them?
A. I think there’s a connection between how we handle challenges in our personal lives, at work or in our communities. You always hear about people who are workaholics, who are absolutely on top of everything at work and try to avoid any form of a crisis, but their personal lives are a mess. I don’t think you can separate the two. Those small things that you avoid in your personal life, like making that doctor’s appointment or changing the oil in your car, will end up taking over and affecting the work life that you so carefully constructed.
Therefore I think it’s very important for people to look at gray rhinos in a holistic way. By changing some of your personal habits, you can improve your ability to handle gray rhinos at work as well. It’s a skill, a muscle that needs to be exercised, to recognize a risk and know how to deal with it. The more you start working on your personal life, by recognizing the things you need to deal with, the sooner that skill will transfer over into your job.
Q. How can entrepreneurs better prepare themselves for gray rhinos?
A. In general, I think the first thing entrepreneurs should do is to come up with possible scenarios of what may happen in the future, based on the present. What is the worst-case scenario for your business if the trade war drags on? What is the best-case and medium-case? What are your strategies for each of them? It’s important to visualize your strategies ahead of time and to assess whether or not you have the right resources to manage the worst-case scenario. Just by facing up to the possibility will help you be better prepared. That way you’re not making decisions in panic-mode or at the end when you don’t have a lot of options available to you. A further step is to consider whether any opportunities could present themselves in the scenarios you thought of and how you could make use of those opportunities.
Q. Based on your experience in handling gray rhinos, what is your prediction on the US-China trade war?
A. The trade war is a very big gray rhino. It’s both a political issue and an economic issue. There has been a lot of concern over the global economy being close to the end of a business cycle, and starting a trade war accelerates that growth cycle. It increases the risk of an economic recession.
There is a lot at stake for the US. There has been a great deal of tension over growing inequality in recent years, seeing as most of the country’s monetary expansion went into stock markets and not into jobs and wages. There’s a lot of tension over jobs that have been lost to automation, and it’s the oldest political trick in the book to blame that on immigrants and on other countries.
With that being said, many countries have also felt that China’s trade policies are more suitable for how China used to be in the past, where it was a developing country, and not the world’s second largest economy. And as China’s economy has grown and gained more economic power, the US is now tapping into some of their resentment of that and the perception of China as more of an economic threat.
I think there are areas that China would be very much in its own interest in addressing. For example, strengthening intellectual property protection as China develops more and more intellectual property of its own, is very much in its own interest. It is also in China’s interest in terms of smart power to open up a conversation about countries that are still developing, how their growth in technology might be used to help countries that don’t yet have the power to develop the technology themselves. And then in terms of access for foreign investment, I think China has already recognized that it is in its own interest to bring in more investment.
So I think it’s more a matter of China identifying the areas in which it already has its own interests. There is still this perception internationally that China’s walk doesn’t yet match its talk. So China could really dramatically change the situation by making some moves that are already in its own interest, but doing so in a way that portrays them as proactive rather than reactive.
Q. Well-known Chinese economist Xu Xiaonian suggested that the Chinese economy is facing several sharp-horned gray rhinos – the trade war, and also low productivity and mounting internal debt. Based on your observations of China, what do you think of Xu’s comment?
A. I think increasing productivity is a very good focus to have. Questions arise as we start using more artificial intelligence and automation, but in some cases you can actually dramatically enhance human capabilities if these advancements are used responsibly, particularly if there is a focus on investing in human capital.
So it’s very important for countries to look at the resources that they are putting into building their human capital, as well as financial and physical capital. In the US, for example, we have the problem that there are much bigger incentives to put financial capital into secondary securities markets where they’re not necessarily going into productive activity. Obviously, China’s economic strategy is very different. But I think in any economy, no matter how well it’s performing, it’s important to ask yourself over time, what are the things we’re incentivizing and the things that we’re not? And are we really putting priority on the things that we need to do?
The other part of that question involves how markets can help allocate capital. How the government can provide a proper policy environment is a very difficult question that I know China has been wrestling with over the years. How do you incentivize the things that are important without burdening the market and slowing down the things that the market can do well?
The other risk is debt. China has done a very good job in identifying the financial risks at stake and has taken some steps to deal with those risks. It’s very difficult to slowly let the air out of asset bubbles instead of letting them pop. But I think China has very much done the right thing in starting its attempt to do that. We need to make it easier to restructure debts that aren’t doing what they ought to be. And realize high risk borrowing pays higher interest rates because they’re higher risk.
Things like that are much easier to do if done in an orderly way. Just look at the difference between Argentina’s collapse in 2001, which was completely chaotic, and Greece in 2012 when they restructured. Obviously it wasn’t easy, but it was done in a much more orderly way. And so that amount for foresight in making difficult decisions can really make a difference in the way it’s managed.
I think that the sooner and more strategically those decisions are made, allows time for a more gradual approach, instead of having to clean things up after a crisis.
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