Avian Flu Diary: `Outlier Blindness' & Things To Come

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For many scientists, and a few small subsets of society, the COVID-19 pandemic - and our fumbling global response - comes as little surprise. Preparing for and dealing with the `next' pandemic has been the raison d'être of this blog since 2006, and the prime focus of many others, including CIDRAP, the Johns Hopkins Center For Health Security, Crof's Blog, and the dedicated volunteers at FluTrackers.

Our common message has been that another pandemic is inevitable, and that the world isn't close to being ready.

That this could be so painfully obvious to so many of us, yet dismissed as a `low probability' threat by (literally) billions of others, speaks to the human tendency to underestimate the magnitude of `outlier events', and our inherent belief that tomorrow will be pretty much like today.

Even after the COVID-19 virus emerged, and clearly posed a pandemic threat, people (who should have known better) continued to dismiss its importance, and potential impact for months. Even today, millions of people refuse to believe that SARS-CoV-2 is a real pandemic, and a genuine public health threat.

Ten years ago, in None So Blind As Those Who Will Not Listen, I wrote about this cognitive dissonance during the backlash over the severity of the 2009 pandemic.

The popular `lay’ perception of a pandemic – at least in the western world – seems to be based on novels like George R. Stewart's Earth Abides, Stephen King’s The Stand, and the BBC’s production of Survivors.

George Romero fans would argue that if it doesn’t involve zombies, it doesn’t really qualify as a pandemic.

By those standards, the status of 1918 as a pandemic would be in doubt.

Seven years ago, in The Pandemic Preparedness Messaging Dilemma, we looked (for the umpteenth time) at the resistance to preparing for pandemics and other major disasters by the general public, large corporations, and even governments.

Even agencies that espoused pandemic preparedness turned out to be spectacularly unprepared for COVID-19. And this despite yearly warnings from the WHO, The World Bank, and others that the world was not ready for a pandemic.

Fifteen years ago Dr. Michael Osterholm, director of CIDRAP, presciently likened a severe pandemic to an 18-month global blizzard, where nearly everything is shut down. Many will find themselves without a paycheck, either due to their refusal to work and risk exposure, or because their jobs are simply no longer available (see Baby, it's Cold Outside).

Sound familiar?

More recently, in his 2017 book Deadliest Enemy (see my Review: Deadliest Enemy: Our War Against Killer Germs), Dr. Osterholm revisits the idea of our JIT economy, and writes:

Ironically, the ways we have organized the modern world for efficiency, economic development, and for enhanced lifestyle -- the largely successful attempts to transform the planet into a global village -- have made us more susceptible to the effects of infectious disease than we were in 1918.

And the more sophisticated, complex, and technologically integrated the world becomes, the more vulnerable we will be to one disastrous element devastating the entire system.

In 2008, in Lloyd's: A Pandemic Is Inevitable and in The Lloyds Report: A Closer Look, we looked at their predictions for the next pandemic.

EXECUTIVE SUMMARY

1. A PANDEMIC IS INEVITABLE With historic recurrence rates of 30-50 years it is prudent to assume that a pandemic will occur at some point in the future. The severity of such events is highly variable; some estimates suggest the most severe to date, in 1918, killed up to 100m. Many pandemics affect the old and young; but some (including the 1918 event) can, perversely, affect the most healthy.

2. 1918 MAY NOT BE THE WORST CASE It is certainly true that the 1918 event was extreme relative to other pandemics in history. However many published “worst case” scenarios take 1918 as a base. There is a danger that we over optimise to this one scenario. There are other forms of pandemic than influenza, some have higher case mortality. Pandemic preparedness should consider a range of scenarios to ensure plans are appropriately flexible.

3. ECONOMIC IMPACTS MAY BE SIGNIFICANT A repeat of the 1918 event is expected to cause a global recession with estimated impacts ranging from 1% to 10% of global GDP. Most industries will be affected, some more than others. In particular, industries with significant face to face contact will be impacted significantly. Insurers investment assets may be affected depending on the mix held. Wider economic and social effects may lead to secondary forms of loss for insurers.

4. MANY INSURANCE LOSSES ARE POSSIBLE For some classes of business such as, life and health it is clear that the impact will be adverse. For other classes of business it is less clear but many forms of liability covers including general liability, D&O, Medical Malpractice as well as specific products offering business interruption and event cancellation could be triggered. Inner limits for Pandemic losses (vertical and sideways) may help to contain exposure.

5. SECONDARY IMPACTS MAY OCCUR Events causing significant global and societal turmoil can give rise to considerable secondary impacts. It is far from clear which of these, if any, would occur; but for resilience planning purposes it is worth considering them. For example the lawlessness experienced in New Orleans after Katrina could be repeated if police services are affected. Traditional claims such as fire loss may be exacerbated if fire emergency services have depleted efficiency and if tradesmen are in short supply.

In December of 2012 the U.S. National Intelligence Council released a report called "Global Trends 2030: Alternative Worlds" that tried to anticipate the global shifts that will likely occur over the next two decades (see Black Swan Events).

Number one on their hit parade?

Global Trends 2030's potential Black Swans

1. Severe Pandemic

"No one can predict which pathogen will be the next to start spreading to humans, or when or where such a development will occur," the report says. "Such an outbreak could result in millions of people suffering and dying in every corner of the world in less than six months."

In 2014, the U.S. Director of National Intelligence declared An Influenza Pandemic As A National Security Threat, writing: No one can predict which pathogen will be the next to spread to humans, or when or where such a development will occur, but humans will continue to be vulnerable to pandemics, most of which will probably originate in animals.

The following year, in The Blue Ribbon Study Panel Report on Biodefense, we examined an 84 page Bipartisan Report of The Blue Ribbon Study Panel On Biodefense that looked at our nation’s vulnerability to a biological attack, an accidental release, or naturally occurring pandemic with a highly pathogenic biological agent.

I could list hundreds more reports, studies, table top exercises ( EVENT 201, CLADE X), and clarion calls (WHO/World Bank GPMB Pandemic Report : `A World At Risk) - all warning of our vulnerability to a severe pandemic - and urging greater preparedness.

COVID-19, and its inevitable knock-on impacts - many of which are yet to come - won't be the last major global crises we'll have to deal with in the years ahead. Another pandemic is inevitable - and may be worse than SARS-CoV-2 - as well as natural disasters like CAT 5 hurricanes, earthquakes, floods, famines, and even severe space weather.

We either get a lot better at recognizing - and preparing for - these threats, or resign ourselves to suffering even greater economic and societal turmoil in the future.

To that end, researchers at the University of New South Wales in Sydney, Australia have published an interesting study on `Outlier Blindness' ; our tendency to dismiss, or trivialize, obvious threats.

This 59-page study is heavy on statistics - all of which are well above my pay-grade - but you can get the gist from the press release below. The authors propose a neurobiological basis for our tendency to grossly underestimate `outlier' threats.

While focused primarily on the investment community, there would seem to be lessons here for all of us.

How our brains blind us to 'black swan' economic events

21 JUL 2020

VICTORIA TICHA

Neurobiological factors blind people to making sound investment decisions when markets are hit by large macroeconomic shocks, shows UNSW Business School research.

The outbreak of coronavirus was and still is an ‘interesting natural experiment’ illustrating how people, particularly investors, initially misinterpret the nature of major unpredictable events (known as black swan events), says Scientia Fellow Elise Payzan-LeNestour, Associate Professor in the School of Banking and Finance at UNSW Business School.

A/Prof. Payzan-LeNestour says people tend to grossly underestimate their importance before eventually readjusting their view – though by which time it may be too late. “Our brain is deceiving us in a pervasive and systematic fashion,” she says.

Her latest co-authored research paper: “Outlier Blindness”: Efficient Coding Generates an Inability to Represent Extreme Values sheds light on the neurobiological foundations of this bias, which is at odds with behavioural patterns previously described in behavioural science. With her collaborator from Columbia University, she calls this bias “outlier blindness”.

Insights for business and finance

During the Great Depression, Australia suffered years of high unemployment poverty, low profits, deflation, and lost opportunities for economic growth. But during this time, the government cut spending drastically. As we now know – thanks to Keynesian economics – fiscal contraction only adds fuel to the fire in times of widespread falls in demand.

If history is anything to go by, Australia needs more government stimulus – not less, inasmuch as the current downturn is not the sign of a temporary crisis but of a permanent shift. The findings by A/Prof. Payzan-LeNestour’s research suggests people tend to grossly underestimate the sheer significance of events like the Great Depression while they are living it, and as a result, they do not react as quickly as they should.

The theory proposed by A/Prof. Payzan-LeNestour and colleagues also sheds light on investor risk attitudes in the aftermath of COVID-19, which is quite puzzling at first. Recent research provides evidence that on one hand, COVID-19 made investors more risk-averse for a given level of perceived risk (which is quite intuitive; this probably occurred because of increased fear and panic).

On the other hand, COVID-19 decreased investors’ perception of a given level of risk, which is also quite puzzling and one potential explanation for why the S&P 500 has rebounded 32 per cent since late March. Many market observers are calling this ‘a disconnect from the deteriorating fundamentals’, says A/Prof. Payzan-LeNestour.

Why is this?

The theory she proposes predicts exactly such a pattern, which she recently described in detail with co-authors from UNSW and UTS. “Following the extreme volatility of March, investors subsequently underestimated risk, leading to inflated valuations through downward biased discount rates, leading to a market rebound until such time as perceptions revert towards objective measures of risk,” she explains.

So, what is causing investors’ temporary underestimation of risk following their exposure to extreme volatility? “The brain becomes adapted to very high levels of volatility reasonably quickly – so completely crazy levels of volatility can become the new normal,” which she shows in an experimental study.

Insights for all of us

“Awareness of our own perceptual biases may help us become less susceptible to them, even though they are very ingrained,” says A/Prof. Payzan-LeNestour.

“If you are conscious of them, even if part of your brain is still deceiving you, you may be able to adjust your decision-making,” she explains.

“Ironically, even I (and I’m supposed to know about outlier blindness) was blind to the importance of COVID-19 for months, in the sense that I grossly underestimated its importance and didn’t realise until a few weeks ago that our world will never go back to what it was before,” confesses A/Prof. Payzan-LeNestour. “I guess this reflects the fact that as any scientist, I try to view my own theories with a healthy degree of scepticism.”

She says, hopefully, the dissemination of her research into the neurobiological foundations of investor decision-making will help people anticipate how they are going to react to the next tragedy and correct their view accordingly.

Even though I've been writing about pandemics for 15 years, it took me the first half of January before I finally wrapped my head around the idea that we were facing a genuine pandemic. Like everyone else, I wanted this to be contained in China, and to turn out to be just another `warning shot', not the real thing.

I suppose we all carry a certain degree of `Outlier Blindness'.

I can't tell you what the next great crisis will be, how bad it will be, or who it will affect. I simply operate on the assumption that another shoe will drop sooner or later, and that anything that occurs in the next couple of years will probably be made worse by the concurrent COVID-19 pandemic and economic downturn.