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Behavioral Economics

The Ball is in Your Court: What can Wimbledon clause teach us about preparation for rare risks?

Ball long

Has the current coronavirus crisis shown us the importance of forward-looking risk management?

A novel coronavirus emerges from Asia and spreads rapidly to a number of countries. Travel and free movement are curtailed and the wearing of masks in public is commonplace. But then the virus suddenly disappears having infected less than 10,000 people and killed less than 1,000. It’s 2003 and SARS sends shock waves around the world.

What’s All the Racket?

The shock waves reach all the way to a subcommittee of the All England Lawn Tennis and Croquet Club. Unlike many other sporting events, the organizers of Wimbledon deemed the risk worthy of preparation, so they accordingly added a pandemic clause to their insurance policy. That decision may seem like a master stroke in light of the current coronavirus pandemic that has led to the cancellation of major sporting events on an unprecedented scale. So did the All England Club know more than everyone else?

Game, Set and Match

No. Pandemics are not new. Epidemiologists have been warning about the potential of a new pandemic outbreak for decades. So what happened?

Pandemics are classic examples of low probability, high severity events. They happen relatively infrequently, so their likelihood of occurrence in any given year is very low. This often results in a false sense of security, with risks being overlooked or underestimated despite the potential for the impact to be significantly adverse.

In theory, these risks are simple to manage. Identify the threats. Consider the mitigation options. Compare costs and benefits of implementation. Implement the optimal solution. So why then were so many event organizers ill prepared?

Serving Up Surprises

SARS was a warning, along with other outbreaks like MERS, Zika and Ebola. However, because threats cannot be foreseen with certainty, they often lead to oversimplification. This, together with other cognitive biases such as overconfidence, can lead to sub-optimal decision-making.

Most people don’t think naturally in terms of probabilities, and are generally more comfortable with binary thinking. In other words, either something will happen, or it won’t. Because low probability events occur very seldom by definition, those who ignore and fail to prepare for them are unlikely to be adversely impacted. It can even pay to ignore improbable events. But if there is a 1% chance of a highly improbable event occurring in any given year, that event eventually becomes inevitable when viewed over longer time horizons. Those who don’t prepare will inevitably be found wanting.

The Aftermath

Crises precipitate change. Once an improbable and extreme event occurs, everything changes. Preparations are made after-the-fact, with protection being sought no matter the cost. But memories eventually fade and risk perceptions change. This psychology shapes perception, and the panic-neglect cycle repeats itself again and again. So how do we break the cycle?

Practice Makes Perfect

Forward-looking risk management frameworks should be designed to enable risk-based decision-making. This should incorporate the following:

  • Horizon scanning to ensure that new and evolving risks are appropriately assessed
  • An analysis of plausible and extreme scenarios, along with the development of proactive action plans for multiple futures
  • Forward-looking key risk indicators to provide early warning signals to trigger intervention prior to risks occurring

The Baseline

The All England Club couldn’t predict the future. They just had a competent risk and finance subcommittee that understood the value of forward-looking risk management and proactive decision-making. Their payout is expected to have saved them more than £100 million, and has even allowed them to make payouts to players for a tournament that was cancelled due to circumstances beyond their control.

Originally published in FA News, August 2020.

  • behavioral science
  • Butlion
  • cognitive biases
  • coronavirus
  • COVID-19
  • crises
  • pandemic
  • psychology
  • risk management
  • SARS-CoV-2
  • Wade Butlion