No doubt the Bank of Israel economists who upgraded their forecast on Monday for economic growth this year to 3.7% from 3.4% took into account all the usual parameters. What they didn't consider (and to be honest, how could they?) is that old problem of the Black Swan, even when it was flapping its wings in their faces.
The same day that the central bank was presenting its newest figures on the economy, northern Israel experienced another earthquake.
It was a small one that caused no damage, but it was the latest of a series of minor tremors over the last week, While swarms of minor quakes are not predictive of a big one, they are a reminder that Israel sits right on the Dead Sea fault, which is prone to producing major temblors roughly every 100 years.
The danger within
Black swans are events that are rare and hard to predict, but when they occur, they upset people's plans and predictions, whether they are stock market investors, scientists, engineers, homeowners or Bank of Israel economists. And, as Nassim Nicholas Taleb, an investor and author who has written extensively on this subject, explains – Black Swans are dangerous mainly because no one can effectively prepare for them.
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Because Black Swans are so unpredictable using normal risk models, ordinary people nor experts effectively ignore them. Then when they do arrive, and they do, the experts get accused of not doing their jobs.
Major earthquakes are a Black Swan par excellence.
In 2003, Japan's Nuclear Power Commission estimated that the risk of fatality by radiation exposure following an accident at a nuclear installation was one every million years.
Eight years later, an earthquake followed by tsunami led to three nuclear meltdowns, hydrogen-air explosions and the release of radioactive material at the Fukushima Daiichi nuclear power plant. There were no immediate fatalities, but it was a disaster by any measure that may show up, among other things, in cancer deaths from radiation exposure years later.
By the same token, a year after Fukushima, six Italian scientists were sentenced to six years in prison for saying the risks of a large earthquake in the town of L’Aquila were low after a small cluster of earthquakes struck the region in 2009.
Six days after the scientists had convened to assess the risk, a large quake killed 309 people. The convictions were later overturned, but the story serves as a good lesson about our limited powers of prediction for Black Swans like natural disasters and the fantasy that we can predict them.
In Israel, there have been no shortage of dire warnings about an inevitable temblor of tremendous proportions. There has also been no end of criticism about how the government and people aren't doing enough to prepare.
How could we both know an earthquake lies ahead of us and at the same time do nothing about it?
Our old nemesis the Black Swan explains a lot of the seemingly contradictory behavior.
The government has more or less done a good job in establishing emergency services in the event of a disaster because the measures are interchangeable with those needed for other kind of emergencies from war and terrorism. Where it has failed is ensuring that infrastructure, mainly residential structures, is genuinely earthquake-resistant.
Knowing that 800,000 residential structures are vulnerable to earthquake is one thing. Being prepared to cover the cost of actually doing something, is another thing entirely, because you don't know if the big quake will come tomorrow or afflict some future generation.
The scenario that the Israeli government is planning for forecasts 30,000 buildings collapsing, 7,000 dead and 170,000 left homeless.
But by the government's own estimates, there is a 95% chance that any earthquake damage we suffer will be less than that. So what is a responsible planner to do? Shut down hospitals while they are being reinforced? Make homeowners shell out money they don’t have to bring their houses up to standard? Spend billions of shekels when the country needs better schools and public transportation?
On the one hand, it will be hard to mobilize the public to make the sacrifices like that now. They may say yes when asked the binary questions should we or shouldn't we, but when they're told their children's school will be filled with dust and surrounded by scaffolding while it's being reinforced, they hesitate. They don't want to put their children in such a hazardous, unhealthful situation.
On the other hand, as Japanese nuclear officials have learned, the odds are only odds and once the once-in-a-million-years probability occurs, it it's not helpful to know that chances are excellent it won't happen for another 999,992 years.
Israel and Jordan are struck by earthquakes about once every 80 to 100 years (give or take a decade) since the 17th century. But before the 17th century, the frequency is not as consistent. Sometimes a swarm of small earthquakes is just that, with no big bang to follow. Seismologists warn all the like about the inevitability of big earthquake, but what do they really know?
And so, just like the homeowner who won't pay for improvements to his house or buy earthquake insurance, the Bank of Israel is predicting a banner year of economic growth, even though a major quake could upset everything in space of a few seconds.