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The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore
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The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore

by Michele Wucker
 

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A "gray rhino" is a highly probable, high impact yet neglected threat: kin to both the elephant in the room and the improbable and unforeseeable black swan. Gray rhinos are not random surprises, but occur after a series of warnings and visible evidence. The bursting of the housing bubble in 2008, the devastating aftermath of Hurricane Katrina and other natural

Overview

A "gray rhino" is a highly probable, high impact yet neglected threat: kin to both the elephant in the room and the improbable and unforeseeable black swan. Gray rhinos are not random surprises, but occur after a series of warnings and visible evidence. The bursting of the housing bubble in 2008, the devastating aftermath of Hurricane Katrina and other natural disasters, the new digital technologies that upended the media world, the fall of the Soviet Union...all were evident well in advance.
Why do leaders and decision makers keep failing to address obvious dangers before they spiral out of control? Drawing on her extensive background in policy formation and crisis management, as well as in-depth interviews with leaders from around the world, Michele Wucker shows in The Gray Rhino how to recognize and strategically counter looming high impact threats. Filled with persuasive stories, real-world examples, and practical advice, The Gray Rhino is essential reading for managers, investors, planners, policy makers, and anyone who wants to understand how to profit by avoiding getting trampled.

Editorial Reviews

Publishers Weekly
02/01/2016
Wucker (Lockout) introduces a variation on risk analyst Nassim Nicholas Taleb’s concept of the black swan, a term for outlier events that are hard to anticipate and harder to plan for. This book looks, instead, at events that should have been predicted, like the 2008 financial crisis. Enter the gray rhino, “a highly probable, high-impact threat: something we ought to see coming.” Wucker believes that the problem is systemic: the political and financial world rewards short-term thinking, and it’s difficult for institutions to pivot quickly when necessary. With so many recent examples of failures to respond to obvious threats, we should have a better handle on why we miss them, but cognitive biases make this difficult. Wucker explores the denial that keeps us from seeing threats, the panic that occurs when we don’t make decisions in time, and ways to implement solutions and take reparative action “after the trampling.” This helpful guide to getting out of your own way long enough to see the rhino charging over the hill will be useful reading for managers, entrepreneurs, and risk takers of all stripes. Agent: Andre Stuart, Stuart Agency. (Apr.)
CEO of Intecur and author of The Team: Solving William Saito

The Gray Rhino offers strategies for dealing with the biggest and most dangerous weak spot for organizations, companies, and nations: the willful failure of business and policy leaders to perceive warning signals... This important, insightful, and original book will be a must read for global decision makers and thought leaders.
author of Planet India: The Turbulent Rise of Mira Kamdar

As Michele Wucker warns us: It's not if; it's when. This is a book for our time, when we face multiple, evident existential threats... This book reminds us that denial will not save us, and provides strategies for navigating a way forward to survival by ferreting out the opportunities born of crisis.
author of Eyes Wide Open: How to Make Smart De Noreena Hertz

If Black Swans leave one feeling helpless, Gray Rhinos teach us that we do have the power to act. In this original proposal Michele Wucker alerts us to how important it is to wake up to what's looming before us and make good decisions about how to respond in time.
From the Publisher

"This helpful guide to getting out of your own way long enough to see the rhino charging over the hill will be useful reading for managers, entrepreneurs, and risk takers of all stripes." --Publishers Weekly

"A valuable guide for individuals and policymakers who want to act when they see the lights of an oncoming train." --Kirkus

"Even more important than a Black Swan is a Gray Rhino: the highly probable, high impact event we often fail to act on. This book offers some easy tips on how to move to action and create competitive advantage."--Paul Polman, CEO, Unilever

"Why on earth would we need a book to tell us to pay attention to and prepare for obvious, high probability events? Because we resolutely avoid and deny what is right under our noses. The Gray Rhino explains why and lays out a valuable set of steps to become more resilient and realistic about the threats and challenges that will redefine our world."--Dr. Anne-Marie Slaughter, President and CEO of New America and author of Unfinished Business and The Idea that is America

"Michele Wucker provides an updated assessment of the challenges that confront society, that need to be addressed, yet we ignore. Public officials would serve us well by getting busy addressing the Gray Rhinos that are out there, rather than waiting for the next predictable surprise." --Max Bazerman, Straus Professor Harvard Business School, Co-Director, Center for Public Leadership and author of The Power of Noticing

"Michele Wucker is right. Often we can see crises coming: climate change, terrorism, financial crashes. Yet, we fail to act. This valuable book explains why. It’s a must read for leaders of all organisations, public and private as we prepare for the inevitable challenging times."--Kishore Mahbubani, Dean, Lee Kuan Yew School of Public Policy (National University of Singapore), and author of The Great Convergence

"In a lucid and accessible style, Michele Wucker forces us to see the knowns we have been treating as unknowns, and teaches us to see opportunities in crisis. This book is a useful primer for rethinking how we manage everything from our personal life to the global economy." --Parag Khanna, author of Connectography and How to Run the World

“Equally vital for companies and countries, [The Gray Rhino] serves as a critical reorientation of crisis management strategy and policymaking.” —Ian Bremmer, President of Eurasia Group and author of The J Curve, The Fat Tail, and Every Nation for Itself

“The world urgently needs a risk-management paradigm shift. This book makes a compelling case for fixing the very risks we create, a bit more every day, or decide to ignore. When your eyes cross those of a Rhino, it's too late.” —Professor Erwann Michel-Kerjan, Executive Director, Wharton Business School Risk Center

“The Gray Rhino offers strategies for dealing with the biggest and most dangerous weak spot for organizations, companies, and nations: the willful failure of business and policy leaders to perceive warning signals... This important, insightful, and original book will be a must read for global decision makers and thought leaders.” —William Saito, CEO of Intecur and author of The Team: Solving the Biggest Problem in Japan

“As Michele Wucker warns us: It's not if; it's when. This is a book for our time, when we face multiple, evident existential threats... This book reminds us that denial will not save us, and provides strategies for navigating a way forward to survival by ferreting out the opportunities born of crisis.” —Mira Kamdar, author of Planet India: The Turbulent Rise of the Largest Democracy and the Future of Our World

“If Black Swans leave one feeling helpless, Gray Rhinos teach us that we do have the power to act. In this original proposal Michele Wucker alerts us to how important it is to wake up to what's looming before us and make good decisions about how to respond in time.” —Dr. Noreena Hertz, author of Eyes Wide Open: How to Make Smart Decisions in a Confusing World

The Gray Rhino should be required reading for decision makers in business and policy. Drawing on many examples from politics and business, social and economic policy, Michele Wucker provides amazing insights into how organizations can define and confront their obvious but neglected risks. The Fourth Industrial Revolution will have many Gray Rhinos if we don’t act in time to create the necessary principles and rules to direct technology and progress in a way which deflates the risks but uses fully all the great potential.”-- Professor Klaus Schwab, Chairman, World Economic Forum and author of The Fourth Industrial Revolution

Kirkus Reviews
2016-02-03
An analysis of "highly obvious but ignored threats"—from failing infrastructure to financial crises to climate change—and what can be done to prevent disastrous outcomes. "Of all the tricks that human nature plays on us, inertia is one of the most powerful forces preventing us from getting out of the way of a known challenge," writes policy analyst Wucker (Lockout: Why America Keeps Getting Immigration Wrong When Our Prosperity Depends on Getting It Right, 2006, etc.), a former vice president at the Chicago Council on Global Affairs. Drawing on interviews and research in behavioral economics, she details the "willful collective failure" to act on warning signs that preceded the 2008 financial crisis, the Enron debacle, the collapse of a Minneapolis bridge in 2007, and other events. She calls these highly probable, high-impact threats "Gray Rhinos," as opposed to the rare, unpredictable catastrophes that author Nassim Nicholas Taleb dubbed "Black Swans" in his popular 2007 book, The Black Swan. Throughout her book, Wucker describes the many reasons people fail to respond to obvious dangers—e.g., denial, avoidance, procrastination, and calculated self-interest. Many reasons are emotional or irrational. Others are encouraged by the imperatives of political and financial systems, which seek short-term results or profits rather than investing in long-term solutions. Wucker makes a strong case, but she is often long-winded and perhaps overly optimistic that an awareness of the quirks of human nature shaping our decisions can spur decision-makers to respond effectively to obvious threats. However, she provides solid examples of government action on such gray rhinos as water shortages and the need to plan for future disasters in the wake of floods. She urges readers to avoid the panic stage of an impending threat by "quickly moving from recognition to diagnosis to action." A valuable guide for individuals and policymakers who want to act when they see the lights of an oncoming train.

Product Details

ISBN-13:
9781250053824
Publisher:
St. Martin's Press
Publication date:
04/05/2016
Pages:
304
Sales rank:
884,284
Product dimensions:
6.30(w) x 9.30(h) x 1.20(d)

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Read an Excerpt

The Gray Rhino

How to Recognize and Act on the Obvious Dangers We Ignore


By Michele Wucker

St. Martin's Press

Copyright © 2016 Michele Wucker
All rights reserved.
ISBN: 978-1-4668-8700-8



CHAPTER 1

MEET THE GRAY RHINO


In the autumn of 2001, Glenn Labhart was chief risk officer at Dynegy. The energy company was considering buying an energy trading company whose stock had fallen by 80 percent in recent weeks, sending shock waves through the energy markets. Dynegy's chairman and CEO, Charles Watson, knew the company well — or thought he did — and had a plan to buy its energy marketing capabilities for a song, stabilize the energy markets, combine the two companies' trading capabilities, and protect itself from the exposure it already had in case the company failed. It was a chance to be a white knight, and to make some money in the process.

Labhart, a plainspoken, no-nonsense Texan, was a seventeen-year veteran oil-and-gas trader and a former risk consultant who now had a $42 billion portfolio of trading, power generation, and energy assets, along with the associated insurance and credit risk, under his oversight. He already had helped steer Dynegy through the recent California energy crisis and the aftermath of the 9/11 terrorist attacks. He had developed a dynamic tool to provide real-time risk-management information. Now he was tasked with assessing the risks associated with the $25 billion deal and advising the board.

He did a value-at-risk analysis of the company to generate a set of metrics not unlike the dashboard of a car, with its speedometer and gas gauge. It had already become obvious that Dynegy would have to put more capital into the company it was considering buying and assume a significant amount of its debt. The more Labhart looked at the company's financials, though, the more concerned he became. "I extrapolated out to one year for risk-adjusted return on capital, and the results were sobering," he told me in a conversation over coffee. He just couldn't figure out how the company had calculated the profitability and cash flow of its trading operations. When he tried to envision standing in front of a ratings agency and justifying the deal, he simply couldn't picture it.

Nearly fifteen years later, Labhart vividly recalled a 7:30 AM due diligence meeting, at the venerable Houston law firm Baker Botts, with Dynegy executives and their lawyers about their risk assessment. He told them bluntly, "If we're going to do this kind of deal, we need to ask them how they value risk on non-liquid assets." He presented his report to the board, warning members that the numbers didn't seem to add up and that they needed to do more due diligence or hold off on the deal. "The report said we didn't need to do this," Labhart recalled. "I said we needed to ask more questions, but the train had left the station. I wish I'd had more lead time."

The company to be acquired was, of course, Enron, the corporation that went down in the annals of business history as an example of the colossal failure of auditors, analysts, and investors to recognize that a firm valued at $90 billion was merely a house of cards. It has become a classic example of greed and willful ignorance of warning signals.

Recounting the story, Labhart quickly sketched a daunting organizational chart, outlining the short-term and long-term assets and liabilities and flows within the company. He drew an arrow and a circle around the thing that had set off alarm bells for him: the way the company marked its assets to market — an accounting practice commonly used for securities trading but which this company used to value its turbines. "How do you mark-to-market a turbine?" he asked. Unlike frequently traded stocks and bonds, turbines are large, unwieldy machines that simply don't lend themselves to easy exchange — and for which, therefore, prices are hard to determine.

While Labhart wished his report had gotten the board's attention soon enough to prevent the deal earlier, his warning wasn't completely in vain. The report did convince board members to be sure to include protections in the deal, just in case he turned out to be right. "When you're chief risk officer, you're being second-guessed a lot because you're taking a negative look," Labhart said in hindsight. But even when you're second-guessed there may still be room to make a difference.

As the date of the proposed merger neared, Labhart worked with management on a contingency clause that would reduce Dynegy's credit risk by giving it ownership of the Northern Natural Gas Company, the only pipeline Enron owned and its most profitable physical asset. Enron put the 16,500-mile pipeline up as collateral.

On November 19, 2001, Enron filed with the SEC notifying it of $690 million in new debts, leaving Dynegy in a very difficult position. It had already channeled $1.5 billion in financing to Enron and assumed responsibility for nearly another billion dollars of debt. Rating agencies downgraded Enron's debt to junk status. On November 28, as Enron's stock price approached zero, Dynegy withdrew its offer. Early the next year, as its own stock price wobbled because of the debacle, it took possession of the pipeline, which, at least temporarily, stabilized Dynegy. The following year, the Global Association of Risk Professionals named Labhart Financial Risk Manager of the Year.

Dynegy's experience and Enron's collapse may be a particularly dramatic case, but the episode has much in common with events that unfold every single day for people faced with evidence of danger: we simply don't want to see it. We avoid asking the questions for which we don't want to know the answers, because we don't want to deal with the consequences of knowing, especially when inconvenient truths get in the way of the stories we tell ourselves about how wonderful things will be if they go the way we've told ourselves they would. We view risks through rose-colored glasses, downplaying the possibility that our bets may go wrong — even as we overreact to less likely yet more emotionally resonant threats.

Even when we do recognize the existence of a clear and present danger, perverse incentives embedded in our political and financial systems — a heavy emphasis on short-term thinking, poorly allocated resources, and mispriced risks — are often arrayed against doing the right thing to get out of the way. As a result, we can't count on the best designed warning systems in the world to sound the alarm loud enough to persuade our leaders to do what they need to do. Even when we acknowledge evidence of danger, all too often we don't act until the threat is fully upon us — and, sometimes, when it's too late.

But the consequences of the grim unfolding of human nature and perverse incentives — the Enrons, WorldComs, Long-Term Capitals, collapsed buildings and bridges, and disasters of all kind that litter our history, from the geopolitical to the humanitarian and the personal — are not inevitable.

In recent years, behavioral economists have identified many of the cognitive biases that keep us from acting in our best interests, and helped draw much needed attention to the ways in which warped perceptions and emotional and irrational motivations shape the decisions we make. In Chapters 2 and 3, we'll explore some of these biases, along with strategies for countering them. An equally difficult challenge, to be addressed in Chapter 4, is the set of perverse incentives, structural obstacles, and crass calculations of self-interest — the tragedy of the commons — that prevent individuals, businesses, and governments from acting in time even when we recognize the many problems in front of us.

There are examples among the wreckage of people who see the danger, are willing to say something, and sometimes can prevent at least part of the worst-case scenario from unfolding. Their success is a combination of leadership and character, awareness of the ways in which we humans trip ourselves up and how we can avoid those mistakes, and sometimes sheer luck in having the right set of circumstances — for example, sufficient resources and a critical mass of others who recognize a challenge and are motivated to respond.


Breaking the Rules

Imagine that you're on safari in Africa, where you've traveled far for a chance to see a rhinoceros alive before it's too late. The Western black rhino was declared extinct in 2011, after five years without a sighting, and the number of all remaining black rhinos is in the low thousands. You know time is running out. You've seen the grisly photos of dead rhinos, with their horns brutally hacked off of their faces by poachers to be traded in Asia at a dearer price than that for cocaine or heroin.

It's been three days, and you and your two best friends are anxious to see what you came for, to shoot a prize trophy not with a gun but with your top-of-the-line camera. The sun is so fierce that you can see the heat shimmering in the air. But you and your friends are determined, so focused on your mission that you ignore your guide's instructions and drift away while he's not looking.

You're nearly ready to give up and return to the group. But, suddenly, there they are: a rhino cow and her calf. The massive mother flicks away flies with her tail and her long ears. You realize that you've forgotten to breathe: the very definition of a breathtaking sight.

The calf is several yards away from the mother, who is looking in the other direction. You creep closer, trying to get just the right angle. Getting a picture with your telephoto lens is one thing, but a close-up would be worth the risk. You forget everything the guide has told you about avoiding startling the rhinos by keeping out of their immediate territory, staying downwind, and being quiet. They're more afraid of you than you are of them, he'd said.

Your friends are also too excited to remember the admonition to be quiet. "Try to get him to look at you so we can get a picture of his face," one whispers. Without thinking about the consequences, the other friend whistles. The calf looks your way, but, unfortunately, so does the mother. That's when you realize your mistake. You've disturbed a rhino cow. Worse yet, you've managed to get closer to her calf than she is. The baby rhino quickly scampers back to her side, but she's still angry. She shifts her weight from one side to the other as she decides what to do.

That's the least of your problems, though, because a bull rhino has appeared nearby, and he has noticed you, too. He's easily half again as big as the cow. He lowers his head and paws the ground with his left hoof, preparing to charge. The tip of his horn is pointed right at you as he gathers all two tons of his weight and prepares to launch himself in your direction.

You've already ignored the advice the guide gave you — that the best way to avoid being charged by a rhino is not to provoke the animal in the first place. Once the rhino charges, it's nearly impossible to stop him. But it's too late now. The rhino has taken his first steps, and starts accelerating to his top speed of close to forty miles an hour.

As he bears down on you, you freeze. What to do? You could climb a tree, but there is none high or strong enough. Throw something in his path? Can you make enough noise to scare him? You could run in a zigzag pattern or in the opposite direction, but the heat has sapped your energy. If you were close enough to the safari vehicle, you could get the driver to put the pedal to the metal, but you've wandered too far from the group for that. You look at your friends for ideas, but they're paralyzed, too. Your final option is to wait for the rhino to get close and then jump out of the way, counting on his inability to turn quickly to save you from being trampled. If there is one thing you must remember about what to do when a rhino charges, your guide has told you, it is this: Do not stand still. Freezing is not an option. But, so far, by (seemingly) making no choice that's what you've chosen to do.


Problematic Pachyderms

Thinking about what to do when facing a rhino's charge is very much the way many leaders approach an impending threat, whether it's a tectonic geopolitical shift with implications for the future of the world as we know it; a market disruption or a management challenge that affects the future of a company, organization, country, or region; or a personal decision with consequences for us or our families. When crisis looms, leaders need to make decisions quickly. Each choice depends on what happened beforehand; every error compounds the stakes. Good decisions ahead of time — like staying away from potentially angry rhinos — make all the difference. Once mistakes have been made, the stakes rise and the options narrow to the point where the choices are not between good and bad but among bad, worse, and almost unthinkable.

A Gray Rhino is a highly probable, high-impact threat: something we ought to see coming, like a two-ton rhinoceros aiming its horn in our direction and preparing to charge. Like its cousin, the Elephant in the Room, a Gray Rhino is something we ought to be able to see clearly by virtue of its size. You would think that something so enormous would get the attention it deserves. To the contrary, the very obviousness of these problematic pachyderms is part of what makes us so bad at responding to them. We consistently fail to recognize the obvious, and so prevent highly probable, high-impact crises: the ones that we have the power to do something about. Heads of state, CEOs of businesses and organizations, like all of us, are often worse at handling Gray Rhinos than they are at acting swiftly when an unexpected crisis arises seemingly out of the blue. This has huge and dangerous implications for leaders, who are particularly vulnerable to threats they ought to see coming but nevertheless fail to recognize and react to in time.

When facing a rhinoceros that's about to charge, doing nothing is seldom the best option. Yet all too often that's exactly what happens. Danger rarely comes as a complete surprise; instead, it follows many missed opportunities for taking precautions, reading and responding to warning signals. The impulse to freeze is hard to overcome. Sometimes the grip of denial is so strong that we do nothing at all; or, even worse, as in many market booms leading to bust, we do more of what was dangerous in the first place. Think of the family who wouldn't evacuate ahead of a hurricane. The smoker who just wouldn't quit. The president who wouldn't give up his cheeseburgers until he had a heart attack. The gambler who kept digging himself deeper into a hole in the false hope of climbing out.

Perverse incentives and calculated self-interest can turbocharge our natural impulse for denial. Think of the bankers who were warned of the dangers of subprime loans but wouldn't get out of these risky investments, and the policy-makers who wouldn't step in. ("This time" is rarely, if ever, different.) The officials who knew how badly bridges had deteriorated but kept putting off needed repairs. The foremen of a factory building with cracks in the walls who insisted on business as usual until the whole thing collapsed. The supervisors and executives, warned of suspicious accounting, who refused to listen to the whistle-blowers. The engineers who knew how dangerous a flawed fifty-seven- cent ignition switch could be but did nothing to change it. The CEO of a market-leading company that failed to respond to the disruptive new technologies that took away its head start seemingly overnight and left it struggling to stay alive. The aging patriarch who knows the clock is ticking and it's time to let the new generation take over but prefers to drive his company or country into the ground rather than relinquish control.

Many of the biggest problems the world faces are Gray Rhinos. Look at climate change, for which scientists have presented a clear case that more than 350 parts per million (ppm) of carbon dioxide is dangerous for the planet. Yet we are at 400 ppm and rising, as efforts taken so far seem to make only a dent. Rising sea levels are causing one catastrophic weather event after another: in New York City, hundred-year storms Irene and Sandy two years in a row; in the Philippines, Typhoon Haiyan, the most powerful storm ever measured. In 2013, forty-one weather-related disasters each left more than $1 billion in damages, a record.

Unsustainable national debt levels, anemic economic growth, and profound changes in labor-market dynamics have left many countries vulnerable to a new round of financial crises. Widening income disparities will intensify social unrest and political turmoil, sparking riots, toppling governments, and destroying economies. Water shortages around the world are already threatening populations, stability, and supply chains, and will only get worse: by 2030, the United Nations predicts, half of the world will face water shortages as demand outpaces supply by 40 percent. This will dry up crops and cause people to go hungry, force tens of millions of people to move from their homes, and could even spark wars over water sources that cross national boundaries.


(Continues...)

Excerpted from The Gray Rhino by Michele Wucker. Copyright © 2016 Michele Wucker. Excerpted by permission of St. Martin's Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

Michele Wucker is the author of Lockout: Why America Keeps Getting Immigration Wrong When Our Prosperity Depends on Getting It Right and Why the Cocks Fight: Dominicans, Haitians, and the Struggle for Hispaniola. Wucker has been recognized as a 2009 Young Global Leader of the World Economic Forum and a 2007 Guggenheim Fellow. She has held positions including president of the New York City-based World Policy Institute; vice president of studies at The Chicago Council on Global Affairs; and Latin America bureau chief at International Financing Review. She has written for The New York Times, CNN, Washington Post, Wall Street Journal, and World Policy Journal, among others. She lives in Chicago.

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