Practical analysis for investment professionals
23 October 2017

Do “Gray Rhinos” Pose a Greater Threat Than Black Swans?

Gray rhinos are popping up everywhere — in a front-page story in The New York Times or in an announcement in an official Chinese government publication that sent Chinese stocks tumbling.

The apt metaphor of the “gray rhino,” referring to a highly likely yet ignored threat, was coined by Michele Wucker, speaker and author of The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore. She also spoke at the 2017 CFA Institute Annual Conference.

In an interview with CFA Institute Magazine, Wucker discusses charging, recurring, and meta rhinos (and how to handle them); their relation to black swans and elephants in the room; and why we often don’t see the danger right in front of us.

Nathan Jaye, CFA: How are gray rhinos related to black swans?

Michele Wucker: In 2007, black swans were all people could talk about. It provided a very convenient explanation for the financial crisis. I think this black swan image captivated people partly because animals are very good at crystallizing our emotions. That’s why Aesop’s Fables are so powerful.

When I was coming up with the rhino image, I was in my office and talking to a friend. I said, “It’s big. It’s scary. It’s dangerous. It’s got a horn.” The rhino popped into my head and my friend joked, “Oh, you could call it a black rhino.” I went to Wikipedia and discovered there are black rhinos and white rhinos, but the black ones aren’t actually black. The white ones aren’t actually white. They’re all gray, but until now nobody talked about the most obvious thing, which is that all rhinos are gray. That’s how the full metaphor popped into my head.

Do gray rhinos evolve into black swans?

Behind every supposed black swan is a “crash” of gray rhinos (“crash” is the zoologically correct term for more than one rhino). You had several potential dangers in 2007 and 2008, and many people sounded the alarm. The black swan emerged when all these obvious dangers interacted, creating a problem much bigger than any one of them. That’s very hard to predict. It’s very hard to tell where it’s going to go — and how big it’s going to be. With gray rhinos, it’s generally a case not of if but when. If they all blow up at the same time, that’s when you end up with what happened in 2008 — a black swan.

What exactly is a gray rhino?

A gray rhino is the two-ton, horny thing that is coming right at you. You’ve a choice to do something about it or not. It’s a metaphor for the fact that so many of the things that go wrong in business, in policy, and in our personal lives are actually avoidable. We don’t pay enough attention to the big obvious problems that are in front of us. By regularly doing a gray rhino reality check, you can be way ahead of your competitors and your peers.

What’s a gray rhino reality check?

It starts with a very simple question: What is my gray rhino? What’s the big thing in front of me that’s going to trample me unless I do something?

Of course, that leads to a number of other questions: How good a job am I doing in dealing with it? Have I properly accounted for the cost of not dealing with it? How much power do I have to change it?

If I have the power to do something, then what’s my goal? Is it just getting out of the way? Is it to turn the challenge into an opportunity? If I don’t have the power to do something, then who does have the power? What can I do to get them to change the situation?

Is admitting you have a gray rhino a problem?

Speaking the gray rhino out loud is a huge step in dealing with it. Also, it lets you know that you’re not alone.

There’s no shame in having a gray rhino. It’s okay to acknowledge that we’re not dealing with something. Once you accept that it’s normal to not recognize something, it opens you up to dealing with it. Just asking yourself regularly, “What’s my gray rhino?” gives you more power to deal with the situation.

I often talk about the gray rhino being a friend, not just a foe. When I came up with the image, I was picturing something big and scary and dangerous. Once I started researching the book, I went to South Africa and learned about the rhino poaching crisis. Humans are a bigger threat to rhinos than rhinos are to us, which made me feel guilty for portraying the rhino the way I do. So when I speak in public, I often urge people to think of the rhino as your friend. If you can see the gray rhino in front of you, you’re way ahead of everyone who can’t see what’s right in front of them.

Once we see the rhino, what should we do?

One of the most important strategies is evaluating your decision-making process. Are you putting off key financial planning decisions? Are you not making some of the career decisions you need to make? It’s helpful to have a system set up ahead of time, where you have a number of people who can help you do a better job of spotting gray rhinos and doing something about them.

I recommend people form a personal board of directors. Do you have someone you can turn to, who can help you think through a situation, whether a colleague or a trusted confidant? Do you have that best friend or colleague who always says the things that you don’t want to hear — but really need to? Do you have a team who can come at a problem from different directions?

What prevents us from engaging threats?

Lots of things get in the way. Some of them are psychological. They’re the little tricks our brains play on us. There are biases that make us look at things more optimistically than we might otherwise. There’s the instinct to deny things, which biologically serves as a way to protect us from things that are scary. There are decision-making biases that make it harder for us to do the right thing.

There are also times when we think we don’t have the power to do something. The less power we feel, the less likely we are to do something. It’s sometimes called learned helplessness. Of course, for businesses or policymakers, there’s a whole other set of perverse incentives and resource constraints and other obstacles that can get in the way as well.

The challenge is figuring out why it is that you’re not doing what you could be doing to deal with an obvious problem, then devising strategies to overcome those obstacles.

How are gray rhinos related to the elephant in the room?

The elephant in the room is, by definition, something that nobody talks about and nobody does anything about. The elephant in the room says to you, “Saying and doing nothing is normal.” The gray rhino says, “No, it’s not normal. You do have a choice. It’s not inevitable that I’m going to trample you.” Gray rhinos are things people are talking about, but not doing anything about.

The truth is sometimes it takes training to see what’s in front of you. My first night on safari I was out with a German family who had been on safari for a couple weeks already. One of them said, “Look at those 20 elephants over there.” I looked. It was down the hill and up another hill. I didn’t see a single elephant.

That had me really worried until I realized that until you train your eyes, it’s hard to see even large multiple-ton animals, and that’s okay to say. As you become more experienced at looking, it becomes easier to see what’s in front of you.

What was the story with China?

The China situation is absolutely fascinating to me. Recently The People’s Daily, the official newspaper of the Chinese Communist Party, came out with a warning that we need to deal with black swans and gray rhinos. The country interpreted the gray rhino reference as a message that the government was about to crack down on speculations and financial risks. Small-cap stocks immediately fell by nearly 5%. It was powerful to see the way this simple concept sent the message that the government was very serious about dealing with something that is obvious and that needs to be dealt with. That was a clear example of how powerful the gray rhino concept is in China.

The government is also using gray rhinos as a signal to prepare people for what may happen so it’s not so much of a surprise. It is easier to make hard decisions if people can understand, “Look, if we don’t deal with this now, something much bigger and scarier down the road is going to come along.”

Someone obviously read your book.

I know a number of high government and policy officials in places like Singapore, the Philippines, and Luxembourg have been looking at it. A number of leaders have embraced the concept. It’s interesting to see the contrast between the United States and China, where they’re very focused on dealing with their gray rhinos. In the United States, it seems like we’re talking about everything except what we need to be talking about.

You describe four types of rhinos: charging, recurring, meta, and unidentified. What are the differences?

A charging rhino is something you need to deal with right away. So the first question is, how quickly is the rhino coming? How much damage is it going to do?

A recurring rhino is something that you’ve seen in the past. You’ve got some kind of roadmap for how to deal with it.

Examples of recurring rhinos are financial crises and boom and bust cycles that periodically repeat. For example, look at how we deal with the flu virus. Every year there’s a flu virus. We spend months and months trying to pinpoint and predict what virus is most likely to be the problem. Then we form a plan to deal with it. Recurring rhinos can be easier to deal with, even though they’re not all the same.

Meta-rhinos are the most dangerous. It’s really more about existing structural factors that affect your ability to deal with a rhino. One of the biggest meta-rhinos is corporate governance. Look at the decision-making structure of companies. Although they’re getting better, in many cases it’s often people who went to the same schools, who’ve known each other forever, who come from the same socioeconomic background, and who turned out mostly to be men. There’s lots and lots of research that shows that diverse decision-making groups make better decisions. They assess risks better. They respond to risks better. They also respond to opportunities better. One of the biggest meta-rhinos is that our corporate decision-making structures are not as resilient and able to recognize and properly assess and respond to risks as they need to be.

What about unidentified rhinos?

Unidentified rhinos are tough ones where you’re not completely sure what the problem is. In my book, I write about artificial intelligence and what that means in terms of threats. In many ways, these threats are still unclear. Some people say, “Oh, robots are never going to be able to do so many things.” Other people say, “Well, yes robots are going to take jobs, but they’re going to create so many more jobs.” I think the only certain thing about artificial intelligence and other technological changes is that there are going to be huge disruptions to the job markets. The nature of those changes won’t be completely clear for some time.

Rhinos aren’t strictly market-related. What about organizational and personal rhinos?

One of the most interesting things is the way in which personal and organizational gray rhinos interact. Look at the turmoil that Uber has gone through. For quite some time, there has been a lot of criticism of the CEO’s behavior. In this case, these were personal habits that spilled [out and] caused a lot of damage to the company before the board finally stepped in and said, “We’ve got to do something about it.”

That’s not an isolated case.

I was talking with a friend who is CEO of a private equity firm. He told me that he’d been sitting down with his team recently, reviewing some of the investments that did not meet their expectations. He said, “Every single one of the investments that went wrong had evidence right in the due diligence that there were problems.” It wasn’t problems with the technology. It wasn’t problems with the market. It wasn’t problems with the business plan. It was personal issues with the CEO, such as driving under the influence or domestic violence. Personal problems ended up blowing up the company’s management and future. There’s a much closer relationship between personal and organizational gray rhinos than most of us probably admit.

What’s the worst thing to do when facing a charging gray rhino?

The worst thing is to do nothing. A lot of people are afraid of doing the wrong thing. I think that’s a big reason why gray rhinos don’t get dealt with. People are afraid they’re going to make a wrong decision about how to fix something, or they’re going to get blamed for doing the wrong thing instead of at least trying to do something. In many cases, you may make the wrong decision about what to do. But that may actually change the playing field. It can shake things up so that you’re more likely to get to a better place.

A good example is New Coke. New Coke is always told as a story of a marketing disaster. In fact, Coke looked at declining market share. They looked at evidence of changing taste. They did focus groups. They came up with what they thought was a good plan. The immediate aftermath was bad, because everybody hated New Coke. But bringing out Coca-Cola Classic and the way that they responded to the crisis actually increased their market share above what it was when New Coke was introduced.

So you can turn a trampling into trampolines?

This is an important point. A lot of times, we might be complacent unless there is a crisis. Generally, when that happens people say, “That’s what I needed to push me onward.” One of the big mistakes we make is not letting things get trampled when they need to be, whether it’s a corporate decision or leaving a job or a relationship that you don’t like.

Kodak is one of my favorite corporate examples. They invented the digital camera. But they put it on a back burner, because they thought it would cannibalize too much of their existing business. That turned out to be a bad decision. They weren’t willing to leave behind something that was obsolete.

Kodak thought the gray rhino was the threat to their existing business. The real threat was the failure to embrace an opportunity. Companies and individuals need to ask “What’s the bigger threat?” Is it that a product line or process is obsolete, or is it that I’m too slow to embrace a bigger opportunity?

What do we do about multiple rhinos?

That’s something I’m often asked in China, where I’ve visited twice this year. China has been dealing with the need to grow the economy, the need to bring people out of poverty and to keep people in jobs to maintain social stability. At the same time, they have financial imbalances they have to deal with. They have huge environmental issues. How do you choose among all of these issues?

One way is to ask yourself if there’s a solution that will handle multiple rhinos at once. In China, for example, the growth of renewable energy and sustainable, green jobs can actually help to create more jobs, keep people employed, and also deal with the environmental problem. That’s one solution. Can you deal with more than one rhino at once?

Another solution is prioritizing gray rhinos. Which one is coming at you fastest? Which one is going to have the biggest impact? An important question for me is, how closely related is one gray rhino to another? If you solve one rhino, will you create unintended negative consequences? Or will you solve a lot of other problems at the same time?

Climate change is a great example of this. If you don’t deal with climate change, you’ve got to deal with pollution. You’ve got to deal with increasingly violent storms. You’ve got to deal with food instability. You’ve got to deal with forced migration. You’ve got to deal with water shortages.

To me, dealing with climate change helps you to address a whole bunch of other problems. That’s really the way that people should be thinking. How does this gray rhino fit into a system? As I said before, the most dangerous gray rhinos are the ones that move in crashes. When a whole bunch of them are coming at once, then you really better watch out.

What about dealing with gray rhinos that are easiest to solve?

Yes. Another question to ask is whether there are low-hanging fruit. How easy is it to solve this one? If I can solve this rhino with a relatively small amount of effort, can I do that and chalk up a victory?

Or is it like Syria, where nobody can agree on what to do. Those are the really, really tough cases. I would encourage people to focus their energy on issues where they do have a good chance of solving them, where there’s a reasonable amount of agreement on how to solve the problem, and where solving this one problem will also help to solve others.

What’s also interesting is looking at the different stakeholders dealing with a gray rhino. In the financial crisis, you had people who took out the subprime loans. You had the crooked lenders. You had the policymakers. You had the people whose businesses depended on the people whose homes are now in default. Every one of them is going to define the gray rhino in a different way. Every one of them is going to be in a different stage of denial of diagnosing the real problem. Multiple strategies are needed if you have different stakeholders who are at different places in the process.

So gray rhinos give us a framework for addressing issues?

It’s a framework. If people are looking for a silver bullet or a clearly outlined plan for how to solve their gray rhino, they’re not going to get it. What I present is a way to frame the right questions, a way to focus on what’s in front of you, and a way to frame the problem. Because every gray rhino is different. It’s impossible to come up with one magic pill that solves everything.

By asking the right questions and doing a regular check-in with yourself, your management team, and your key advisers, you’re going to be so far ahead of everyone else.

Many of the biggest problems that we see on the corporate level, on the policy level, and on a personal level are things that were preventable but were ignored. Look at Wells Fargo. Look at the Volkswagen emission scandal. Look at the Takata airbag scandal.

There were people in those companies who knew there was a problem. It was extremely obvious, but they didn’t do anything to fix it. Then it blew up into a huge disaster that was much costlier to the company than dealing with the problem in the first place. Once you start looking for gray rhinos, they are out there all over the place. Companies have been destroyed because they didn’t take the obvious actions. If you’re looking for the obvious, if you’re doing that reality check, you are already way ahead of the pack.

This article originally ran in the September 2017 issue of CFA Institute Magazine.



Image credit: ©Getty Images/ Jenhung Huang

About the Author(s)
Nathaniel Jaye

Nathaniel Jaye is a speaker on intelligence. Jaye's insights and writing on human intelligence, technology and meaning have been shared on Business Insider, American Mensa, the American Monetary Association, and New York Hedge Fund Roundtable.

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