I find myself enjoying the beach more and more in retirement. I enjoy watching the people walking on the beach and of course enjoying the sound of the waves as they come crashing in. All in all, it is a very pleasant experience. And of course, I expect to continue seeing the beach and enjoying the beach experience. This has created a kind of “normalcy bias” …. the beach has always been pleasant and therefore I expect it will continue to be pleasant. Erudite Risk in its recent DRB risk report has discussed normalcy bias in detail. All risk managers and in-house counsel need to pay attention.
Normalcy bias can be seen as a major reason why so many companies as well as some countries were not prepared for Putin’s invasion. After all, Putin hadn’t invaded Ukraine for a number of years so the odds were that he wouldn’t…despite the signals leading up to the invasion. Normalcy bias can be seen affecting everyone’s perception of many kinds of risks. Yes, geopolitical risk is a major risk that is now looked at perhaps with a greater degree of interest. But financial risk, operational risk, and legal risk among others should also be looked at in a new light. Has normalcy bias affected a company’s perception of the risks it faces? If no one actually thinks risks should be taken too seriously as such risks have never led to a major crisis, have they really taken a hard look at the risks facing the company? Does the risk mitigation strategy really work when everyone’s perception is clouded by normalcy bias?
The Black Swan event may be more likely to happen than people think. In today’s business climate, more and more crises are beginning to happen when a few years ago many never thought they would occur. Everyone was lulled to sleep because of “normalcy bias”. So people tend to lump Black Swan events into risk events they thought would never happen. A kind of normalcy bias has set in, people continue to look at potential risk events as they always looked at them. Nothing happens until of course it does.
But risk events you never thought would happen may very well happen. Just because you look at the past or present a certain way doesn’t mean it will be the same in the future. North Korea hasn’t attacked South Korea in more than 70 years. Many look at the potential of a North Korean attack as nil because they don’t even remember the last invasion. Today, South Korea’s younger generations have no recollection of the post-war years and extreme poverty that many went through following the Korean War. Younger politicians think it is absurd that an attack would occur. But there have been warning signs. North Korea has ramped up its ballistic missile program as well as its nuclear testing. But a kind of normalcy bias or complacency has set in. If an attack occurs, it may catch everyone by surprise. Just look at the Russian invasion of Ukraine.
If you or your organization does business in South Korea or anywhere else in Asia, are you prepared in case there is an invasion or attack on South Korea? What about Taiwan? Or anywhere else in Asia? What plans are in place? Have you really spent time analyzing all the details or have you simply paid lip attention to it because everyone believes it won’t happen? After all, nothing has happened in 70 or 80 years (except for bombings, acts of terrorism and kidnappings, threats, nuclear bomb testing, etc). My advice when it comes to risk mitigation is to plan for every eventuality regardless of how you perceive it. Don’t let normalcy bias set in. This includes:
In essence, don’t let normalcy bias set in. It may be too late to act once the unthinkable happens.
Recently, a number of airlines have announced plans to cancel flights to South Korea due to the corona virus outbreak. Korean companies such as Samsung and LG have had to shut down production lines in some of their Korean based plants as well, causing a cascading number of economic issues to impact Korea’s economy as well as the world’s supply chain. Much of the world’s high tech based supply chain is based in Northeast Asia ( China, South Korea, Japan, etc.) and the negative effects of the corona virus can be seen everywhere. As a major supplier of memory chips, cell phones, computers, consumer electronics and home appliances, any disruption in Korea’s economy spells trouble for the rest of the world.
Until recently, for companies doing business in South Korea, the most pressing geo-political risk was the threat of war. Seoul is not far from the DMZ and any altercation between North and South Korea would have an immediate impact upon Seoul and its surrounding cities. However, the impact of the current virus, drives home the fact that for companies doing business in South Korea, not only do they have to think of geo-political risk in terms of war, but as health emergencies and pandemics as well. Therefore, a company contemplating potential business projects in Korea must at least on a tactical level consider the implications of geopolitical risks as well as everyday market risks such as financial, legal and operational risks.
Considering recent geo-political events, many companies should review old risk management policies and procedures, in case updates are needed. Companies are only now beginning to realize they are not prepared to handle the escalating risks caused by the corona virus. Of course, what happens if there really is a true global pandemic? Many companies are not prepared for that. Some risk management processes that should be reviewed are not being considered as they are viewed as too expensive or impractical. Such is the case with political risk insurance.
Companies face many kinds of risks when engaged in offshore projects; of course geo- political risk is one of them. This comes about when a government changes its policy, ideology or even itself which creates instability, disorder, war, strikes, riots, etc. Or of course health risks that effect the region. What must be done to manage such risks? Political risk insurance comes to mind, but some forms of political risk insurance that are offered by capital –exporting nations ( such as OPIC, etc.) is subject to politically motivated conditions or motivations that may not take the needs of the investor into account. Case in point- OPIC can only operate in countries which have a bilateral investment treaty with the US. If you are a US investor trying to invest in a country which lacks a bilateral investment treaty with the US- you are out of luck when trying to obtain political risk insurance from OPIC. This is true of outer countries which supply similar political risk insurance through export development programs.
For more on political risk see my previous blog: “Managing Political Risk” at Seoullegalriskmgmt.com.
