Why We Suck at Planning for Catastrophic Events

Why We Suck at Planning for Catastrophic Events

COVID has disrupted everything and is bringing about unprecedented changes. However, while many say that we could not have expected COVID, that is not the case. Many people raised the alarm over or planning for a pandemic, from Bill Gates to George W. Bush and Obama administrations. And this is not the first time.

If we look back at the Financial Recession, that was not entirely unexpected. Several people saw the problem and were either raising the alarm or trying to profit from it. As Nassim Nicholas Taleb has stated on several occasions, these are not actual Black Swan events, they were predictable, and the probability of them happening was far more extensive than we recognized.

Finally, even when these calamities are bearing down on us, we tend to do little to avoid them until it is too late. The Administration’s response was lacking in preparing for COVID, even though we knew about it coming out of China. How many times do we see a hurricane bearing down on the coast, and even though there is a mandatory evacuation, people refuse to leave, often paying for such decisions with their lives?

It seems there are some reasons.

 

Economic Behavior

Why we prepare so badly is basic economics. In our continual pursuit to improve efficiencies and be either more profitable or less wasteful, it becomes harder to justify spending money on events that we are uncertain will occur. Thus companies moved to just in time systems with no redundancies or excess inventory, which failed them when COVID hit and disrupted shipping. Companies had moved production to lower-cost centers overseas, which caused huge issues when COVID shut down operations in those countries. Finally, I think we have seen the failings of our economic priorities in the U.S. healthcare system, which is not designed for dealing with a public health care crisis, but rather for making a return to investors.

Former Governor Arnold Schwarzenegger invested $200 million in three mobile 200-bed hospitals deployable to the scene of a crisis within 72 hours. Each hospital would be the size of a football field, with a surgery ward, intensive care unit, and X-ray equipment. Medical response teams would also have access to a massive stockpile of emergency supplies: 50 million N95 respirators, 2,400 portable ventilators, and kits to set up 21,000 additional patient beds wherever they were needed. As Schwarzenegger told a news conference, “In light of the pandemic flu risk, it is absolutely a critical investment, I’m not willing to gamble with the people’s safety.” However, in 2011 facing a recession and budget deficit of $26 billion, Former Governor Jerry Brown cut funding for the program.

Thus in our continual drive to be efficient, investments in backup systems and redundancies quickly get cut. For governments, there is always the demand of current situations that take priority over planning. Thus, our economic behavior leaves us vulnerable to the crisis when it arises.

However, once a crisis hits, we are terrible at dealing with it, and that is due to three psychological issues: normalcy bias, optimism bias, and our herd instinct. 

 

Normalcy Bias

Normalcy bias is a cognitive bias that leads people to disbelieve or minimize threat warnings until we are overwhelmed and cannot respond. Thus, individuals underestimate the likelihood of a disaster, when it might affect them, and its potential adverse effects. Normalcy bias causes many people to inadequately prepare for natural disasters, pandemics, war, and calamities caused by human error. During a disaster, about 70% of people reportedly display normalcy bias. Normalcy bias is also called analysis paralysis, the ostrich effect, and by first responders, the negative panic. 

Throughout history, there plenty of examples of normalcy bias.

  • When Vesuvius erupted, the residents of Pompeii watched for hours without evacuating. Thousands of people refused to leave New Orleans as Hurricane Katrina approached.
  • At least 70% of the 9/11 survivors spoke with others before leaving. 
  • Officials at the White Star Line made insufficient preparations to evacuate passengers on the Titanic.
  • Passengers on the Titanic refused evacuation orders because they underestimated the odds of a worst-case scenario and minimized its potential impact.
  • Experts at the Fukushima nuclear power plant believed that a multiple reactor meltdown could never occur.

So how do we overcome Normalcy bias? Amanda Ripley, author of The Unthinkable: Who Survives When Disaster Strikes – and Why explains that there are three phases of response:

  1. Denial. People are likely to deny that a disaster is happening. It takes time for the brain to process information and recognize that a disaster is a threat.
  2. Deliberation. In this phase, people have to decide what to do. If the individual has no plan, the problem is serious. The effects of life-threatening stress on the body (e.g., tunnel vision, audio exclusion, time dilations, out-of-body experiences, or reduced motor skills) limit an individual’s ability to perceive information and make plans.
  3. Decisive Moment. Here a person must act quickly and decisively. Failure to do so can result in injury or death.

According to Ripley, the faster we can get through the Denial and Deliberation phases, the quicker we will reach the Decisive Moment and begin to take action. 

 

Optimism Bias

Optimism bias is a cognitive bias that causes someone to believe that even though bad things are happening around me, I will do better than everyone else. It is also known as unrealistic optimism or comparative optimism. Optimism bias is “Even if bad things are happening around me, I will do better than everyone else.” Optimism bias is common and transcends gender, ethnicity, nationality, and age. Four factors cause optimism bias in people:

  1. their desired end state,
  2. their cognitive mechanisms,
  3. the information they have about themselves versus others, and
  4. overall mood. 

A typical example would someone diagnosed with aggressive cancer, and ten specialists tell them they have little chance of survival. However, an eleventh tells them they will be ok, so they believe the 11th. Other examples are:

  • smokers feeling that they are less likely to contract lung cancer or disease than other smokers,
  • first-time bungee jumpers believing that they are less at risk of an injury than other jumpers, or
  • traders who think they are less exposed to potential losses in the markets.

 

Herd Instinct

We are social animals, and we take our clues from those around us. If we know a tsunami is coming, but no else is leaving, we figure it is safe to stay, even though we understand a tsunami will cause a calamity.

 

So what to do?

From an economic behavior point of view, we will have to bear additional costs and waste to maintain preparation. I would expect that for a while, at least a decade or more, we will ensure we have back up lines of supply and more inventory than we need. However, once all memory of COVID has passed, and there is another generation making decisions which did not experience it, costs cuts will return with our move to efficiency.

Concerning our biases, we need to understand them and be prepared. With normalcy bias, we need to have plans on what to do in the case of an emergency. Luckily for the economy, the experience of the Great Recession was still fresh enough that governments knew that had to provide financial support in large amount to stop the economy collapsing, which they did. However, for a lot of emergencies, we will not have the benefit of a recent crisis to fall back on as a guiding example.

Unfortunately, like the generals, in planning for crises, we tend to “fight the last war.” However, each situation is different. What will out next problem be, A.I. went amuck, climate change? Who knows, but it may be something we have not experienced yet, or even if it is, e.g., a public health crisis, the disease may be very different, requiring a different response.

A great example of our failure is Climate Change. We know that climate change is coming, and a recent report by the U.S. Commodity Futures Trading Commission (CFTC) starts by saying climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.” The report, “Managing Climate Risk in the U.S. Financial System,” was written by a group of 35 advisors from major banks such as Morgan Stanley and JPMorgan Chase, environmental groups such as The Nature Conservancy and Ceres, energy firms such as B.P. and ConocoPhillips, several investment firms, and experts from several universities. According to it, regulators “must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks.”

However, our economic behavior justifies us doing nothing since the costs of prevention are so high. The vested interests of doing nothing spend an enormous amount to ensure nothing changes. Of course, the price of prevention is high compared to what? We always underestimate the expense of the crisis, as COVID has dramatically shown. The annual costs of climate change continue to grow, as we experience more significant fires, hurricanes, and damage to crops. 

Concerning normalcy bias, we have one denial and not enough deliberation. Concerning decisive movement, the Republican chairman of the CFTC, Heath Tarbert, acknowledged the risk of climate change. Still, he said, “The subcommittee’s report acknowledges that ‘transition risks’ of a green economy could be just as disruptive to our financial system as the possible physical manifestations of climate change, and that moving too fast, too soon could be just as disorderly as doing too little, too late.” Basically, we don’t have a plan!

Concerning optimism bias, we have a situation where 97 percent of actively publishing scientists believe human activity is causing global warming and climate change. However, we cling to the three percent who are deniers.

Finally, herd instinct, we don’t want to be the first or do something that we are not sure others will do.

However, if you wish to protect your business, it would be worth investing time in understanding the effects of climate change on it and developing a plan to protect yourself. Start follow Nassim Taleb’s advice and build “antifragility” into your systems, which provide robustness to black swan events. An application of the least fragile risk management approach, according to Taleb, is the “barbell strategy,” which seeks to avoid the middle in favor of a combination of extremes. How that applies to your business will be different, but planning should start now.

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The Hotel Market – COVID Is At Work

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For a long time, the middle market hotels have been the growth behind the U.S. hospitality market. The established brands like Hilton Garden in and Courtyard by Marriott have led the way, followed by many new brands that have started, e.g., Aloft, and element. The key to these products was:

  • Good business location;
  • Good clean rooms with complimentary wifi;
  • Free breakfast;
  • Happy hour or a bar where you could get a drink; and
  • Some form of shop that provided snacks.

Well, COVID once more has sent a wrecking ball through the industry. Free breakfasts, elevators, and happy hours are out in the world of social distancing and COVID. Business travel is way down and how much it will return is debatable. Among my clients, the majority says that while they will start traveling again, primarily when their clients want to see them, they expect it to be at 50% of the pre-COVID levels. As a result, like the U.S. retail industry, we may have too much supply! As a result, I would expect rates and values to fall.

However, what is very interesting is what is happening at the two extremes of the industry.

 

Luxury Hotels

During June and July, many luxury resort and city hotels were catering to the wealthy who had their international travel plans disrupted. However, in August, unexpectedly, they found no one was ready to return home, and demand was increasing. Guests were all looking for a second, third, or fourth pseudo home, and finding luxury hotels met that criteria. As many of these hotels’ clientele can work from home and are schooling from home for the foreseeable future, there is no need to be tethered to their usual residences. Instead, they are interested in multi-month hotel bookings to bypass a cold-weather span of locked-down living stylishly.

Not only do these properties offer a change of environment, but many guests “do not feel safe in [their own] homes with staff members coming in and out, without proper protocols in place,” said Ed Mady, the regional director of the Dorchester Collection. The Beverly Hills Hotel and Hotel Bel-Air, managed by the Dorchester Collection, have seen an increase in 90-day bookings since the advent of  COVID-19, primarily from L.A. natives. The Dorchester Collection properties all have an on-site nurse and a dedicated director of risk management to ensure full compliance with CDC guidelines.

At Timbers Kaua’i’i in Hawaii, over 25 percent of the guests 30+ night stays booked. On the East Coast, Gurney’s Montauk and the Ocean House in Rhode Island have many guests staying for a month or more during the fall.

As a result, many hotels are pivoting to meet this new demand. Auberge Resorts, which owns 19 hotels worldwide, has experienced a 300% increase in the length of guests” stays. As a result, it is offering “Remote With Auberge” packages. Some of these packages for two months offer private tutoring services for children, personally stocked in-room kitchenettes, pet care, and laundry with a 30 to 40 percent discount.

However, even with these discounts, it is not cheap! A recently booked year-long stay at Rosewood Miramar Beach’s’s two-bedroom residence in Montecito, CA, costs approximately$1.1 million.

 

Economy Hotels

Meanwhile, at the bottom of the industry, motels are making a comeback. Initially, travel stopped for all but essential workers, truckers, doctors and construction, maintenance, food-processing, agriculture, and government workers who are always more likely to use budget-style hotels.

As the summer came, those that wanted to travel domestically and maintain social distancing by avoiding airplanes, elevators, crowds, and questionable HVAC systems turned to road trips and motels. Many of the middle-market hotels that were accepting guests had closed their spas, fitness centers, indoor dining rooms, swimming pools, and other amenities, but were maintaining their rates. Many travelers saw they now paying $250+ per night to get the same services they get for $100 per night at a motel.

Motels are typically one- to two-story properties with exterior corridors and parking lots in proximity to the 12 to 35 guest room doors, said Jan Freitag, senior vice president of Lodging Insights for the data and analytics firm STR. Often referred to a U2s because of their “U” shape and two stories. The benefits of such properties are:

  • Allow guests to avoid contact with others;
  • Don’t feature elevators;
  • No large common spaces; and
  • Each room has its own heating and air unit.

Thus, guests have a sense of control over their environment.

Besides, motels are benefiting from the nostalgia that COVID has released. Along with the demand for homemade bread, playing board games, and reading, staying in motels appeals to the fantasy of simpler times.

The perfect storm of COVID, which is damaging the middle market hotels, is saving motels from extinction, at least for the moment. Will the demand remain post-COVID is yet to be determined.

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All Employees are Equal; Just Some Feel Parents are more Equal than Others

All Employees are Equal; Just Some Feel Parents are more Equal than Others

Schools are reopening to various degrees across the county. However, these degrees are causing a multitude of issues, and the problem is more complex as the degree is not state by state but in many cases, county by county.

As the schools reopen, we are experiencing everything from virtual schooling to full in-person instruction and everything along the spectrum. Many of the schools with full in-person teaching face resource issues as many older teachers, who are at risk, are retiring rather than working, putting more pressure on the schools’ resources. Besides, while some child care programs are also beginning to reopen, for many, the crisis has taken its toll and will never reopen, aggravating an already strained child care system. To further compound the issue, even if child care and schools do fully reopen, some parents may not be confident in those environments’ safety and opt to keep their children home.

In 2018, over 41 million U.S. workers ages 18 to 64 were caring for at least one child under 18. Of these, nearly 34 million have at least one child under the age of 14 and are more likely to rely on school and child care than parents of high school-aged children. Besides, 70%, or 23.5 million working parents, do not have any potential caregivers at home, and their return to work will likely be dependent on the reopening of child care programs and schools.

However, these parents working from home face an impossible balancing act every day, keeping up with their work while caring for and teaching their children. Others have been laid off, left their jobs to care for their children, or been forced to cobble together temporary child care arrangements to report for work at essential jobs, such as nursing and grocery work. Ultimately, the status of schools and child care programs in the fall will largely dictate the speed and robustness of economic recovery.

Working parents who rely on child care and school also make up a significant share of employees in education, health care, social assistance, finance, insurance, public administration, management, and professional services. In these industries, at least one in five workers depends on child care and schools.

For those working parents, the uncertainty surrounding child care and in-person instruction for school-aged children is unprecedented. As a result, there is an unfolding series of consequences on family life, education, and earnings. The implications for corporate health also need consideration.  

Many tech companies have rushed to help their employees, extending new benefits, including extra time off for parents to help them care for their children. However, a backlash has started. Many nonparents of minor children are saying that they feel under-appreciated, as they shoulder a heavier workload, and all the policies are directed to parents of minor children.

Parents of minor children are frustrated that their childless co-workers don’t understand how hard it is to balance work and child care, especially when daycare centers are closed, and they are trying to help their children learn at home. Some say that they cannot get any real work done during the day as they help their children, so they have to work longer at night, resulting in burnout.

The schism has been at the major tech companies, e.g., Google, Facebook, Twitter, and Salesforce. However, it has been most vividly on display at Facebook. In March, Facebook offered up to 10 weeks of paid time off for employees if they had to care for a child whose school or daycare facility had closed or for an older relative whose nursing home was not open. Google and Microsoft extended similar paid leave to employees dealing with children at home or a sick relative. Also, Facebook announced that it would not be scoring employees on job performance for the first half of 2020 because there was “so much change in our lives and our work.” Every Facebook employee would receive bonus amounts, usually reserved for outstanding performance scores. This policy irked some childless employees who felt that those who worked more should receive more pay. Other childless employees felt they should also get the ten weeks paid leave just like parents, creating significant friction. Some parents at Facebook felt negatively judged and that a child care leave was hardly a mental or physical health break. One Facebook parent wrote, “Please don’t make me and other parents at Facebook the outlet for your understandable frustration, exhaustion, and anger in response to the hardships you’re experiencing due to Covid-19.”

Sheryl Sandberg, Facebook’s chief operating officer, was asked on several occasions what Facebook could do to support nonparents since its other policies had benefited parents. Ultimately she said Facebook has tried to design its leave policies to be “inclusive.” “I do believe parents have certain challenges,” she said. “But everyone has challenges, and those challenges are very, very real.”

As a result of the tension, Facebook has had to shut down some internal discussion boards. In August, Facebook announced that the leave policy would remain in place through June 2021 and that employees who had already taken some leave this year would receive another ten weeks next year. This extension further angered some nonparents who feel the company seemed less concerned about their needs.

However, even pre-pandemic resentment from employees without children about extra parental benefits existed. But like all things, COVID has amplified that tension. Parents who had usually been able to balance work and home struggle to help their children learn remotely while still doing their jobs.

Thus, how to deal with this friction? It requires:

  • Good corporate communication. Erin Kelly, a professor at MIT’s Sloan School of Business, who studies workplace policies and management practices, believes that this tension results from companies failing to do a good job explaining that what benefits parents can benefit the entire workforce. “A question that we might ask the employees who are feeling some frustration about their co-workers being on leave is what do you think is going to happen if that person quits?” she said. “You’re going to actually be stretched further.”
  • Empathy. A hard trait in our self-centered culture, and especially in many tech companies full of STEM students who have not had to learn compassion. One has to realize it is a difficult situation for everyone, but added Laszlo Bock, Google’s ex-head of HR, “for people to get upset enough to say that ‘I feel this is unfair’ demonstrates a lack of patience, a lack of empathy and a sense of entitlement.”
  • Core Values and Culture. How does your organization expect you to behave? If your values are only about money, then the friction will get worse. Core values and culture are essential and will be vital in binding the organization together through these times. At times like this, culture truly eats strategy for breakfast.

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Burnout! Houston We Have a Problem

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For most of us in an office environment, it is now over five months since we vacated our office and began working from home. While some companies are seeking to have employees return, many are pushing that back until sometime in 2021. Also, in some areas with children returning to “virtual” school,” work from home will continue for a while.

While the data shows that overall productivity is up, what is becoming apparent is that few are taking vacations since COVID hit. According to a recent survey by the global online employment platform Monster, 59% of employees are taking less time off than usual, and 42% of those working from home are not planning to take any time off to decompress. SAP internal data shows employee vacation usage is 4% vs. 24% for the same period last year. For many employees, a combination of cancellation of events, summer camp closures, risks from travel, and minimal ability to travel internationally has led to a deferment of vacations. 

However, fewer vacation increases the risk of employee burnout. The recent Monster survey revealed that 69% of employees are experiencing burnout symptoms while working from home, an increase of 20% since a similar study in early May. In addition to the burnout, financial anxiety is also causing mental health issues.

The World Health Organization has updated its definition of burnout from a stress syndrome to “a syndrome conceptualized as resulting from chronic workplace stress that has not been successfully managed.” Three symptoms characterize burnout:

  1. feelings of energy depletion or exhaustion;
  2. increased mental distance from one’s job or negative feelings toward one’s career; and
  3. reduced professional efficacy.

The damage employee burnout can do to an organization is very real. Individual employee burnout reduces productivity. Also, as employees begin to show symptoms of burnout, they transfer their stress (and workload) to others–and the burnout spreads. 

With so few employees taking a vacation, issues of what to do are arising.

  • Give employees more days off during the year, e.g., a Friday a month.
  • Make employees take staycations? 

The odd day off used to be a great break, but working from home, it is just the same as being at the office. So the rest and recharging that it used to offer are no longer there.

Encouraging employees to take staycations may sound good for their mental wellbeing. However, according to an HR Consultant, “The type of staycation where you don’t travel, but you stay home and forget all things work-related for a week feels different when you are working from home. [ The staycation ] is not by choice, and there is a lot of fear, trepidation, and isolation involved. If you don’t have enough space to have a completely separate work from home space, your staycation will feel like you just took a pillow and blanket into your office.”

Finally, some are taking vacations, but not turning off during that time. Since we can all work virtually, they are just continuing to work but at the vacation spot rather than at their home. This type of vacation defeats the purpose and results in the break being ineffective at reducing stress and burnout.

Another issue that is arising is what to do with all the unused vacation time. Many companies that have a use it or lose it policy may find that people lose it during these uncertain times, but that probably increases the risk of burnout. Another large set of companies are revisiting their employee policies to allow for unused vacations to roll over into 2021 so that when things allow for holidays, employees can use them. Right now though 2021 may not be long enough and rolled over vacation is a liability carried on the balance sheet.

Like many things during COVID, the situation is fluid, and flexibility is critical. First, though, find a way to reduce burnout and get your employees downtime. Then you can figure out what to do with vacations.

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What is happening out there? Airbnb confidentially filed for its IPO last week. In the spring, the company laid off 2,000 employees and was negotiating over the terms of two fundraising deals totaling $2 billion in debt and equity.

However, total consumer spending on Airbnb in July was 22% higher than in the same period last year, according to Edison Trends. According to the company, it surpassed 1 million bookings on a single day that same month, led by an increase in stays at nearby destinations.

So, are we returning to normal? I would answer no, but there is hope. Normal is a long way away as people are still scared and want to social distance. However, given we can only take so much of staring at the same four walls, we are heading on vacation. Those vacations may not be the ones of pre-COVID days with cruises, trips abroad, or all-inclusive resort, but booking a house for just our family or close friends that we trust, works! Thus as the company reported, bookings are up for close to home destinations, basic economic substitution.

Along with other reports, consumer spending has increased during the pandemic, and I put that down to the fact that we are not spending as much on other things, e.g., commuting, sports, and meals out. However, will that spending last? Last week the Labor Department reported first-time jobless claims increased to 1.1 million, and it was the 22nd consecutive week claims exceeded those during the worst week of the Great Recession. On the positive side, the total number of Americans collecting unemployment fell from 15.5 million to 14.8 million, the lowest since early April. This data goes to show that the recovery will not be quick and a V-curve.

Where exactly are we headed, I am not sure. I hear lots of talk of continued layoffs ahead with about Wells Fargo and Boeing announcing more cuts as well as many smaller companies planning layoff. There is a sense of uncertainty over Q4 2020 and Q1 2021, and expect many are taking a wait and see approach. However, with school restarting, albeit in a confused manner, the Federal Unemployment Benefits in unchartered waters, and Congress in gridlock, there is a lot of confusion out there.

However, as an old Keynesian, the amount of stimulus that the government has poured into the economy is why we are experiencing a robust recovery to date. According to economic theory, in a world of excess capacity and mass unemployment, a combination of vast government borrowing with monetary expansion will not fuel inflation until most of the excess capacity is exhausted, which is where we are now. A Keynesian fiscal stimulus financed with negative real interest rates will boost private consumption and investment and should generate above-trend economic growth. Before the cry of “Crowding Out,” arises from many as I heard during the Great Recession, where all indications showed none. Currently, with central banks worldwide committing to financing this Keynesian stimulus with zero or negative interest rates for years ahead, there is no risk that public borrowing will crowd out private investment.

Thus, will this Keynesian stimulus lead to a healthier and longer growth economy? I would put that down to two factors.

  1. As always, public health. The sooner we adopt and proactive, data, and science-driven approach to the COVID crisis, the sooner we return to a functioning economy. Cases are rising again in Europe, which indicates that this is a marathon and not a sprint. I know for many, it already feels like a marathon, but the more apt analogy is the British in September 1939 saying, “It’ll all be over by Christmas!”
  2. The Stimulus. The actions by the Fed and the Congress, through the CARES Act, have injected substantial stimulus into the economy. However, as these have ended, we will have to observe to see what happens. As in the Great Recession, Congress stopped the stimulus too soon, for political reasons, which lead to a much weaker recovery than there should have been. Hopefully, this time, they will put the country first and give the economy what it needs to recover.

A lot of economists are arguing that the stock market is pricing in continuous stimuli for the economy, and if Congress fails to deliver the will, a market correction to accompany the economic contraction.

For those gnashing their teeth and anguishing over a Keynesian expansion, it is worth remembering that the 20 years of broadly Keynesian macroeconomic policy in place from 1946 until the late 1960s saw the most robust economic growth and productivity advances ever recorded. At the same time, we experienced generally moderate inflation and almost continuous bull markets in equities, property, and other real-value assets.

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