Black Swans: The Surprise Malaysian Election Results

Strategic Analysis and the Artifice of Prediction

When we teach strategy at any level, we imply (even if that is not our intention) that through careful analysis and study we can predict the future. We encourage people to assess their industry, their organisation, their work unit, look further a field at politics, technology, economics, social demographics, the environment, and the law, and then widen our view to take into account national, regional and international trends. It is like casting a net into the ocean – and the theory is if we make our net very large, catching all the variables in our internal and external environment, we can predict the future, and plan accordingly. This theory of strategy supposes that there are no real surprises so long as analyses are done properly.

But no matter the analysis, study and research we put into our predictive efforts, some things always make it through our net. Part of this is the nature of the analysis itself – once you have hauled up the contents of the sea, what do you do with them all? How is it possible to deeply and thoroughly analyse every single variable, and then relate them to each other and analyse each relationship? By the time you have finished your analysis, all your information will be out of date. And then there is the human mind itself. No matter how rational, thorough and analytical we think we are, our own biases, experiences, and assumptions will colour our thinking and encourage us towards certain conclusions.

It is part of the philosophy of the organisation I work with, Paradigm Infinitum, to be up front about the frailties of strategic analysis. We do emphasise that it is impossible to know everything, account for every variable, and completely discount the emotional impulses of the human mind. And we also emphasise that all the analysis in the world is no substitute for taking action and actually doing something. We emphasise that strategic analysis gives us a glimpse of possible futures, scenarios, and issues that we can plan for to some extent. But it is not a crystal ball and we should not mistake it for such. Yet, in some ways the very nature of teaching strategy means encouraging belief in prediction.

Nassim Nicholas Taleb, a scholar with an interest in mathematics, statistics and related fields, recently proposed the theory of the black swan. The black swan is an event – good or bad – which lies beyond the realm of normal expectations. It is so out of the ordinary, random, rare or unexpected, that it is unforeseeable.

The black swan concept recognises that it is impossible to predict everything. Taleb argues that the human mind does not cope well with random events. We cannot predict something, or include it in our list of possibilities, if it has never happened before. Yet, our inherent need for explanation and our cognitive bias leads us to concoct explanations for black swan events once they have occurred. This offers us comfort after the fact -if only we had analysed the situation more thoroughly, we would have foreseen it, and now we will learn from our mistake and it will never happen again. This is very easy to do with hindsight – and almost impossible to stop ourselves from doing. September 11 is a prime example. So much analysis has been poured into understanding the lead up to the event, after the fact, and much has been made of what could have been done. Others argue that the Boxing Day Tsunami could have been predicted and the catastrophic number of deaths averted. Taleb would argue that these events were so out of the ordinary and rare, that even with all the information available and the time to analyse the information, these events are unlikely to have been prevented.

A black swan that swam by me recently was the March Malaysian election results. These were a real surprise and are being hailed as a revolution, akin to “the fall of the Berlin Wall” according to one commentator – the results are causing shockwaves around the region. The great Malaysian intellectual stalwart himself, Royal Professor Unku Aziz said that the 12 th Malaysian general elections is not a new chapter in Malaysian politics, but a whole new book. Yet, no one predicted it. How did such a significant change sneak under the radar of almost every commentator on these events?

To us here in Australia, the results don’t seem that significant – the national government is still controlled by the ruling coalition, Barisan Nasional. In the Australian federal elections in November 2007, the government changed and we didn’t make a big song and dance about it. Maybe it is unwise of me to put the Malaysian Elections into the category of black swan along with other far more tremendous events. But it is illustrative of the concept, a rare event that was not predictable, and certainly in a Malaysian context it could indeed be hailed as a black swan. The event is significant for Malaysia as it is only the second time since independence that the ruling coalition has lost its two thirds majority in Parliament. And for the first time, the loss of absolute power has not been met by violence and racial riots. A number of states are now ruled by the opposition as well. There is some possibility that the ruling coalition might still fall if some MPs cross the floor of Parliament to side with the opposition. It might not look like a “revolution” but for Malaysians who have long come to expect no electoral change it is a true and unexpected awakening.

The Malaysian Election Results: Unforeseeable or Implausible?

First, let us look at the background of the Malaysian elections. Malaysia is a multi-racial state – people of Malay background make up around 60 per cent of the population, with around 25 per cent Chinese, 8 per cent Indian and 7 per cent indigenous. Race plays a big role in Malaysian society. Since independence in 1957 the ruling coalition – Barisan Nasional – has always had at least a two thirds majority of seats in Parliament. Barisan Nasional is a coalition of the UMNO (United Malays National Organisation, a Malay party), MCA (the Malaysian Chinese Association, a Chinese party), MIC (Malaysian Indian Congress, an Indian party) and a number of other smaller parties. The first thing you will probably notice about the list of coalition parties is that the parties are racially based. Even the opposition parties in Malaysia are largely racially based – something we can hardly imagine here in Australia.

The other occasion when the ruling coalition lost its two thirds majority is known ominously as ‘513’ or the May 13 incident. In 1969, a coalition of opposition parties took 52 per cent of the popular vote – but due to seat distribution, did not take government. What exactly happened after the 1969 election is disputed, but in the capital, Kuala Lumpur, a race riot ensued between Malay and Chinese, and later Indians as well. At least 6,000 people were made homeless (90 per cent of these victims were Chinese), and a great many homes and businesses were destroyed. Officially around 200 people died, although independent sources give much larger figures. The country was put under a state of emergency which wasn’t lifted until 1971.

1969 has left a permanent scar on the Malaysian psyche. Indeed, members of UMNO have often reminded the other races of the incident, implying that to vote against the coalition will lead to a repeat of the incident. At the time of the 1969 election, Chinese and Indians made up almost half of the population. Due to migration and differing birth rates between the races, Malays are now around 60 per cent of the population. If a racial riot happens today, the minorities’ numerical disadvantage is much greater than before. Since 1969, Malaysians have also come to enjoy quite a stable economy and good standard of living compared to some of their neighbours – and frankly no one wants to give that up. The very thought of the electorate voting against the ruling coalition and risking another May 13 incident was just unthinkable.

Or was it? The recent election was a snap election. It was called just weeks before former deputy Prime Minister and now leader of the opposition party Keadilan (Justice Party), Anwar Ibrahim, would become eligible to stand for election. Several years ago Anwar had a sudden and bitter fall from power in UMNO. While filling in as Prime Minister in 1997, Anwar had taken action against cronyism and nepotism in UMNO,. This challenged the authority (and some say, the vested interests) of the then Prime Minister Mahathir. Anwar was quickly deposed and disposed of – questionable sodomy and corruption charges saw him imprisoned until after Mahathir stepped down from power in 2003.

Unlike the other opposition parties which include the DAP (Democratic Action Party, a Chinese based socialist party) and PAS (Islamic Party of Malaysia, a very conservative Malay based party), Anwar appeals to urban Malays. Before he was arrested, 100,000 people attended a rally to support him. If the Barisan Nasional and UMNO in particular did not conceive of the possibility of Anwar winning the election, would they have bothered to move the election so suddenly?

The answer here is actually, yes. The two thirds majority allows the ruling coalition to change the constitution at will – not a power it wants to relinquish. Even a small loss of seats or overall vote is seen as a significant challenge to Barisan Nasional’s authority. But no one expected such a blow to it’s majority. And this was without Anwar as alternative Prime Minister.

The results were quite remarkable. Barisan Nasional only just scrapped by with barely over 50 per cent of the popular vote. Despite this huge boost for the opposition (Keadilan, DAP and PAS have a loose coalition against Barisan Nasional), it did not translate so well into seats in Parliament, due to apparent gerrymandering. For example, one seat in Putrajaya held by UMNO has 5,000 voters. Contrast this with a seat in Penang that has 87,000 voters. However, the results were still very significant. Prior to the election, the opposition held a total of 19 seats of 222 seats in Parliament. Now the opposition has 82 seats.

Did anyone see this one coming? No commentators here or in Malaysia really expected a change from the status quo. The opposition parties hadn’t really seen themselves as a possible alternative government. There are four million people in Malaysia who are eligible to vote, but have not registered. Would they have registered if they thought there vote would have some affect on the outcome?

Was it predictable? This election was hard fought – there were a lot of personal attacks, media beat-ups and unsavoury electioneering. With hindsight, there were a great many issues that could be seen to be pointing towards a backlash against Barisan Nasional. Race and racial discrimination was a big issue. It has been simmering for some time, with long resentment by minorities against the National Economic Policy which provides special opportunities and quotas for people of Malay background. More recently there had been a number of high profile cases in which Sharia law (Islamic law) had been applied to non-Muslims, which many believe is against the constitution. Destruction of Hindu temples and the perceived disadvantages of people of Indian origin had led to protests by Indians. There was a perception among Indian and Chinese that Barisan Nasional, and the MCA and MIC in particular, were not acting to protect their rights.

Corruption was also an issue. The current Prime Minister Abdullah Badawi had been swept to a 90 per cent majority at the last election on an anti-corruption pledge. However, since then the perception is that no action has been taken. In fact, Badawi’s own son-in-law, also an MP, has been repeatedly implicated in corruption. High profile cases such as one involving the apparent brokering of the appointment of judges, and corruption allegations against wealthy senior police also eroded confidence in Badawi’s pledge, as did the orchestrated murder by special branch police of a Mongolian model and (alleged Russian arms broker) linked to one of the Deputy Prime Minister’s key advisers. Of course, bringing the election forward to exclude Anwar no doubt had an effect as well.

But I don’t really believe anyone would have thought this result was possible. The shadow of May 13 looms large across Malaysian politics. It is hard to imagine people of any racial background voting for change when change could include the destruction of their homes, death of their loved ones, and plunging Malaysia into another state of emergency. After all, the electorate has consistently voted for Barisan Nasional since independence despite allegations of corruption and controversial policies. Malaysians have traditionally preferred the tainted but steady hand of Barisan to the possibility of social upheaval should an opposition party be successful.

Yet voters took a chance. They defied Malaysian style “electoral logic”. They broke out of the pattern of behaviour which had long been expected of the electorate by defying the threat to stability, and frankly, to their own safety, to erode Barisan Nasional’s majority. Malaysians now believe their votes can make a difference – perhaps many of those eligible but unregistered voters will take the trouble of registering now. An Anwar led government still holds some possibility if some Barisan Nasional members cross the floor and side with the opposition. Or perhaps Barisan Nasional will now see that accountability is as important as stability and get down to some serious reform. No matter what the future holds, the Malaysian electorate can no longer be taken for granted.

Black Swans and Strategic Analysis

One of Taleb’s major themes in his black swan concept is that as human beings, we have a tendency to overestimate causal relationships, and cannot account for – or accept – randomness. If we base our predictions on what has come to pass, in this case on existing patterns of behaviour within the Malaysian electorate, we cannot possibly hope to predict a black swan event. But that is the way we perform analysis. We base our predictions and assumptions on pre-existing patterns.

So what do we do? Do we forget about prediction, analysis, experience? Do we just wait for things to happen? No, we just need to keep some perspective. What Taleb tells us is that we cannot know everything. Black swans will occur, and rather than focus our energies on trying to explain them and make them appear less random after the fact, we can accept them and move on. All that analysis and explanation post-event is unlikely to prevent another black swan in the future – the significance of that analysis is our own need to contain the event via explanation. It is an exercise in comfort, not in rationality. Taleb argues that analysis and explanation of the specifics of a black swan event is useless, because a similar black swan event is so unlikely to happen again – it will not be a carbon copy of the previous event. However, understanding the event in a more general sense may help us prevent a black swan in the future.

We cannot dismiss strategic analysis and strategic thinking altogether, which Taleb seems to be on the verge of doing sometimes. I think it is important to note his work, but we should also note a few points here. Firstly, the hindsight with which we might analyse a black swan is also the hindsight that allows us to identify a black swan. How do we know a black swan until some time has passed? In the meantime, it might be a precursor to a series of similar events. We cannot know these things straight away, so maybe we should take note of the specifics. Also, if it is a human need to rationalise out an event in hindsight, why deny that need? As humans we have a need to know, understand and explain the world around us. Denying us the opportunity to analyse a major event after it occurs because it will never occur again is like saying humans should just stop every scientific endeavour right now, because we’ll never understand everything.

The black swan concept is very interesting to me in the study of strategy and strategic analysis. It reminds us 1) it is impossible to know everything; 2) human beings have an inherent need to explain the world around them in a rational manner, even if the desire to explain is itself irrational; and 3) really big surprising things are going to happen, and we are just not going to see them coming. Strategic analysis is a crucial activity for any organisation and if we have the luxury of time and the issue is important, it should be undertaken in a rigorous manner. But it is not infallible, and a black swan event is an important reminder that should help us keep our perspective.

Written by Shona Leppanen-Gibson