Risks — the long term is more difficult to see

Image via Wikipedia

Risks — the long term is more difficult to see

Great, short, podcast on risk: The public deals with risk using emotions more than mathematics. David Spiegelhalter argues there is good risk, and that we’re assessing and taking risks all the time in our daily lives. The bigger risks are often longer term risks and these are not as easy to see.

Obesity, lack of exercise, energy security and climate change are examples of future risk and the delayed affects of current activity. Making judgements of risk goes beyond statistical analysis. It also involves scientific judgement.

via Risks — the long term is more difficult to see – Farnam Street.

Prof. Spiegelhalter goes into much greater detail in this video (also in the “Fit for randomness collection” – see link in Headings) that gets particularly interesting after about 35 – 40 mins. when dealing with “uncertainty”.

He has a very easy, yet engaging, style. Which helps when dealing with, what, to many, is a pretty dry subject.

 

Complexity may be inevitable but it must be managed

So says Alan Bird is UK Head of the Organisation Practice at Bain & Company, the consultancy. I doubt very much that we would agree on every aspect of their definition or approach and, to the best of my knowledge, Bain & Co (like every other consultancy) only have a qualitative means of tackling complexity…rather them than me!!!

Complexity may be inevitable but it must be managed – Times Online.

Downturns reveal a company’s weaknesses. An organisation that seemed nimble and focused during a period of expansion may be sluggish and ineffectual when demand drops. One cause for this is complexity, often a consequence of success. As companies grow, typically they add complexity. Its costs usually are hidden, so executives often don’t grasp the magnitude of the problem – until a downturn hits.

Some level of complexity is necessary to sustain a competitive edge across a global organisation. For example, country or regional business units know better what local customers want, creating a need to define which decisions get taken locally or at headquarters. That kind of complexity in a global organisation can be vital to sustain sales through a recession….

How’s the outlook?: Right location, wrong forecast…

I “had” to share Part 1 of this blog earlier, under the title “Who wants to pay for Professional vanity?“.

There is little I feel I can/should add to Part 2. Well, other than, READ IT and, if you have an interest in the “hard science” take on complexity, read more!

Risk introduced by modellers of risk management – part 2.

Management focus should be on balancing all the historical information to develop a pragmatic strategy. This challenge quickly becomes non-trivial when dealing with systems with high complexity. What are needed are tools that can identify patterns within data and seek out quickly those parameters which affect the behaviour of systems at a macroscopic level. Management focus should also be on identifying sources of uncertainty in order to mitigate or eliminate them. What are not needed are more models that pretend to predict risk. And of course, some common sense is always helpful.

World Economic Forum: Global Risks 2010 – complexity perspective

The Annual WEF: Global risks report always makes interesting reading but, from a “complexity perspective” this year is of particular interest to us at Ontonix. Of course that is not to say that this is the full extent of the interest! It really gets meaningful when we are able to work with clients to tackle the issues that have been identified.

I have endeavoured to convey in the above graphic the inter-connections between the various domains. As we know, but sometimes forget, more life exists outwith the Economic domain than in it. Hold that thought. Keep it with you. Because interdependence is encoded in what makes and keeps us ALL.

SO, please take the time to read these extracts that, in one way or another, reference risks arising and/or increasing as a result of the “complexity” that comes from inter-connectedness.

The messages are there for corporations to see but, it is very clear that, unless the carriers of financial and insurance risk proactively tackle the task of providing solutions they will fail their global clients, shareholders, reinsurers, investors, etc.

Attempting to resolve 21st century risks with 20th century tools and techniques can only have one outcome.

Cross-cutting themes

Three themes provide the backdrop for discussion in this report. As the first chapter discusses, the increase in interconnections among risks means a higher level of systemic risk than ever before. Thus, there is a greater need for an integrated and more systemic approach to risk management and response by the public and private sectors alike. Second, while sudden shocks can have a huge impact, be they serious geopolitical incidents, terrorist attacks or natural catastrophes, the biggest risks facing the world today may be from slow failures or creeping risks. Because these failures and risks emerge over a long period of time, their potentially enormous impact and long-term implications can be vastly underestimated.

The Global Risks 5i Framework applied to transnational crime and corruption

Insight: Crime and corruption thrive on the increasing complexity and opacity of supply chains and global markets. While various actors and institutions have visibility into segments of the chain, most often they lack the complete overview of the chain and interactions within it. Forward-looking risk management must therefore identify these interlinkages and account for the entire sequence of exchanges from the source to the distribution to end customers, identifying the trading routes and facilitators connecting each step.

Critical Information Systems and Cyber vulnerability

Who still wants to pay for Professional vanity?

My esteemed colleague, Bala Desphande (at Ontonix USA), delivers…as usual! If you want to read the full article here is the link: Risk of using Models in Risk Management – Part 1

I am still amazed how many people, in senior positions within major institutions, still argue for a belief system so dangerously flawed. They are fixated with the ability to predict the future and not a crystal ball in sight!!!

Conventional risk management, of the variety used by the likes of Lehman, involves calculating the probability of the maximum loss a given portfolio can experience over a specified time horizon. Let us unpack this statement for what its worth:

 

1. We first need to specify a time horizon – fairly simple,

2. We need to compute the return of this portfolio over this time period – any financial website can feed a spreadsheet to do this,

3. Then we need to state the probability that the return (or loss) will be below (or above) a certain value.

Hmm 3. gives me a problem! How much faith should any right-minded person have in a vision of our future based upon an incomplete picture of our immediate past, some mathematical theory and a model to satisfy the belief system. P-l-l-l-ease.

Related articles

• Why did the 2008 Financial Crisis Happen? (davidgwilson.spaces.live.com)
• “Physics Envy…” presentation by Prof Andrew Lo: Risk & Uncertainty (in financial systems) (davidgwilson.spaces.live.com)