“Disaster myopia”: Failing to learn the lessons of increased uncertainty

Financial or physical loss doesn’t only stem from “risk”! Risk we know a lot about. Dare I say that we understand, can quantify and influence (if not manage) risk? I would add one caveat though. Much of the accumulated data upon which probability and, therefore, rating is calculated, relates to a period which bears little resemblance to the world and civilisation as it is today…or will be in the future.

So what about the murky world of uncertainty that lies beyond risk? What do we know and what can we do to “deal with” that? Because that is what we are, increasingly, dealing with…

Today, there are fewer certainties.

Unfortunately, our habits of thought still make us look for linear trends and other simple patterns, and make us expect the future to be a recognizable version of the past. In many cases, we constrain our lives in an attempt to achieve such security, but in complex networks of competing businesses, in financial markets, in the world of emerging technology, and in politics, these expectations are out of place.

Organizations need to learn to distinguish between the kinds of problems that can be handled with traditional perspectives, where precise prediction and solution is possible, and the kinds of problems associated with unavoidable complexity.

Entrainment of thinking is an ever-present danger.

Mark Buchanan

“We” have made some huge mistakes and it would be naive to assume that those who masterminded the mistakes will not do so again! They may not have learned the lessons because…

they have not been punished nor have they felt the brunt of the pain, thanks to the debts (that span generations) being socialised.

Business Leaders need to become “Risk Leaders”…and quickly! Robustness or resilience is your goal.

If you aren’t already familiar with terms such as: complexity; systemic risk; “epistemic, partially or fully reducible uncertainty”; Fourth Quadrant; Knightian Uncertainty*, then you have some work to do to prepare a business for survival in the months and years to come.

In modernity it is pointless denying that we aren’t all part of an infinitely complex network of systems and ecosystems. We need to get “fit for randomness”:

  1. To take the “fat tails” of power law systems seriously. Expect change to arrive not gradually, in a way that will allow the organization to adjust in real time, but in sudden discontinuities of great consequence that reshape the business environment, bringing both dangers and opportunities.
  2. To recognise that globalization and decentralization bring risks as well as rewards, and that more is sometimes different — that increased interdependence can create the conditions for “emergent” threats that are traceable to no specific element within the system.
  3. To take note of the human element in efforts to become adaptable, in part by organizing practices to decrease “entrainment of thinking.”

*Here is some interesting reading I recently stumbled upon that will help with understanding risk, uncertainty and the economy: Risk versus Uncertainty: Frank Knight’s “Brute” Facts of Economic Life

2 Responses to “Disaster myopia”: Failing to learn the lessons of increased uncertainty

  1. I look at risk and uncertainty through the lens of the ISO31000:2009: “Risk management – Principles and guildeines”. This looks at risk as not merely relatve to an event but as a relationship. It defines risk as ‘the effect of uncertainty on objectives’. Among other, this indicates that risk does need to be only negative but can also be positive.

    • Maarten,
      Thank you for your interest in my blog and for taking the time to comment. Sorry it has taken me a while to deal with it…this has been a pretty hectic week.

      I must confess that I am not familiar with this particular lens…but will gladly take a look at it. I fully appreciate that the outcome of risk decisions can be both positive and negative but the “trick” is to ensure that the basis and quality of the decision-making process is robust. My issue is with the limitations of risk! That is that we are dealing with “known knowns” i.e. what we have experienced before, what, in theory, we have learnt from and have sufficient data to be able to determine probability of recurrence and/or impact, whether positive or negative. From the blog: “…bringing both dangers and opportunities“.

      I would recommend the presentation by Andrew Lo (see link in blog) for an in depth analysis of risk/probability and uncertainty.

      I have taken the liberty of copying this text of my recent contribution to a long-running discussion on Linkedin.
      The Question: Can you really measure and model risk?

      …I remain very surprised that so many learned people are still intent upon spending time on attempting to predict the future! Blindly quoting guidelines, rules and regulations as if some earthbound authority knows and probability will do the rest.

      I am no scholar but, patently, this is not the case.

      We may measure and manage risk. But I can’t help but come back to my main point that, while we can learn a lot from the past, with sufficient data and assumptions a risk model can be built. We should not ignore what we now know about the roughness of Mandelbrot’s fractals. Nor the fallacy of the Perfect Market. Even Modern Portfolio Theory assumes an equilibrium.

      Nice, “smooth” but rather too contrived.
      Life isn’t linear, it isn’t Gaussian – thin tailed. It is decidedly non-linear, interdependent [Power Law dist.] – fat tailed – and increasingly complex.

      Inter-connections and risk-decision options are multiple and “fuzzy”. Too much to calculate, too much to predict, too much – endo/exogenus – uncertainty, both natural and man-made…in every domain.

      Investing in prevention NOT spending on prediction has got to be the course to build robustness into our systems at every level.

      But the lead should come from the Financial Sector…who, after all, have most to lose (from systemic contagion) but can have much to give by acknowledging the limitations and incentivising sustainable resilience.

      As I say I am no scholar merely a concerned global citizen looking for the right, not the most convenient, answers!
      I hope this is useful to you and thanks again for your interest.


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