Risk: If we already “know” what we can’t but…

Rodin's The Thinker at the Musée Rodin.

Image via Wikipedia

…can, no longer, be sure of what we think we know, what do we actually know that is of any use to anyone relying upon our expertise?

No this isn’t an introduction from Donald Rumsfeld as a guest blogger but part of a serious question that, if isn’t answered correctly poses hard questions for the future of our industry.

Perhaps some explanation would help: we “know”, (well, understand) that we cannot predict the future – which could be pretty worrying for an industry whose success or failure relies upon the frequency and impact of a variety of events that haven’t yet and may never happen. But, in the absence of “special powers”, we have relied upon what we know i.e. what we can learn from the occurrence of similar events, in the past. We now have vast quantities of data, accumulated over many years by a wide variety of sources. The type of information with which Statisticians, Actuaries, Economists, Carol Vorderman can have hours and hours of fun with, aided by tried and tested techniques and the most sophisticated technology in our history.

Sophisticated interpretation of data affects almost every aspect of our daily lives, influencing decisions and the timing of individual and collective actions. Like consulting the shipping forecast before leaving port:

We have learnt how to build boats and to sail, the seas are charted, our course can be plotted, we have our forecast (so know when should be safest to set sail) and can rely upon technology &/or the stars to guide us. But, we cannot actually “know” the weather, it is part of our planetary ecosystem and, as such, is subject to rapid and catastrophic change.

We can do all that it is possible to do to mitigate the risks but the awesome power of a nature, with all its beauty and danger (both seen and unseen) has the ability to render past knowledge redundant: destroying crew, cargo and vessel in a matter of minutes – of course this is not the full extent of the loss as its impact “ripples” across associated businesses and beyond.

Risks (known probability: known loss) that are reducible have been assessed and managed but the voyage and connected enterprise(s) have become victims of ” irreducible uncertainty” (unknown or low probability: unknown cost). We have used our past knowledge to determine what is prudent to guard against future events.

BUT, what IF we have entered a new era that renders past knowledge redundant or (at best) misleading?

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 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 … Read More

What we have seen during the “digital decade” is the emergence of patterns found in nature that call into question what we thought we knew!!!

So, at what point or after how long do we contemplate that our forecasting tools and techniques are no longer reliable, the tolerances inadequate> Because, maybe, just maybe these stormy (turbulent conditions) represent the new norm and we have to re-evaluate what we “know”?

The invaluable lessons for our man-made world are that:

  • we should question what we think we know – you know what they say about assumptions!
  • conventional tools CANNOT “deal” with complexity
  • we can learn many more lessons from nature
  • resilience (or, per Nassim Taleb “anti-fragility”) should be our primary concern

No less than the Bank of England are taking these lessons on board (presentation and links)

There is common ground in analysing financial systems and ecosystems, especially in the need to identify conditions that dispose a system to be knocked from seeming stability into another, less happy state.

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