UK Gov. report:: high impact, low probability events
Wednesday, 15 February, 2012 Leave a comment
With thanks to Dave Marsay for his insightful analysis and comments
Risks arise in the world, so our view of the world affects our view of risks. If a risk is ‘really’ such a low probability then it seems reasonable not to let it dictate our lives. The real risk is from risks that are under-appreciated. For example, natural risks are often thought of as natural, but what is of concern is not so much the once in a century event that happens about once every hundred years but the one that happens more often. A natural disaster is possibly just bad luck, but more often its ‘likelihood’ or impact had been underestimated. Part of the problem is risk management itself. After a flood the risk of subsequent flooding is appreciated and drains are kept clear, but after a period without flood . we ’learn’ that floods are unlikely, the perception of risk reduces and drains can remain blocked. The risk of flooding increases. More generally, we manage our lives according to our perception of risk, thus there is a reflexive relationship: a risk is only a serious risk if it is under-appreciated. Thus the inherently challenging risks are those that are invisible, obscure, complex, confused or otherwise outside our management approach. Perhaps we should rise to the challenge?
“With sufficient knowledge and informed judgement uncertainty can be characterised statistically. It follows that strategic surprises arise from lack of knowledge or the inability to perceive the consequences of what is known”
This is reminiscent of the view that free will must be an illusion, because our actions are either deterministic or probabilistic (in the Bayesian sense). On the other hand, according to Keynes economies harbour genuine, non-statistical uncertainties, leaving scope for free will. Mathematically, statistics tell you about the past. Inferences about the future rely on some principle of induction. But if one has data that have been generated by a particular system (e.g. economic) the best that induction based on statistics can do is extrapolate the behaviour as if the system will endure. But it might not. Such, surely, are ‘high impact low probability’ events?