Tempus fugit:: Extreme Risks update [report from Towers Watson]
Thursday, 8 March, 2012 Leave a comment
Towers Watson are doing some sterling work at the minute whilst others appear content to believe that the future will closely resemble the past…strange, when you consider how much the world has changed in the last 20 years, let alone the last century! As the Founder and CTO of Ontonix, Dr Jacek Marczyk, put it:
“Running a company based on just the financials is like driving a car by only looking at the rear view mirror!”
This statement can be readily adapted to apply to classical economics, credit and risk rating (& modelling) that have been shown to be “deeply flawed”. Compounded by an unchanged culture and utilisation of risk management tools and techniques (from the Industrial era) that have failed, so spectacularly, in the Digital Age.
We “know”: about the differences between risk and uncertainty: that interconnected entities present a very different probability distribution; about “Black Swans” and low probability/high impact events; the threat of “systemic risk” is significant and straddles domains as readily as it transcends “scales” (micro to macro), business sectors and national borders; that, in the face of uncertainty, we NEED to (re)build RESILIENCE…
Regrettably, the common approach (particularly in Financial Services) seems to be to overlook the inconvenient truth
because it is necessary for the revenue of the business, to convey the impression of knowledge rather than to admit apparent shortcomings. So reports, such as this, from Towers Watson and their recent The Wrong Type of Snow*, are necessary to counter the “mixed messages” (some may say misinformation) from Financial and Political leaders for whom the truth could be costly. At least in terms of position and wealth.
Tim Hodgson, head of Towers Watson’s Thinking Ahead Group, said:
“The global economic environment continues to be characterised by significant imbalances and consequently is not in good shape to withstand any further major shocks. This ranking lists a number of concerns that could disrupt the recovery and long-term economic developments and aims to help asset owners consider and manage their investment risk beyond the conventional VaR95 level.
“It should however be noted that even with the best analysis, we will not be able to anticipate all risks. While we have a list of 15 extreme risks, by definition they are ‘known unknowns’ and what might harm asset owners even more are the ‘unknown unknowns’. The important thing is to build our ability to adapt and learn, enhancing the resilience of the system.”
*I have just started reviewing the The Wrong Type of Snow report (like what I see so far) and aim to pull a blog together asap. Any input/comment welcome…as ever.