Airmic:: ‘Black Swan’ events – avoiding extinction


Practical advice, courtesy of AIRMIC & Marsh. The article is well worth a read even though all it really does is reiterate some of the key points I have been putting across since I started my original blog in 2009!

I have selected this extract as it identifies a huge failing that “stalks” the whole financial and risk sector but about which too few are prepared (or able) to be honest and many are even less forthcoming about its impact: ASSUMPTION.

The truth is that, without a healthy dose of assumption, the basis for flawed economic theory, mathematics that is as misleading as it is elegant and the computing power to turn it all into plausible financial models, they would not find it so, relatively, straightforward to relieve the populous (directly or indirectly) of our hard earned cash to enable them to wield – and abuse – the power that it brings!

There is an instinctive human tendency to form assumptions about the way our environment operates, allowing apparently rational and efficient decision making. This can lead to ‘risk blindspots’ as people not only stop challenging fundamental assumptions, but fail to remember they have made assumptions at all. This is particularly relevant when assessments are made around gross risk (before controls) and residual risk (after controls).

I find it ironic that, in reading the full article and taking on board the warnings about ‘assumptions’, one may still be led to believe that it is only ‘Black Swan’ events that cannot be predicted! It would be wrong to tag this as a long-held fundamental assumption as if only applies to ‘high impact, low probability’ events. The finest minds and most sophisticated computers CANNOT reliably predict anything meaningful about future events beyond the most immediate timeframe.

Of course it is helpful that we have huge amounts of data and risk modelling can be a useful guide BUT THAT’S IT!!! Why do you think that investment products carry the caveat that “past performance is not a guarantee of future returns”? In the Digital Age even relatively small enterprises are highly inter-connected and can be very complex. EITHER factor makes reliable prediction impossible.

This may help:

“High complexity is incompatible with high precision” – this is known as L. Zadeh’s Principle of Incompatibility

Risk v Resilience(1)

The problem is the solution…

Complexity: instead of wasting valuable resources on the industry obsession with prediction, time would be better invested in a deeper understanding of the nature of the problem. if we know that very real threats exist – not just the probable but the possible and plausible – and that we can’t predict them, there is no point in trying to manage them…but every reason to manage what IS within the scope of your influence if not control. That is to measure and manage the resilience of the enterprise you are intent upon protecting.

But remember: “we can’t fix today’s problems with yesterday’s tools”

Complex Systems, whether financial, technological [man-made] or biological [natural], can be analysed using the tools developed by Ontonix.

Think about it this way. If you go to your Doctor and are diagnosed with a life-threatening illness, would you rather a team of specialists:

  1. set to work calculating the likelihood of your survival based upon your symptoms and historic data about individuals with a similar health profile to your own?
  2. conduct further investigations to identify and assess the nature and extent of the illness, to tailor treatment to your specific needs?
  3. told you about how your lifestyle [risk culture] has been a major contributory factor and sell you on the notion that a homeopathic remedy (i.e. without any scientific basis) may, somehow, cure you?

If only all decisions were so simple!

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