Risk = Probability X Consequences. Really?

“Wall Street thought it had risk all figured out…” should read that they figured out a marketing message given kudos by the number of Phd’s, MBA’s etc. employed by organisations whose appetite for individual/collective wealth and power was enabled by regulatory and credit (rating) regimes that suited the aspirations of politicians ALL at the expense of their citizens (customers) i.e. those that give them the means to function.

Their own greed and inability to continue to control information that exposed it, has been their undoing. Access to INFORMATION has enhanced our knowledge to such an extent that we have been able to recognise the MISINFORMATION that was presented as ‘knowledge and expertise’.

They created and profited from a volitile financial environment that, once globally interconnected, is beyond their control but, for as long as profits can be privatised and losses socialised, they will not suffer…until what has been ‘hidden in plain view’ can no longer be tolerated or sustained.

Time is nearly up.

Ontonix QCM Blog

Nik-Wallenda-tightroping-over-Niagara-Falls-1cv324b (image from www.impactlab.net )

Probably the most frequently used definition of risk is this one:

Risk = the Probability of something happening X resulting Cost/Consequences

This definition is flawed because of two fundamental reasons, which the formula itself suggests very eloquently:

1. Estimation of probabilities of future events is very difficult (while it is considerably easier when talking of past events). Rare events have very low probabilities and these are extremely difficult to estimate due to the fact that the sample of available data is very small (what is the probability of an event similar to 9/11?). Since this factor multiplies the “cost” in the above equation it is of paramount importance.

2. Estimation of the costs/consequences of these events. This is most difficult. Even after a catastrophic event it is difficult to estimate the total damage and cost.

However, the most important flaw is hidden and it is conceptual…

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Ontonix S.r.l.: Complexity Profiling and Causality

See on Scoop.itComplexity & Resilience

Complexity is a measure of how much information a system “contains” and how much this information is structured. One could simply sum up the Shannon entropies of each variable and conclude that this is the total amount of information in a system. However, because variables can be correlated, they give rise to structure. Structure means the system can “do more” and, potentially, perform new functions. Structure is present everywhere in Nature.

David G Wilson‘s insight:

The potential to track causality through identification of ‘Causal Relationships’ offers insight where an early warning can serve as a means to prevent a potentially major loss.

Invaluable insight for carriers of financial and insurance risks where the causal relationship between its own profitability and risk profile is apparent…so, WHY, if loss prevention is achievable, are those charged with the responsibility to underwrite such risks, ‘content’ with conventional wisdom and a limited ‘risk horizon’ when:


See on ontonix.blogspot.it

Is it Possible to Make Predictions?: don’t ask an Actuary or statistician

Probability and Measure
Probability and Measure (Photo credit: John-Morgan)

I don’t consider myself particularly clever but I understand that, when it comes to matters of finance and insurance, we CANNOT predict the future. So, why is it that extremely clever, highly educated, people don’t appear to understand OR are prepared to feign ignorance?

“…contemporary “predictive machinery” is based on statistics – looking back in time, building some model of what has actually happened, extrapolating into the future. The concept of probability plays a central role here. Bertrand Russell is known to have said, back in 1929, that “probability is the most important concept in modern science, especially as nobody has the slightest notion what it means”. In fact, probability is not a physical entity and it is not subjected to any laws in the strict scientific meaning. As a matter of fact, there are no laws of probability. If a future event will take place, it will do so irrespective of the probability that we may have attached to it. If an extremely  unlikely event will happen, it’s probability of occurrence is already 100%”

via Ontonix S.r.l.: Is it Possible to Make Predictions?.

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Insurance – the 7 principles that make it ‘work’

As someone with (too) many years in the insurance industry under my belt I have called ‘insurance experts’ a lot of things but never described them as this ‘simple’ explanation of the industry does…

Insurance experts are just hopeless romantics.

Large numbers are necessary in order for insurance companies to be able to calculate risk and work out the cost of providing insurance.

The bread and butter of insurance companies is statistics. Statistics is the tool that tells insurance providers what the chances are something will happen. If you have a large number of clients you can use the “law of large numbers” which states that if you have a large enough number of exposure units you can expect them to behave as the population in general does

via Insurance – The 7 Principles That Make it Work | Career, Business management, Leadership, Entrepreneurship…. Read more of this post

Ontonix S.r.l.: The 787 Dreamliner, Complexity, Systemantics And Linear Thinking

“In the past few decades we have conceived, designed and constructed extremely complex systems and infrastructures on which our lives depend to a very large degree. The list is endless but it all comes down to huge networks, systems of systems, computers, software, information and communication, the internet, etc. Such systems are indeed very complex and yet they have been designed without taking complexity into account…”

Ontonix S.r.l.: The 787 Dreamliner, Complexity, Systemantics And Linear Thinking.