“As you know, I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it,” confesses a high-ranking S&P analyst. “If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value,” complains another senior S&P man. “Let’s hope we are all wealthy and retired by the time this house of card[s] falters,” ruminates one more.
Listen to the “risk management” fraternity and they will tell you that they know what they are doing, blah, blah but I can, emphatically tell you that THEY DO NOT!
Here is what, the late, Hunt Taylor (former Hedge Fund Manager) had to say about the markets prior to his death in 2006:
“Let us start with what we know. First, these markets look nothing like anything I’ve ever encountered before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves, the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters….
“I’ve had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens. And I think it will come, like a comet, from that part of the night sky where we least expect it. This is something old.
“I think shocks will come, but they will be shallower, shorter. They will be harder to predict, because we are not really managing risk anymore. We are managing uncertainty – too many new variables, plus leverage on a scale we have never encountered (something borrowed). And, when the inevitable occurs, the buying opportunities that result will be won by the technologically enabled swift.”
At Ontonix we talk about “crisis anticipation” but, I suppose, anticipatory awareness has a certain ring to it AND reflects the potential to identify both THREATS and OPPORTUNITIES…developing an informational advantage into a competitive advantage!
Moving from “fail-safe” systems to multiple sub-systems that are safe-to-fail
However, the most important thing is to recognise organisations for the, dynamic, COMPLEX SYSTEMS they have become. Attempts to manage performance and risk with tools and techniques that may have facilitated construction of “complicated machines” are dangerously inadequate…hence the increased need for an early warning mechanism.
We know we can’t make reliable predictions about our environment..but it doesn’t stop us from spending enormous amounts of money to do so. Then to pay for the consequences of getting it wrong!
Introspection needs to get serious and, to do so, go beyond, “how can we improve our margins?” Apparently we don’t like to indulge in too much self-analysis, even though identifying and addressing “flaws” at source makes so much more sense. We can influence, manage or control what we do, why and how we do it. There is very little we can influence outwith our immediate environment.
To put this into a business context and convey the message about how complex any business can become, consider the following table:
If this is insufficient to convince you that there are enough risks associated with behaviour to be getting on with please consider how many of these could be addressed by a robust Operational structure!
If you still have doubts, perhaps this extract, from a very interesting paper, will help. It was the result of a collaboration between US National Academies/National Research Council and the Federal Reserve Bank of New York on an initiative to “stimulate fresh thinking on systemic risk”.
Catastrophic changes in the overall state of a system can ultimately derive from how it is organized — from feedback mechanisms within it, and from linkages that are latent and often unrecognized Read more of this post
The complexity bandwagon just keeps rolling along. Hard on the heels of a report on Complexity from KPMG here are the latest findings – see Executive Summary below.
If you find the video and summary interesting but, perhaps, “woolly” or a bit light on practical, quantitative, solutions we will be delighted to help.
At Ontonix we offer a clear, concise, definition and rigorously tested scientific solutions to this important topic that others appear content to approach from a qualitative angle. It certainly gives the impression of being more about marketing based upon COMPLEXITY, quite rightly, being identified as a major issue for modern business in an inter-connected global society.
Alternatively, if this is your preferred version of complexity or you are content to read about it rather than take decisive action, I will provide you with a full copy of this report along with those of KPMG, IBM, McKinsey and AT Kearney. Just drop me an email:email@example.com Hopefully I can be more of a help than that!
How severely is increasing complexity affecting businesses? The Economist Intelligence Unit conducted a global survey of 300 senior executives to ascertain the level of this challenge, as well as the causes and impact of it. This report also looks at what firms are doing to tackle the complexity.
The main findings from the research are as follows.
Doing business has become more complex since the global financial crisis. An overwhelming majority of survey respondents (86%) think that business has become more complex in the past three years. While 28% say doing business has become “substantially” more complex in this period, 58% say complexity has “somewhat” increased. Among sectors, complexity seems to be of greatest concern in technology and telecommunications, with 41% of respondents from this sector flagging it as a clear and present challenge.
Firms are finding it increasingly hard to cope with the rise in complexity. Just over a quarter of respondents (26%) describe their firm as “complex and chaotic” but just one in five say they would have described their firms this Read more of this post