How Crises Model the Modern World


Crises are our new reality. “Black swans” are increasingly becoming the norm; our systems, environments, contexts are structurally prone to crises. Doing more of the same will not be the appropriate way to deal with modern crises: a paradigm shift is needed, based on a more accurate understanding of the dynamics of complex systems. This paper is an invitation to change the theoretical vision of crisis and crisis management, and the education and training of all actors involved.

Global Crises… is a paper that could, very easily, have ended up as an exercise in mental masturbation BUT it is so much more than that. Read it and you will learn!

In physics, the Lyapunov theorem on stability of systems states that “In the vicinity of its equilibrium points, the solutions of a non-linear system are similar to the ones of the equivalent linear system”. This means that as long as your system is near its equilibrium point, you can use the techniques usually used for linear systems to get answers on the behaviour of the non-linear system. It is a non trivial theorem that can explain why techniques in risk and crisis management could still be used quite effectively during the previous decade or so, even though complexity had already become increasingly apparent.

However, the need, in the current framework of crisis management, for adding more and more
parameters to describe the behaviour of the system should have been a clear indication that something had changed. One cannot hope to describe a nonlinear dynamic system with a patchwork of simple parameters.

A non-linear system implies, in most cases, unpredictable behaviour, such as the inversion of the Earth’s magnetic field in physics. We must now prepare for the unexpected, and not predict the predictable. We must be more creative, learn to be surprised, and to act rationally and creatively during the phase of ignorance, information surge and shock.

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!

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Ontonix: "Optimal does NOT mean best"


Nowadays it is very popular to seek optimal solutions to a broad spectrum of problems: portfolios,  engineering systems, strategies, traffic systems, distribution channels, networks, policies, etc. But have you ever wondered if optimal really means best? Well, it does not. Optimality is not the most convenient state in which to function. The reason?

Optimal solutions are inherently fragile.

Our economy (but not only) is fragile because everything we do is focused on maximizing something (profits,  performance, success) while minimizing something else (risk, time, investment, R&D) at the same time. This leads to strains within the system. Everything is stretched to the limit (or as much as physics will allow). This is exactly what one should not do when facing turbulence. The focus should, instead, be on:

  • Solutions that are fit, not optimal.
  • Simplifying business models and strategies.
  • Accepting compromises not seeking perfection. Improve, don’t optimise.

 

Read the full article: Ontonix – Complex Systems Management, Business Risk Management.

“Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding of its properties” Nassim Taleb [Black Swan].


Without the appropriate tools complexity is unseen: it is both problem-solving capability and, unmanaged, has the capacity to destroy a business [system] from within.

When it comes to reducing the “noise” around signals, upon which our shared-future may depend, they don’t get more effective that Nassim Taleb and, the late, Benoit Mandelbrot. This interview from 2008 is well worth re-visiting.

But so many appear totally absorbed into the prevailing culture that they have their eyes on the “prize” of extrinsic rewards, such as sales commissions or other financial rewards that, admittedly, do work well when a task simply requires people to follow a formula. However, according to research cited by Dan Pink, for jobs that require complex or creative thinking, extrinsic rewards can be dangerous, because they tend to restrict people’s ability to notice things on the periphery and craft novel solutions.

The inability to discern SIGNAL from NOISE when we are, increasingly, suffering from information-overload is, perhaps, understandable. But it can be a tell-tale sign that a business is overlooking or ignoring vital signals from its environment [marketplace; ecosystem] or that the ability to interpret is impaired…whatever the excuse the signals are aplenty but it does require an acceptance of the need to look and to LISTEN.

“Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding of its properties” Nassim Taleb.

http://rs.resalliance.org/2008/10/24/turbulence-and-finance-taleb-and-mandelbrot/

Broaden your mind:: Nassim Taleb reading recommendations


You don’t have to agree with all that he says, like his (occasionally) abrasive manner or even have much of an understanding of probability, financial markets, uncertainty, complexity and risk to learn some interesting information from Nassim Taleb’s book recommendations.

Another fascinating source of “challenging” reading material, to which Taleb contributes and that I would highly recommend is Edge.

via Book Recommendations from Nassim Taleb | Farnam Street.