Complexity and Consequence: what financial and risk engineers MUST learn from mech. eng. (or anywhere)


Gadget craziness

Image by XuRxO via Flickr

Recently, I have found myself writing about the importance of ADAPTABILITY* & RESILIENCE in complex (business) systems. This is, partly, due to the fact that, the acceptance of the “shortcomings” of current risk models and tools, are becoming more widely “recognised” (in some instances “admitted”)!

*Boston Consulting Group recently cited “Adaptability: the new competitive advantage”.   

The number of Consultancies that – after many years of profiting from preaching the merits of (now-discredited) models and strategies – have now discovered, and wish to share, their “new found” expertise in “complexity theory” and “systems thinking”.

Unfortunately, their participation in the education process wont undo the damage done!

WE should be grateful that the damage their contribution to the prevailing culture has done is substantially reduced and that a higher level of business understanding is, increasingly, on the agenda.

However, I suspect that we have not seen the last of Consultancies promoting and implementing “solutions” that make (business)  systems and economies more fragile…because there are fees to be earned! Read more of this post

Power Laws & Complexity Management


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Mark Buchanan is one of the best writers on this most complex of subjects and this article (click on image for link) covers exactly what it says on the tin!

I particularly appreciate that he tackles key aspects of the wider subject in such a manner as to make it readily understood by anyone with a desire to learn and apply what the knowledge.

Business leaders NEED to understand the nature of  complexity and the threat of self-generated risk (excessive complexity for poor structure, processes, etc.): risk resulting from the execution of the processes that facilitate functionality.

Also, to appreciate the systemic risk exposures communicated by organisations with whom they trade…without which they would fail…reinforces the most pressing need for in-depth assessment of existing and prospective partners…both up and downstream.

MB illustrates this point and the exposure that comes from Global Supply Networks “beautifully”, by recounting the sorry tale of the enforced departure of Swedish company Ericsson from the mobile handset market thanks to a factory fire in Mexico!

 

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Revealed: the capitalist network that runs the world – New Scientist


I recently wrote "If you think "ruling elites" are a fantasy…think again" and have been boring regular readers about complexity and the threat of excessive complexity, particularly when the inter-connections are "closely coupled" (see below). Amongst others, the World Economic Forum have attempted to highlight the issues.

Financially “influential” firms SHOULD BE, as they have historically been, sources of “systemic resilience”. Instead, in a turbulent, debt-laden, global economy they can, effectively, act as “superspreaders”…hubs of systemic risk:

The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue <i>(Image: </i>PLoS One<i>)</i>AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

….Concentration of power is not good or bad in itself, says the Zurich team, but the core’s tight interconnections could be. As the world learned in 2008, such networks are unstable. "If one [company] suffers distress," says Glattfelder, "this propagates."

Read more of this post

Risk: If we already “know” what we can’t but…


Rodin's The Thinker at the Musée Rodin.

Image via Wikipedia

…can, no longer, be sure of what we think we know, what do we actually know that is of any use to anyone relying upon our expertise?

No this isn’t an introduction from Donald Rumsfeld as a guest blogger but part of a serious question that, if isn’t answered correctly poses hard questions for the future of our industry.

Perhaps some explanation would help: we “know”, (well, understand) that we cannot predict the future – which could be pretty worrying for an industry whose success or failure relies upon the frequency and impact of a variety of events that haven’t yet and may never happen. But, in the absence of “special powers”, we have relied upon what we know i.e. what we can learn from the occurrence of similar events, in the past. We now have vast quantities of data, accumulated over many years by a wide variety of sources. The type of information with which Statisticians, Actuaries, Economists, Carol Vorderman can have hours and hours of fun with, aided by tried and tested techniques and the most sophisticated technology in our history.

Read more of this post

Management Consultants: “Capitalising on complexity”


I have accumulated quite a collection of “papers” advising business how to deal with complexity and am happy to share them…so long as everyone understands that I am not endorsing any of them!

For your delectation I am pleased to add to the list of what, in the main are “qualitative management consultant-speak” that, even when referring to research, interviews, etc. read (to me at least) like documents produced on a topic, primarily because it is topical and offers a further opportunity to secure some well paid consultancy work.

This latest publication is from Celerant Consulting. Make up your own mind…then take another look at the Ontonix website.

Call, email me or get an objective, quantitative, insight into complexity for  FREE!

It really makes my day when other people do a marketing job for Ontonix! OK, so there is never a specific recommendation to contact us but we are happy to settle for the next best thing. That is to identify where complexity IS already costing and will, increasingly, cost through: the impact upon clients, customers, employees and “the bottom-line” budget to identify, measure, manage and monitor on an ongoing basis reduced ROI on assets and facilit … Read More

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