Wednesday, 9 January, 2013
We “know” (well, understand) that we cannot predict the future – which should be pretty worrying for the financial sector, whose success or failure relies upon the frequency and cost of a variety of events that haven’t yet and may never happen. Except that, the expiry date is approaching, for relying upon a steady stream of (mis)information, discredited economic theories, spending vast amounts on personnel and technology that convey the impression of knowledge.
In the absence of “special powers”, insurers have to rely upon what they ‘know’ i.e. what they have learnt from the impact and frequency of past events, that happened to OTHER, similar, risks!
We now have vast quantities of data, accumulated over many years, from a wide variety of sources. The type of information with which Statisticians, Actuaries, Economists (and Carol Vorderman) can have hours and hours of fun, aided by tried and tested techniques, using the most sophisticated technology in our history. But it doesn’t change the basic fact that we cannot predict the future although we must learn from past events.
The invaluable lessons for our man-made world are, that:
- non-linear [real world] interactions CANNOT be modelled – concatenated probabilities are still linear
- we should question what we think we know – you know what they say about assumptions!
- we cannot manage risk – we CAN influence what is within the scope of our control
- conventional tools CANNOT identify, map or measure complexity
- resilience is a function of complexity
- resilience (or, per Nassim Taleb “anti-fragility”) should be our primary concern
- we can learn many more lessons from nature Read more of this post