Synchronization versus collaboration:: uncertainty v risk

The Lorenz attractor displays chaotic behavior...

The Lorenz attractor displays chaotic behaviour. These two plots demonstrate sensitive dependence on initial conditions within the region of phase space occupied by the attractor. (Photo credit: Wikipedia)

We don’t need an understanding of  ‘Chaos Theory’ to know about the “Butterfly Effect”, nor do we need a medical qualification to grasp that (hitherto) unseen flaws in human DNA can have life-changing consequences for individuals.

In business terms, those of us who are concerned enough with ‘risk’ to look beyond what conventional “wisdom” tells us, KNOW that in the Digital Age of networks of inter-connected systems and sub-systems, apparently minor errors can have a MAJOR effect:

HILP – high impact, low probability events

Power Laws [fat tail] NOT Gaussian [thin tail]

Beyond probability…to the possible and plausible.

Yet, still, risk carriers, such as banks and insurers, think and rate in terms of “old world”.

It is gone. Past. An era that will not return and the problems that are being stored-up, because they fail to embrace the facts, CANNOT be funded by informed customers!

Production did not drive our lives in the old world, but the complexity of the new societies is turning our lives into gears of a big machine. Thinking that human life has the only aim of being productive for the society is the first error of any organizational system. Engineers design the pieces of a machine in order to be manufactured with a certain level of precision that provides a good performance; however, human organizations cannot design the behaviour of the people with the required precision…

via Synchronization versus collaboration.

Why bother with systems thinking?:: presumably because you want to understand!

Team interactionI absolutely INSIST that you read this excellent 3 part series on ‘Systems Thinking’ (ST).

I came to ST along a path from insurance risk, to complexity and resilience but it made so much sense because, well, that is the way my brain is wired! When I was younger I didn’t buy in to the conventional Business Management books because they just didn’t feel right but ST did and, although it can, as John says, make you feel like you are going crazy! However, when the message is spelt out in such a readable manner I begin to see where I (and others) have been going wrong in our efforts to communicate the need for and benefits of change.

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Krawcheck on banking complexity:: The Complexity of the Simplicity Solution

After so long it is encouraging to know that complexity in banking is, at least, getting a more frequent airing by others! But, unlike the headline in the recent FT article, we (at Ontonix) don’t believe that “fighting complexity is futile“…far from it! Einstein knew of the rewards available to those who “reached” the simplicity beyond complexity. The scale of the problems created by the excesses of our financial system should tell us that the quest is only futile if banks DON’T adopt a culture and the tools that facilitate “transformation”.

Joining the dots between the ongoing banking crisis and the enlightened output from, such as, Andy Haldane resolves nothing until we act upon what we have learnt! We can’t afford to overlook the obvious shortcomings in Risk Management, Regulatory failures and abandonment of Corporate Governance.

But SURELY, as the author has identified some of the current problems, it can only be a matter of time before sufficient number of enlightened, influential, individuals reach their “flipping points“, act to influence and educate the crowd  – at Ontonix we are doing our utmost to aid this process [refer following video] – so we reach a “tipping point” and effect a, long overdue, paradigm shift.

Krawcheck offers some basic ideas for “paring back the complexity risk” in banking. She argues for looking at the bank’s overall risk profile; for compensating bank executives based on the bank’s risk profile (in terms of debt and equity); paying out dividends as a percentage of earnings; reforming the credit agencies (sigh); and urging boards to worry about booming, not struggling, businesses. (The last advice makes sense, but if we need to remind boards of that, we’re really screwed.) All this is very nice, but very broad — and given, yes, the complexity of banking, it’s a little hard to see the kind of effect it would have.

In fact, except for her first notion, I’m not sure it would do much to either rein in complexity or too-big-to-fail. The devil here is in the details. How would you calculate the “overall risk profile”? Is this a mark-to-market process, in which daily, weekly or monthly numbers are generated, like the much abused and suspect value-at-risk? How, given the enormous complexity, would these metrics be generated — and by whom?

If JPMorgan Chase & Co.’s big ugly trade managed to escape the bank’s internal risk management operation — not to say regulators — how would that have found its reflection in the bank’s overall risk number? It’s a rule: It’s the stuff we don’t know, or don’t want to know, that tends to kill us. And just remember: We’ve had a devil of a time just trying to provide guidelines on bank capital. What makes anyone think calculating an overall risk profile would be easier?

Huffington Post 

Hopefully the following video will go some way to answering critical questions and paving the way to a, less volatile, sustainable future…

“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.

Dogbert does Financial Planning:: applying myth or math?

Dogbert (flaw of large numbers)

Regulators want big, complex banks to hold larger buffers of capital to protect the financial system.

Big banks argue this is unnecessary because risk is diversified across their larger balance sheets.

Who is right? Natural sciences – especially epidemiology, ecology and genetics – provide clues…

 Complex systems: The FLAW of large numbers.

A “law of large numbers” is one of several theorems expressing the idea that as the number of trials of a random process increases, the percentage difference between the expected and actual values goes to zero.

If you REALLY want to get a deeper understanding of probability – and why it is wrong to assume too much from independent events (e.g. the roll of a dice) and apply that knowledge to the real world of inter-connected, non-linear systems – PLEASE check out the “Physics Envy…” presentation by Andrew Lo (link below).

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