Both Aleatory and Epistemic Uncertainty Create Risk


Nice work Glen! I have asked the question before but “at what point does the decision NOT to obtain accessible knowledge about ‘reducible exposures’ [epistemic uncertainty] – such as excessive complexity – become a Corporate Governance issue?”

Epistemic risk is modeled by defining the probability that the risk will occur, the time frame in which that probability is active, and the probability of an impact or consequence from the risk when it does occur…

…For these types of risks we can have an explicit or an implicit risk handling plan. I use the word handling with special purpose. We handle risks in a variety of ways. Mitigation is one of those ways. But the risk handling work is actual work. It is in the schedule. We are doing work to mitigate the risk. We are buying down the risk, or we are retiring the risk. In all cases, we are spending money, and consuming time to reduce the probability that the risk will occur. Or we could be spending money and consuming time to reduce the impact of the risk when it does occur. In both cases we are taking action to address the risk.

via Herding Cats: Both Aleatory and Epistemic Uncertainty Create Risk.

The need to get proactive:: IBM on ‘Complexity and risk’


I may not entirely agree with the conclusions but it is difficult not to agree with the IBM introductory problem statement

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It is little wonder that the services of firms such as IBM are so costly. Because they invest a huge amount in research such as this…only for it to fall on ‘deaf ears’, closed minds and lose out to blind faith in practices that few “on the inside” dare speak-out about or question. EVEN when preserving the status quo with artifice and lies… CREATES AMBIGUITY (A SOURCE OF COMPLEXITY), INCREASES RISK,  FEEDS VOLATILITY AND ADDS TO UNCERTAINTY…in an already VUCA WORLD

It IS a VUCA world…and we aren’t helping:: Kevin Roberts [Saatchi & Saatchi]


Perhaps it is going to require a declaration from such as the Pope , Obama, Dalai Lama, Lady Gaga or some “celebrity” enjoying 15 minutes of fame before we, finally, take on board that we don’t know what we are doing! The tools and techniques of the last century topped-up with any amount of talking will change little, if anything and, in all probability, the scale and pace of change will not be sufficient…

“So in the UK, first, we don’t have the dream, second, we don’t have the appetite to win – the Chinese are going to eat our lunch. We’ve lost the desire to win because winning has been ugly in the last economic environment. And the third thing Britain’s getting wrong is execution. We live in a ‘Vuca’ world – a world that is volatile, uncertain, complex and ambiguous but British companies keep having strategy meetings! What the f***? We have no strategic plans at Saatchi – instead we have 10 things to do in 100 days. Have a dream, get on with it and if you fail then fail fast, learn fast, fix fast.

via Leadership | Kevin Roberts.

crowd wisdom needs a new paradigm:: five characteristics of Paradigms


Uncertainty is apparent in every domain…because the realisation, that is gradually seeping into our consciousness, is that much of what we thought we knew…WE DON’T!

Clinging to “the past”, in the form of something that appears “familiar” or that has previously delivered a satisfactory outcome MAY feel like the right thing to do. But, if relying upon homogeneity is the preferred course isn’t that the equivalent of avoiding critical decisions and, merely, adding to uncertainty!?

… paradigms have five important characteristics and implications:

First, in periods of uncertainty, we search for a suitable paradigm that will satisfactorily mitigate the uncertainty (i.e., provide some certainty) and latch onto that paradigm as soon as it is discovered.

Second, because uncertainty leads to unpredictability, we are driven to locate a paradigm that can solve the problem.

Third, precedents or past actions or beliefs focus our attention toward certain solutions, which means we neglect perfectly acceptable paradigms. In organizations, one readily available source of information is to observe how others have dealt with the same issue.

Fourth, when we are uncertain, we imitate others as long as we find ourselves in a homogenous group or believe the other individual has an adequate paradigm to adopt.

Fifth, as long as the chosen paradigm is logically optimal, we continue pursuing a course of action that might be seriously flawed. Why would we pick a solution or course of action that was not the best? Human nature requires us to make some decision when faced with uncertainty. Therefore, an answer that allows us to take some action appears more desirable than inaction.

Underlying our choice of paradigm is our need to make a decision to allow us to continue to function.

via PERCEPTION AND PARADIGMS | PrMC.

Tempus fugit:: Extreme Risks update [report from Towers Watson]


Towers Watson are doing some sterling work at the minute whilst others appear content to believe that the future will closely resemble the past…strange, when you consider how much the world has changed in the last 20 years, let alone the last century! As the Founder and CTO of Ontonix, Dr Jacek Marczyk, put it:

“Running a company based on just the financials is like driving a car by only looking at the rear view mirror!”

This statement can be readily adapted to apply to classical economics, credit and risk rating (& modelling) that have been shown to be “deeply flawed”. Compounded by an unchanged culture and utilisation of risk management tools and techniques (from the Industrial era) that have failed, so spectacularly, in the Digital Age.

We “know”: about the differences between risk and uncertainty: that interconnected entities present a very different probability distribution; about “Black Swans” and low probability/high impact events; the threat of “systemic risk” is significant and straddles domains as readily as it transcends “scales” (micro to macro), business sectors and national borders; that, in the face of uncertainty, we NEED to (re)build RESILIENCE…

Regrettably, the common approach (particularly in Financial Services) seems to be to overlook the inconvenient truth

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