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It is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems

It is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems

Apr 12th, 2017

This week we discuss why it is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems corporations and governments face when dealing with risks and uncertainties.

A historic view

In the mid-60s Peter L. Bernstein’s 1996 wrote a book entitled “Against the Gods, the remarkable story of risk”. The book offered a historic view of risk management and the forces which drove it.

It is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems

Consulting the Oracle 1884 John William Waterhouse 1849-1917 Presented by Sir Henry Tate 1894 http://www.tate.org.uk/art/work/N01541

Voices have raised since claiming that accepted risk management practices have reached their obsolescence point. Furthermore they do not add any demonstrable value to our significantly more complex, dynamic and unpredictable societies.

Although these voices are unanimous in declaring common practices obsolete and misleading, proposed remedies vary substantially.

At Riskope we believe that obsolescence and misleading results generate when methodologies are:

  • poorly applied,
  • oversimplified, and finally
  • loaded with hidden assumptions.

It is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems

We have proven this over and over. We have also proven that it is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems faced by corporations and governments.

Of course, chaos and complexity alibis are needed by those who do not want to make the effort to sit down, think, analyze the system their are working in.  Those do not want to perform robust hazard identification either.

They behave like early humans trying to understand natural phenomena ending-up creating a mythology to explain what they could not yet understand. Bernstein pointed out that throughout history, we viewed our Fate as being in the hands of the Gods.

That was especially true when undertaking highly uncertain activities like battle, weather, travel, disease, etc. Hence terms like Act of God and Force Majeure became ubiquitous in commercial contracts. Lately another divinity has raised from the waters: Black Swan!

Oracles and divine were the early version of Risk Management experts. Professions needed to secure favorable outcomes in uncertain situations. They were going “Against the Gods”, hence Bernstein’s book title.

Black Swan is the God of Darkness. More often simply because people have a very short memory and do not spend the time to study what is really “unheard of”, “unprecedented”, unforeseeable, unfathomable, etc.

A paradox

It is paradoxical that Risk Management may cycle back to the world of “magic” using what is perceived as chaos and complexity as an alibi.

Properly balanced and well thought out “rational” solutions are possible and can be successfully applied even to the world of startups and disruptive innovation. They can transparently include uncertainties, long-chain events (interdependencies) without adding yet another layer of “magic” to our endeavors and without falling in the treacherous ground of blind predictive data analysis, statements like future will be similar to the past, etc.

As Keynes stated, “the very presence of uncertainty ensures that not all can be predicted” and that remains true. However, especially when supporting decision-making we are interested in relative uncertainties among alternatives, relative risks, relative consequences. And all of the sudden things become clearer for anyone to see.

Some cite as a proof of the need to go “magic” the fact that allegedly economists cannot predict a global recession. Traders cannot predict a major stock crash. Political analysts cannot predict the political votes; seimologists cannot predict the next earthquake. Large organisations may become insolvent due to unforeseeable market shifts and mega-projects fails to meet their estimated baselines 70% of the time.

A misunderstanding and a solution

Those people seem to misunderstand what RM is all about. RM is not there to predict when a given event will take place, but a range of probabilities it may occur with a certain magnitude and certain consequences.
As a matter of fact, we were perfectly happy to use, for example:

  • 17 major recessions over 200 years to predict the duration and depth of the 2008 recession,
  • well documented frequency and uncertainty of stock crashes of a certain magnitude,
  • ranges of probabilities for earthquakes and maximum credible events,
  • subjective probabilities estimates for market shifts, and finally
  • time and pricing uncertainties to predict better contingencies for projects which normally fail because of lack of analysis…

As you probably have noticed we did not quote political votes. That’s only because we have never worked in that arena. Again, remember, RM is not about predicting who will win in an election, but to analyze the ranges of uncertainties about the election. That means understanding the probability of each candidate and the consequences for whomever asked the RM analysis of that vote.

Remember also that many predictions are nowadays generally based on data mining algorithms, polls, etc. Those can be misleading also because people lie, sometimes even to themselves.

Thus we can say again that  it is not necessary to invoke chaos, “complexity” and “irrational methods” to solve problems corporations and governments face when dealing with risks and uncertainties. Solutions come when we properly define problems, we understand the essence of risk management and we properly account for uncertainties and interdependencies.

Conclusions

We are past Anthropocene and starting into the Sapieozoic …we should know better than invoking “magic”, divinities and throwing away solutions that could work just because we are lazy and we prefer to embrace another layer of unknown uncertainties.

Call us to understand how you could really benefit from appropriate solutions in Risk Management.

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Category: Probabilities, Risk management, Uncategorized

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