Opinion

The Great Debate

Five overlooked global risks

September 15, 2009

Rafael Ramirez is James Martin Senior Research Fellow in Futures at Oxford University's Institute for Science, Innovation and Society. His latest book is "Business Planning for Turbulent Times: New Methods for Applying Scenarios" edited with John W. Selsky and Kees van der Heijden. — Rafael Ramírez is the James Martin Senior Research Fellow in Futures at Oxford University and author of “Business Planning for Turbulent Times: New Methods for Applying Scenarios” edited with John W. Selsky and Kees van der Heijden. Ramírez attended a session at the World Economic Forum’s gathering in Dalian, China, on managing global risks.

Reuters asked Ramírez to elaborate on five overlooked risks the world is confronting as it works its way through the current recession. His response is below. The views expressed are his own.

Risk one: Confusing risk with uncertainty

The first — and perhaps most important risk — is confusing categories of ignorance. This most centrally is about confusing risk with uncertainty. It entails pretending that probability (with data sets of past events with distributions of occurrence which are relevant for the future) is relevant for both “known unknowns” one cannot model with probability as well as unknown unknowns in one’s plausible futures where no data set is available, such as those of unique events.

Unfortunately, while the uncertainty that we became aware of as the financial crisis unfolded did not obey to the characteristics of “risk”, a lot of the policy interventions and “solutions” that were put in place pretended that the risks were known — and thus are well positioned to create new trouble. What we need to do instead is accepting that uncertain ignorance – for which forecasting, probability and risk are irrelevant – is now a common characteristic of our environment, and that we need technologies based on plausibility, like scenario planning. Plausibility is not going to be easy to implant in large organizations with established teams whose livelihood depends upon calculation of probability – but is necessary.

Risk two: Failure to link different types of knowledge

A second under-explored risk is keeping different forms of knowledge disconnected. This is typically manifested as keeping knowledge in the organizations that develop and use knowledge (like universities, corporations, or patent offices) in silos, while also ignoring that different scales create difficulty to translate applicability from small to large contexts and vice-versa. Failure to link different types of knowledge together, and to organize the architectures that enable this, prevents effective action. So the risk is that insufficient conversations linking different forms of knowledge will be made available, and that “solutions” in one context create (bigger) problems in others that have not been consulted.

Risk Three: Finding false comfort in “solutions”

A third important risk is the ongoing and often unquestioned over-dependence on the comfort of “solution”. The promised comfort in any one solution leads people addressing complex messes to construe these as a single problem that, once solved, will be OK.  The emotional appeal of “solution-security” is highly misleading, and way too often the “solution provider” over-promises and under-delivers. For example, the “solution” confidence to develop and do well after “winning a war” has led to terrible approaches to deal with messes such as poverty, drugs, and terrorism. The “wars” that have been declared on poverty, drugs, and terrorism have not only not delivered the promised solutions but have also mis-fired and created even messier messes.

Risk Four: Pushing irreversible solutions

A fourth under-attended to risk is promoting irreversible designs. Uncertain complexity in our contexts means that what we do may be the wrong thing to do if the context changes. So designing irreversible options is the only responsible thing to do. Certain forms of bioengineering such as some GMO crops and toxic cocktails of insecticides and herbicides have created conditions in the countryside (such as the collapse of honeybee colonies) that may well be irreversible, and which would be terrible if scenarios for which they were not designed unfold.

Risk Five: Giving too much priority to the short-term

Finally, the form of discounting that is used to value things is highly risky. The short-term is  given far higher priority in relation to long-term effects than sustainable solutions call for. Contextualising the short-term in long-term implications is one of the key challenges to design better governance than we have today.

Comments
10 comments so far | RSS Comments RSS

Right.
When uncertain, better categorize it as risk as your data as is incomplete and avoid it.
Short term returns are always dicey.
Apply common sense in lending-simple formula is whether the borrower can repay with out you going into auditor’s mumbojumbo like NPA( non performing assets-meaning not recoverable).
Do not over sell a financial product.
Do not force the borrower to borrow, as in credit card companies.
Allow people to foreclose loans, with out penalty.
Screen your agents who bring in business for you.

 

Definitely food for thought from Rafael Ramírez, but just how can the world in its current high-speed, and demanding to go faster mode, find the time to even just stop to think about such weighty ideas.
Personally I would have liked to have seen the current economic catastrophe used as an opportunity to address more of the causes of the events than (I’m under the impression) is happening, and the five risks here high-light quite well the kind of things that could have been tackled. Even if it means back tracking, for instance on some of the repealed banking laws deregulating the market at it seems, it’s own request.
Instead it seems there is a rush to get banking and housing back on track, and after that’s been accomplished our leaders will pat themselves on the back and say “job done”, and no-doubt be out of office by the time the rubber-band snaps back… with more load on it next time.

Posted by Peter H | Report as abusive
 

“Certain forms of bioengineering such as some GMO crops and toxic cocktails of insecticides and herbicides have created conditions in the countryside (such as the collapse of honeybee colonies)” Is this cause and effect established? Can we have a reference?

Posted by Sara | Report as abusive
 

As I see things, there’s a massive unresolved problem that remains a significant global risk… i.e. the nature of money.

While only a lunatic would harp back to the days of the gold standard restricting economic activity with its arbitrary use of a physical commodity to measure value, in a modern age we are left with a huge conundrum. Where banks are trusted, and everyone presumes their activities are both honest and sustainable, it makes sense to use experience to guide decisions. It makes sense to invest in tangible assets (for example) in order to be protected (or profit) from inflation. It makes sense to borrow more than you can reasonably expect to repay by linear extrapolation of today’s income. It makes sense to engage in leveraged speculation.

However, the question we must now face is this: will the future economic environment resemble the past 30-60 years, or will it be different? Might leveraged speculators lose their shirts? One thing is for certain: either inequity continues to grow, or our economies must de-leverage. Obviously, there will be fierce political battles – but these, to my mind, are a sideshow. What matters is what ordinary people believe, and how that influences their behaviour – as it is this belief that will shape ultimate reality. The tragedy is that rational honest people are faced with an impossible dilemma – as a casino economy demands they gamble with their futures. I expect that this will reward the reckless and dishonest over the diligent and hard working – that it will promote speculation above investment and ultimately cripple the productive economy.

What is needed is not a ‘quick fix’ – for none exists. What is needed is a stable, trustworthy anchor for the metric we use for secular value. Without this, all productive activity is futile – an exploitation of the gullible by the reckless… hardly a recipe for success.

Posted by aSteve | Report as abusive
 

Where are the Greens? – I would like to know…the recession provided an excellent opportunity to put forward the case that reduced manufacturing and consumption is good for the planet.
No-where…which is what we knew all along.
When it comes down to it exponential increased consumption is man’s destiny eventually to destroy the planet.
Don’t tell me about wind turbines either, thats a Green no-where solution that they have been fobbing us off with all along.
Stabilising jobs and the housing market, what? that means putting back all the problems that got us here in the first place…
My answer
Increase interest rates to attract money into the system, let house prices fall to where they should be
then go balls out for nuclear energy.

or….continue offering society the prospect of your own house and a fashionable car with nothing behind it except building houses and (mostly foreign) cars.
We used to call that fur coat and no knickers

Posted by mammachou | Report as abusive
 

Unfortunately the column also displays some of the faults that the author is criticising. Confidently ascribing honeybee colony collapse syndrome to one of a small number of “knowns” that just happen to have occurred recently ignores the possibility that it may actually be due to an ‘unknown” that we haven’t noticed yet. In other words – keeping the requisite open mind is harder than it looks!

It’s said that a good software designer is someone who looks both ways before crossing a one-way street. My father, who designed nuclear reactors in the 1960′s, had to worry about the plausibility of major earthquakes in England. Maybe the financial industry should just recruit more people from industries where these kinds of issues are commonplace.

Posted by Ian Kemmish | Report as abusive
 

Ian Kemmish – If your father had really worried about the plausibility of earthquakes in England, he wouldn’t have been able to be involved in building nuclear power stations here. There was a sizeable earthquake at Mersea Island, which is very close to Bradwell nuclear power station, a little over a hundred years ago. There was also a tsunami or a storm surge in the Severn Estuary, where Hinkley Point nuclear power station is now located, in the 17th century. This may have been caused by an earthquake, or an underwater landslide, off the coast of Ireland in the 17th century. Even if that was not the cause of the 17th century wave, future tsunamis or storm surges are certainly not all that unlikely around our coast.

Mammachou – going “balls out for nuclear energy” will also cause an increase in leukemia. I believe that, if they did the right experiments (which I could provide the details of, although I cannot do these experiments myself, because I do not have a lab or a grant for it), they would probably find that plutonium can, and does, pass through the human gut wall, even though our government says that it cannot, and therefore, they say, this is the reason why it, allegedly, cannot cause leukemia. But they still cannot explain the leukemia clusters, other than by saying that they don’t happen, because they shouldn’t happen, because plutonium is “safe” (according to them).

Nuclear power is a ‘grey swan’. It is probably, a major accident waiting to happen and it is a technology that produces harmful pollution, the effects of which have been covered up. It is not a ‘black swan’, which a term used by Popper and Taleb to describe an unpredictable event.

Posted by Clive | Report as abusive
 

Nuclear power is all very well, but how much Uranium is left? Less than 60 years so I read. We’d better get puffing in those wind turbines!

But that one-of-many problems aside, one big problem hasn’t been addressed anywhere: Companies want customers, they don’t want workers. How can capitalism work?

 

I like this article. for more see: http://www.businessday.co.za/articles/Co ntent.aspx?id=81722

September 16th, 2009 3:38 am GMT – Posted by Sara: and don’t forget about the butterflies and the frogs.

Nuclear is BAD, see Column elsewhere below.

Posted by Casper Lab | Report as abusive
 

I have lost the plot – we jump between “context; ignorance; risk; returns; assumptions; predicting the future with past data sets, but preferably not the near future; probabilities; uncertainty principles; forecasting, scenarios, distributions, bell curves, variance, standard deviations; straight lines; logs; presumably all contained in Monte Carlo simulations; bees and plutonium; trader algorithms, millisecond high frequency trading, churning”, that gets parked for, say 14 hours, while Wall Street sleeps until the beast is unleashed the following morning.

Sounds like Philosophy 101 to me.

It is simple – Market efficiency, A (-) symmetry of information, Diversification, (Un-)expected returns, the security market line and the capital asset pricing model. As back-up we have market to book ratios, PE ratios, free cash flow ratios, dividend growth models, and the ultimate net asset value test. That is for shares. For bonds you enter ‘i, n, pmt, pv and press the button to get fv’. Apparently the options markets are hopelessly inflated and out of control, so I won’t comment on that. And we have terra-flop computers and a range of highly paid actuaries and accountants.

What risk is there to overlooked and by whom ? Maybe we over-relied on celebrities like Buffet and Greenspan and other chameleons. Maybe I am out of context.

Posted by Casper | Report as abusive
 

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