Hussein Shobokshi
WHAT’S the right level of risk and to what extent can wise management keep us in check? The challenge is to create a system that tolerates risk taking but limits the kind of systemic risk taking that helped lead to crisis. Everyone needs to prepare for Black Swan scenarios which are deemed unlikely but are catastrophic when they occur.
We don’t live in the world for which conventional risk-management textbooks prepare us. No forecasting model predicted the impact of the current economic crisis, and its consequences continue to take establishment economists and business academics by surprise.
Moreover, the crisis has been compounded by the banks’ so-called risk-management models, which increased their exposure to risk instead of limiting it and rendered the global economic system more fragile than ever.
Low-probability and high-impact events that are almost impossible to forecast, the so-called Black Swan events, are increasingly dominating the environment. Due to the Internet and globalization, the world has become a complex system, made up of a tangled web of relationships and other interdependent factors.
Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them.
Risk management, should be about lessening the impact of what we don’t understand, not a futile attempt to develop sophisticated techniques and stories that perpetuate our illusions of being able to understand and predict the social and economic environment.
One of the mythologies about capitalism is that it is about incentives and also about disincentives. No one should have a piece of the upside without a share of the downside.
It all boils down to decision making under uncertainty and the issues this creates. We are all subject to our own biases and need to be aware of them when we are thinking about our decisions. That can create a problem with experience.
Experience creates credibility, but it also anchors your perspective. The risks that get you are the ones you’re not expecting, and your experience may be what’s making you not expect them.
