Avoiding ‘Black Swans’
January 27, 2012 2 Comments
A UK Blackett Review has reviewed some approaches to uncertainty relevent to the question “How can we ensure that we minimise strategic surprises from high impact low probability risks”. I have already reviewed the report in its own terms. Here I consider the question.
- One person’s surprise may be as a result of another person’s innovation, so we need to consider the up-sides and down-sides together.
- In this context ‘low probability’ is subjective. Things are not surprising unless we didn’t expect them, so the reference to low probability is superfluous.
- Similarly, strategic surprise necessarily relates to things that – if only in anticipation – have high impact.
- Given that we are concerned with areas of innovation and high uncertainty, the term ‘minimise’ is overly ambitious. Reducing would be good. Thinking that we have minimized would be bad.
The question might be simplified to two parts:
- “How can we ensure that we strategize?
- “How can we strategize?”
These questions clearly have very important relative considerations, such as:
- What in our culture inhibits strategizing?
- Who can we look to for exemplars?
- How can we convince stakeholders of the implications of not strategizing?
- What else will we need to do?
- Who might we co-opt or collaborate with?
But here I focus on the more widely-applicable aspects. On the first question the key point seems to be that, where the Blackett review points out the limitations of a simplistic view of probability, there are many related misconceptions and misguided ways that blind us to the possibility of or benefits of strategizing. In effect, as in economics, we have got ourselves locked into ‘no-strategy strategies’, where we believe that a short-term adaptive approach, with no broader or long-term view, is the best, and that more strategic approaches are a snare and a delusion. Thus the default answer to the original question seems to be ‘you don’t – you just live with the consequences’. In some cases this might be right, but I do not think that we should take it for granted. This leads on to the second part.
We at least need ‘eyes open minds open’, to be considering potential surprises, and keeping score. If (for example, as in International Relations) it seems that none of our friends do better than chance, we should consider cultivating some more. But the scoring and rewarding is an important issue. We need to be sure that our mechanisms aren’t recognizing short-term performance at the expense of long-run sustainability. We need informed views about what ‘doing well’ would look like and what are the most challenging issues, and to seek to learn and engage with those who are doing well. We then need to engage in challenging issues ourselves, if only to develop and then maintain our understanding and capability.
If we take the financial sector as an example, there used to be a view that regulation was not needed. There are two more moderate views:
- That the introduction of rules would distort and destabilise the system.
- That although the system is not inherently stable, the government is not competent to regulate, and no regulation is better than bad regulation.
My view is that what is commonly meant by ‘regulation’ is very tactical, whereas the problems are strategic. We do not need a ‘strategy for regulation’: we need strategic regulation. One of the dogmas of capitalism is that it involves ‘free markets’ in which information plays a key role. But in the noughties the markets were clearly not free in this sense. A potential role for a regulator, therefore, would be to perform appropriate ‘horizon scanning’ and to inject appropriate information to ‘nudge’ the system back into sustainability. Some voters would be suspicious of a government that attempts to strategize, but perhaps this form of regulation could be seen as simply better-informed muddling, particularly if there were strong disincentives to take unduly bold action.
But finance does not exist separate from other issues. A UK ‘regulator’ would need to be a virtual beast spanning the departments, working within the confines of regular general elections, and being careful not to awaken memories of Cromwell.
This may seem terribly ambitious, but maybe we could start with reformed concepts of probability, performance, etc.