Beyond the limits of Risk Management
• OBSERVATION
The risk management frameworks governments and corporations rely on were built for a world where the past was a reliable guide to the future, and that world is gone.
We started Perivista by looking at the effect of demographic decline and then collapse on the future shape of human society. We will go on to looked then at the effect of the digital/online world on human society and the experience of being human.
That’s led us to see the language of risk as a central feature of the way we deal as societies and as political communities, or don’t deal, with the big things we all face. To cut to the chase, our society believes we use, or think we use the science of probability to manage risk, and that this is OK. But the evidence shows that we more often use a perception of probability to avoid facing up to and managing threats that make us feel uncomfortable. The upshot is that we as a society, and so governments, corporations and NGOs, are ‘accepting’ – but actually ignoring - risk which is not understood, or not even imagined, and therefore not managed.
We got to this insight because we were puzzled by the way people, and governments, react to these big issues. Talk of demographic “change” diminishes the significance of what will be the defining issue of the next 300 years (after which there may not be enough people for there to be any issue beyond survival). This is not hyperbole: the coming slow-decline-to-collapse trajectory is the central scenario already baked into the numbers. It might be worse. It almost can’t possibly be better. Almost everyone has experience of things happening slowly and then quickly, in their working and everyday lives, in politics, banking finance, even sport. Hemingway’s quote about bankruptcy happening that way is widely recognised and used. So we were left asking why this model isn’t expected, never mind recognised, in these megatrends?
We get the same fearful and avoidant reaction when we look at the impact of the digital/data age on our lives and culture. This is not a fashionable “AI takes all the jobs” panic. Nor is it a “robots take over the planet and kill us all” story. Both fears are hyperbolic versions of real risks – something else which will be familiar to most readers. No, it’s the effect of having already traded away autonomy for digital convenience and a ‘free at the point of delivery’ attention ecology that blurs boundaries, intrudes on our inner psychology, and is in many important ways is deskilling.
Our foundational insight is that there are critical ways in which the future will not be like the past. So a probability-based risk management system will no longer be adequate.
We write for people in a leadership role (or who think like leaders), and for them this is a critical issue. Leadership has to involve engagement with a future on some basis you can explain, even if only to yourself. If you’ve blanked out the bad bits and the hard stuff, you will fail. If you use simple extrapolation between the perceived truth of today and that extrapolated future, you will fail. You will only succeed by seeing and understanding the future you want in the context of what you actually face, and hindcasting to make it real. This is also how we face up to that fear.
We realise we’re questioning a central feature of personal and institutional planning, and concluding that it is either compromised or soon will be. We want to challenge a central assumption of what is presented as evidence based decision making, risk management and a lot of public discourse: that future uncertainties can fit into today’s probability-based modelling. It’ll come as little surprise that we think probability-based modelling is now unfit for purpose as an effective tool to prepare for what we can see is coming, let alone what we can’t yet see.
Of course there should, in the ideal world, be a persistent debate about how to define and then manage the range of real world possibilities likely to be presented to the next generation. This is not only about the scale and pace of contemporary change. Change has always been unevenly paced and it remains true that the comfort zone is the most dangerous place for any leader to be. This applies to government and economic leadership as much as it does to academic and cultural.
Modern civilisation has learned to ‘manage’ (for which more often read “accept” then “avoid”) risk using the language of probability. We suspect this is an artefact of efforts to adopt the language of mid-century business schools as a universal mode of thought – what might be seen as a legacy of Robert McNamara and Margaret Thatcher. Whatever the origin, we see that Governments and many others maintain risk registers, companies maintain enterprise risk models. Insurers price uncertainty. All depend upon the same hidden assumption: that future events can be already be described and that meaningful probabilities can be assigned and categorised as high to low likelihood and high to low impact. And then prevention or mitigation resource can be assigned on the principle that most resource should be used manage the outcomes perceived to be most likely.
The language of ‘likelihood’ is the comfort blanket here – it conveys a misleading sense of adequate knowledge about the context in which we live. Likelihood-based thinking is a problem. One honourable exception is the military, where there is a constant effort, at least in professional military systems, never again to plan for the last war. That said, a glance at any military history will show how hard it is to avoid seeing your cavalry charge the machine guns.
Probability based risk management can make apparent sense of much of the current world and so make it seem easier to understand. But the clue is in the word manage. That’s good enough for managers whose job is to turn the vision of leadership into the instructions for operations. It’s not good enough for leaders who need to sense and anticipate future states so they can define and shape them, not just react to events. And to do that they need a deeper understanding of current reality and future inevitabilities to balance against that overused and underdelivered concept, the ‘vision’.
Our second foundational point is that risk assessment based on probability or “experience” is inherently backward-looking – it assumes we know the universe of adversity, and that the past is a reliable guide to the future.
It’s not. Our approach is to identify assume that there are forces in play that will constrain the future – these are inevitabilities. Within those constraints, there are true risks, the known unknowns. We don’t know the detail in advance but we know the principle – the kind of challenges with which we will have to deal. And there are actual choices – options we have. Needless to say, they are narrower than we pretend. But there are options at least. But this brings us to the realities of leadership again. The challenge of leadership is to imagine tomorrow while ensuring that managers manage today. And today that means dealing with inconvenient but unarguable truths for which the past is no guide. These will include demographic decline tending to collapse; the third data revolution and the population of the world by third generation digital natives; the rise of alternatives to the geographically defined state for the exercise of power. These aren’t hyperbolic claims, they’re already well onto the certain-to-likely scale.
It may be useful at this point to define leadership vision. It is of a future governing, trading or research environment which is feasibly different because of directed human agency. It is not a successful quarter, trading year, or campaign. And it is not taking credit for the outcome of random events, nor promoting some Panglossian or hyperborean fantasy.
Mainly we write about the inevitabilities. This note is about risk – the contingencies that operate within the inevitabilities. Our central insight is that probabilities derived from the past won’t be enough to prepare. Actual imagination is needed, as well as an appropriate professional pessimism.
There are two elements here: leaders need to imagine things happening which have never happened before – things that now seem extreme or far-fetched when judged against past experience. And leaders need to see risks in system terms – with cascades of consequences. Not isolated, insurable events.
Things that have never happened before happen all the time – we call them ‘Black Swans’ because they are impossible until they happen. It might be as simple as another pandemic disease with very different RO and mortality than the last one, or successful cyber disruption of global payments systems. Other examples slip toward the edges of the conventional likelihood and impact axes of risk. But we can say with unwelcome certainty that bad stuff will happen, because it always does. We will find ourselves being told that it was ‘unlikely’ after it’s actually happened. Cold comfort.
Lurking behind all the above, and more, is what has been called the “Pink Slip problem”, usefully defined as linear management in exponentially complicating crises. The problem of managing in cascading failure of systems is confronting because we can imagine the consequences, and they’re terrifying, so we choose to focus on what we can cope with. And, by extension, that leads to the tendency to cling to processes which reassure and comfort individuals also but leave the organisation ever more vulnerable to collapse.
This zombie self-soothing dressed up as management seems to occur at all levels of organisation. We do not know whether Neanderthals or other long extinct hominids had any understanding or explanation of why they were going extinct. Yet, at least some of what we face will be existential in civilisational if not biological terms. We do know, not least from Jared Diamond’s masterwork ‘Collapse’ that neither innovation nor resource availability can of themselves prevent societal failure. The key point is not just that we don’t see our own predicament, but that we actively avoid seeing it. Emotional comfort is more important than survival. That’s a big claim, but we think it’s right.
The urge to focus on managing the ‘most likely’ (ie the stuff we already know how to manage) and the passive acceptance - avoidance - of all other risk is not new. This is the delusion of competence. As far back as history can take us, societies have accepted partial explanations - faith, reason (however defined), the collective consciousness of the data revolutions - as total explanations. As they have accepted each phase of human development - the agrarian, industrial and data revolutions, the demographic spike caused by the elimination of child mortality - as the eternal normal. Sic transit gloria mundi.
But if history has any lesson for leaders, it is that no normal is eternal.
Decision making is already often less scientific than it is presented. One person’s evidence based decision is another’s decision based evidence. The same is true for risk management. Probability fails as a principle where there is no historical sample or reference point. And is inadequate anyway where the axes look to be tending to the infinite.
Yet, day by day, and as individuals, we reassure ourselves that the recent past will be the future normal. This is all based on assumption and hope, not evidence, and is not fit for leadership purpose. There is no evidence base to locate new events or discoveries on any axis of probability. But our experience is limited - in most cases, desperately so. A glance at history tells us that unexpected events up to extinction level happen to societies and species which do not expect them - and maybe because they do not expect them. So if we discount the extremes, probability has not failed. Our assumptions about where it can legitimately be applied are wrong.
What’s left? It seems odd and quixotic at this point to put in a plug for imagination, even fiction. We need to imagine futures that may be deeply unwelcome, and which we don’t want to face. But failure to imagine leaves us re-enacting versions of the past, and not the future. What’s the point of this? Imagination is the broadening of the leader’s mind’s eye. Probability is easy to defend but narrowcast. Just as we need to accept the inevitabilities, we also need to imagine what might happen. It’ll take a big dose of courage for many leaders to leave the comfort of the past, and step into a chilly future. But we know (Paul Ormerod’s Why Most Things Fail) that even a little bit of actual learning from experience pays off in organisational survival. And most organisations don’t learn.
And we need to think systemically – we live in what we call modernity which has a lot of interconnectedness, a lot of points of failure, limited real resilience, and limited access to repair skills and resources. Failures will cascade. This is not an add-on point: probability (‘Likelihood thinking’) assumes that one event will be determined independently of others. Yet the evidence points the other way. It’s shallow thinking to lead an organisation or a country in the hope that the flaws in your mental model aren’t exposed on your watch.
As populations fall, the outworking and re-working of our relationships with each other, and with machines will be a huge task, made harder by the constraints we can already see, and the contingencies we can literally only imagine.
The So What: This isn’t just theory. It means: -
We all need to identify, name and change the optimism bias in all planning models towards known risks. Leaders need to think more freely and without embarrassment about more outlandish outcomes.
We will write on these ‘black swan’ ideas, as well as on our main topics. This is intended to deliberately flex the muscle of imagination as an antidote to likelihood-based thinking.
We will confront the fact that some coming problems will not be fixable. Managing through decline sounds bad, but may be better than collapse. Alarmingly, too many people we have spoken to on this issue tell us that surely a great leader will emerge to make it all better. Magical thinking, and unlikely.
With a longer historical perspective, the more extreme outcomes become less outlandish. And the less outlandish the less scary. Rationality based on probability has limits, and leaders need to be able to occupy the space between probability and actual impossibility.
Risk can be ‘managed’ using our existing models. Ignorance cannot, and we have to admit that what we do not know is expanding even faster than what we do. The defining strategic problems of this century increasingly sit outside the reach of conventional risk analysis. This is where the Second Horizon journey begins.
