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Risk Thinking

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Risk Thinking

...In an Uncertain World

Ron Dembo,

15 min read
9 take-aways
Audio & text

What's inside?

Risk thinking involves running scenarios involving unknown unknowns to mitigate possible future negative effects.

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Editorial Rating

8

Qualities

  • Analytical
  • Applicable
  • Concrete Examples

Recommendation

Risk managers often use sophisticated models to understand the future through the lens of the past. However, such recent catastrophes as the 2008 financial crash and the Fukushima catastrophe show that such forecasting is inadequate. In today’s complex and intricately interconnected world, the observation of British novelist LP Hartley rings true, “The past is a foreign country; they do things differently there.” Fortunately, decision-makers have an alternative to modeling the future based on the past: Risk thinking opens planning to include unlikely, but potentially devastating, future possibilities. Anyone making decisions in an uncertain business environment will find this work helpful.  

Summary

Even small events can generate severe disruptions.

Statistics and probability have deluded people into believing they have a reasonable understanding of possible future events. Most situations have both deterministic and “stochastic” elements.  Deterministic events are predictable, while stochastic events are uncertain. You must identify and deal with each element individually.

People can’t be certain what tomorrow will bring, but must make decisions today. A stochastic process develops over time and is subject to random events. Some stochastic processes allow the calculation of probabilities, but unique situations frustrate such calculations. Some uncertainty is measurable, and some is not. Risk thinkers posit that most future events are not predictable.

One way to deal with uncertainty is to generate scenarios that include best and worst cases.

Understand what factors drive a potential risk. In assessing the future of Miami, for example, climate change planners consider the interrelationships among sea levels, high tides, low tides, hurricanes and precipitation...

About the Author

Dr. Ron S. Dembo is the founder and CEO of riskthinking.AI, a company developing data and algorithms to help price climate risk into the financial markets. Formerly he was founder and CEO of Algorithmics Inc. which supplies enterprise risk systems to banks. He has been an associate professor at Yale, a visiting professor at MIT and a consultant to Goldman Sachs.

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