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April, 2003
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| Paralysis of Uncertainty Is it possible to act when uncertainty strangles action? The prevailing geo-political and economic question marks create a sense of global anxiety, fed daily by the news media. We are confused about deflation in Japan, stagnation in Europe, economic unraveling in South America and mounting government deficits and economic inertia in the US. We are overwhelmed by the inability of the world to build a reasonable consensus on the threats posed by Iraq and North Korea. The well-known self-confidence of the United States is at a low ebb. Many in the rest of the world now distrust the leadership of the US. Globally we are uncertain which way to turn. That is the situation as I write these words in late March, as pictures of war in Iraq offset the first crocuses and buds of another spring in New England. Should uncertainty be so constricting? Is our current situation so unusual? History tells us that we always see the problems of our own times as more pressing and critical than in all preceding eras. But have not we always lived with compelling uncertainty? Last month, I printed a quotation from Ortega y Gasset that is worth repeating: “The man with the clear head . . . looks life in the face, realizes that everything is problematic and feels himself lost, as this is the simple truth that to be alive is to feel oneself lost. He who accepts it has already begun to find himself, to be on firm ground.” “To be alive is to feel oneself lost:” now that’s the idea! I printed this quote because I believe that it has significance for the practice of risk management. It can also be a guide to those who represent us in positions of political and economic leadership. One of the current problems in the management of risk is an excessive fear of volatility and surprise. While some caution is a good thing, too much effort is devoted to avoiding what is entirely natural. Do we need all those abstruse econometric models whose designers insist will stabilize everything in the financial markets? Too much time is spent trying to “transfer” our risks to others, creating a false sense of security. Too much time is spent avoiding surprises, those unusual events that have the capacity to stimulate our creativity and resilience as well as hurt our pocketbooks. We expect our “leaders” to know everything and they in turn must present a façade of superior knowledge. The mantra is “Trust us, we know the answers. We are privy to information that we cannot share with you.” How seldom have I heard a politician or business leader honestly say, “ I really don’t know, but we are proceeding on the basis of current information?” What Ortega y Gasset proposes is honesty about our uncertainties. They
should not One of my readers, Talmadge Birdsey, the head the North Branch School,
an independent
I hardly suggest a Panglossian attitude that we live in the “best of all possible worlds” or that we disregard the multiple downside outcomes can occur today, yet we must shed the handcuffs that cripple decision-making. I am encouraged about the future of this country (and the world) when some of its future leaders show such understanding of the role of uncertainty in their lives and the need for a constant search for new knowledge. I lifted a Latin quote (author unknown) from Nassim Taleb’s contrarian masterpiece, Fooled by Randomness: felix qui potuit cognoscere causas. “Happy is he who understands what is behind things.” Happy is this Felix who understands that uncertainty lies behind everything we do. Perhaps the best coda to this contemplative essay on uncertainty is a haiku that was circulated some years ago about the tribulations of dealing with a computer. No author has yet acknowledged this creation:
Using Scenarios 3 In the early 1970s I joined an organization called the World Future Society. Its principal operating premise was the idea that we cannot “forecast” the future but we can describe “alternative futures,” and, in so doing, better prepare ourselves, our organizations and our governments for the inevitable unexpected events. This idea has remained with me as a cornerstone of effective risk management, incorporating the use of scenarios as a basic tool of risk analysis. Some years later, in 1988, my friends at Nova Corporation, in Canada, gave me a new book by Vernon Grose entitled Managing Risk: Systematic Loss Prevention for Executives. In Chapter 20, Dr. Grose described the use of scenarios, which he called the “heart of identifying risk.” He described specific and practical methods for encouraging operating managers to build their own scenarios. Since then I’ve been fascinated by this extraordinary tool for risk management. The Grose book, now in its third edition, remains on my shelf of the ten most important books for risk managers. It was followed in 1991 by Peter Schwartz’s The Art of the Long View (Doubleday, New York), another book on my ten best list, in which the author recounted his experience with the Royal Dutch/Shell Group, and later as a consultant, using scenarios in strategic planning. Most recently, I was reminded of the enormous utility of this technique
of risk analysis “We often talk about risk as if it was something objective, “ argued Davis, “and there are certainly technical risks of which this is true.” “However,” he continued, “there are other types of risk that are neither objective nor easily comparable. Often they involve other people’s fears and interests.” Here is where scenario plans can expand our understanding of the effects of multiple unexpected events on our organizations and stakeholders. According to the Shell website (www.shell.com), a recommended resource for those interested in this analytic technique, scenarios are “carefully crafted stories about the future embodying a wide variety of ideas and integrating them in a way that is communicable and useful. They help us link the uncertainties we hold about the future to the decisions we must make today.” As Ged Davis explained in his talk last fall, scenarios help us do four things: “to work with uncertainty; to broaden our perspective to include risks we haven’t previously recognized and ideas of risk we haven’t previously understood; to uncover unexpected differences; and to find a way to talk about them not only with colleagues and partners, but also with anyone who has a shaping interest in what happens.” These works synthesize the goals of risk management, including that of communicating our conclusions with all those affected by our action or inaction. Davis explained further that, before answers are reached and decisions made, the risk scenario team must hold conversations “with each of the parties involved in order to try and understand their point of view, their beliefs, and the particular risks “ of any given project. Too often risk analysis is confined to internal staff talking with each other. A decision is made and – surprise! –outsiders see the response entirely differently. I later downloaded from the Shell website another article by Ged Davis, Creating Scenarios for Your Company’s Future (April 1998). Davis started this paper with the comment “scenarios are plausible, pertinent, alternative stories of the future. They are powerful tools for addressing what is both fundamentally significant and profoundly unknowable—the future.” He noted the tyranny of the past and present, which distorts our ability to contemplate a future that could be radically different. Forecasters, he argued, extrapolate from the past and, in so doing, often fail to incorporate the high probability of “discontinuities.” The key behind the value of scenarios lies in their ability to move from “identifying single-risk factors” to the way in which multiple elements of events combine to alter our futures. Davis described one method of altering our worldview. Most perceptions of the world are based on North American or European-centric maps, in which these areas are the focal points. To change our thinking, he suggested re-orienting a conventional map so that Australia is at the center and it is upside-down, with South (and Antarctica) at the top and North (and Russia and Canada) at the bottom. Try it! Davis summarized the application of scenarios:
Scenarios should be the primary tool for risk assessment for today’s risk manager.
Precautionary Principle I’ve mentioned the so-called “precautionary principle” in these pages, most recently in my “Issues for 2003” in January 2003. I’ve always found it a vague and excessively cautious approach to risk management, too often freezing action in the fear of doing something wrong. It is a major topic of late, appearing in not only academic journals but also in the public press. It has both advocates and detractors. The detractors have the most recent word. In the February 2003 issue of Risk Analysis, the official journal of the Society for Risk Analysis, Chauncey Starr, one of the great visionaries of risk management and currently with the Electric Power Research Institute in Palo Alto, California, directs a scathing attack on this purported “principle.” Starr writes: “the precautionary principle exists only as a rhetorical
statement; it He argues that the process of decision-making under risk requires “quantitative risk analysis (i.e. a benefit/cost/risk assessment) which provides an insight to the likely consequences of a proposed action . . . . The only defensible approach is a comparative risk analysis of alternative pathways, taking into account our most credible projections of (their) lifetime economic, environmental, and health values . . . . The key point is that comparative benefit/cost/risk analysis of the decision options should be the government’s response to new challenges rather than the rhetorical ‘precautionary principle’ as an excuse to forestall the future.” Every risk manager should read his concise three-page analysis. I’ve posted a copy, with Mr. Starr’s permission, on the Risk Management Reports website, www.riskreports.com, on the Useful Information page. He attacks the idea that we should be hobbled to the present for fear of the loss of even one future life. At the same time as the Starr article appeared in Risk Analysis,
Cass Sunstein, of the Starr and Sunstein are the detractors. For a countervailing view of those who support the “Principle,” go to The Precautionary Principle in the 20th Century, edited by seven scientists and published in 2002 by Earthscan Publications Ltd., in London. The authors acknowledge that “precaution is now a fully politicized phenomenon,” one that, at its most interactive, is “a process in a form of governing that is participatory, adaptive and sensitive to a variety of outlooks and framing values.” The basic argument in this book is that we failed to listen to early warnings on many current problems. We were incautious and this has cost us dearly. The authors use such examples as over-fishing, radiation, benzene, asbestos, PCBs, halocarbons, DES, antimicrobials, sulfur dioxide, MTBE, TBT antifoulants, hormones as growth promoters and “Mad Cow Disease” and its human connection, CJD. In almost every case, we ignored early warnings only to find that they were fully warranted. Even here there are countervailing disclosures. Thalidomide, first used to protect against spontaneous miscarriages in pregnant women, was found to cause terrible birth defects and was discontinued. Yet today, the drug is being used again, successfully, for treating other medical problems, indicating that its initial full banishment was premature. The Journal of Risk Research devoted its entire October 2002
issue (Volume 5, Issue 4) Discussion of the Precautionary Principle may seem excessively academic
for many
Risk
Management Reports,
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ISSN 0199-6827. Permission
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