Risk Thinking - A Better Way to Battle Uncertainty
(Extracted from Risk Thinking, Ron S. Dembo, Archway Press 2021)
Have you ever looked into a storm cloud just as lightning strikes? The white-hot flash sears sky and retina alike – a lethal and near-instant reminder of how unpredictable nature and our planet can be. Greek myth depicts the lightning bolt as the weapon of Zeus, a terrible force to strike down his enemies. In the Vedic tradition, it is the god Indra who wields this world-breaking fire. Throughout history, lightning has captivated both our imagination and our fear. Not only does it stun our senses, but it can also cause destruction around us—sparking wildfires, disrupting air traffic, triggering power outages or surges, and reducing buildings to cinders in seconds. In rare cases, lightning also kills.
We often describe lightning as random. “Lightning never strikes the same place twice” is how we comfort people, suggesting that a bad event won't happen again. But it can, and it does. That lightning challenges our expectations is what makes it powerful, just as the unpredictable uncertainty in many of nature’s extreme events is the foundation of its destructive force – the timing of freak flooding, the persistence of drought, or the exact spot where a hurricane will make landfall.
Yet in the face of the ineradicably random, there is plenty we can do to hedge our risks and tilt the odds of survival in our favour.
We may never know exactly where a bolt will hit. However, scientists who study storms say the atmospheric conditions that cause lightning follow predictable patterns, making them particularly suitable for probabilistic forecasts that show the range of future weather possibilities and their likelihood of happening.
Weather services will issue storm warnings, giving us time to act and prepare. We can see the clouds approaching. Before an electrical storm's path, we can seek shelter in a building or a Faraday Cage in a vehicle. We avoid hilltops, seek low ground, and stay well away from tall objects such as trees or telephone poles that could conduct lightning toward us.
Such simple steps can save our lives. They cannot eliminate the uncertainty of a storm strike, but they can reduce the chance of catastrophe by decreasing our exposure to risk. They turn the random into a hedge to protect – setting parameters on potential destruction. When we shelter from the storm, we are strategizing amidst the unknown. We are, perhaps without realising it, using our intuition to Risk Think.
In some ways, Risk Thinking is a book about formalizing common sense in a world of extreme uncertainty. Our brains are wired to think ahead, to imagine future scenarios, and to prepare for the unknown. It is an ability embedded in our genetic makeup but somehow lost in translation to a global society where corporations and governments rely on flawed forecasts to try and predict the unpredictable.
But the book is also much more than that. It promotes a new, more realistic way of analysing risk and planning for the future that relies less on a single simple solution or an unnuanced forecast, and instead emphasises the importance of flexibility and diverse approaches.
In the past, if an earthquake shook the ground beneath our ancestors’ feet, our primitive huts collapsed into the abyss. When the rains did not arrive, our crops failed. Yet we learned to prepare for these events by storing grain in good times because those who did not starve.
Through our planning, we aimed to master nature – to outsmart it in its own random game. We industrialized, building machines that shifted us from our agrarian roots to cities that sprang from the wilderness. We started needing fewer hands to feed more mouths. We became billions and abandoned the land around us. Trees turned into commodities; wildlife into exotic visitors. That green and blue, once all around us, became nothing more than a holiday destination.
As we advanced, our ability to innovate and develop even more remarkable technologies has convinced us of our invulnerability. Our supply chains have become cumbersome and complex, our communication worldwide and instant, our industries automated, our economies instantly reactive, our politicians unrestrained, and our greed for consumable resources enormous and unimpeded.
With the rise of statistics and probability now taught at school, we become more confident in our planning. We make increasingly daring predictions with a straight face, genuinely believing in our capacity for foresight – convincing ourselves that we know what is coming.
But there are events around every corner, ready to humble us: events that, from tiny beginnings, break through our defenses and devastate our systems – the pandemics, financial crashes, cyberattacks, terrorist acts, geopolitical conflicts, and man-made disasters.
Paradoxically, our callous dominance over the environment and our separation from it have angered Mother Nature. We have stripped so much from her that she reverts to what she knows best – bigger storms, stronger hurricanes, and deadlier diseases. And science, despite how brilliant we believe it to be, has faded in comparison to her power.
As a species, we face increasingly interconnected global challenges: climate change, water scarcity, an aging population, resource depletion, and rising inequality. As the world becomes more complex—with multinational corporations, global financial networks, and advancements in big data, machine learning, and artificial intelligence (AI) shifting decision-making away from us—our vulnerability to radical uncertainty increases, and forecasting proves to be less effective. There is simply too much to model over systems that are hypersensitive to disruptions and quick to react.
Yet every day, our governments and companies act as if they are unaware of the risks. We build structures in flood-prone areas. We drill into the ground for the carbon that is harming us. Our economists regularly get the forecasts they are paid to produce wrong by significant margins, and multi-billion-dollar businesses plan manufacturing processes that fail spectacularly when minor disruptions break into their systems.
Our hubris has blinded us from seeing that our ability to plan amid uncertainty is weak; it makes the uncertainties of our world more obvious. Now more than ever, we must remember our skill for risk thinking and recognise its relevance today. We must adapt it to our business and social environments, enhancing it to handle new and radically aggressive challenges.
We need to work with nature, and we are beginning to do so, gradually. However, we also must ensure our survival as we quickly approach nature’s tipping points and increasingly unpredictable events become routine. This calls for a shift in how we think about the future—a revision in how our business schools teach aspiring managers to make risk decisions. We must let go of our dependence on forecasts, recognising their failure in the face of uncertainty. Our tendency towards wishful thinking needs to change.
We need to accept that, in a radically uncertain world, we cannot dictate outcomes; we can only prepare ourselves for their potential occurrence. In our world, there is no single right or wrong answer to a question. There is only a multi-faceted strategy. It is a better way of reasoning that we have called “risk thinking,” and the building blocks are scenarios.
Scenarios help us understand an uncertain future. In their simplest form, they are stories about potential futures that could happen around us. Importantly, however, scenarios are not predictions. They do not challenge the current business outlook with a single, definitive vision of the future. Instead, they present and communicate to stakeholders a range of possible future events with the goal of encouraging openness to new, uncomfortable, and unlikely signs of change and disruption. They serve as a way of asking, “what if?”
As we move forward into a world of deep uncertainty, scenarios act as our headlights in the darkness. Like headlights, they extend ahead and offer a broad view of the upcoming terrain as we navigate. More importantly, they only shine so far, and their beams fail to reveal much of what is off to the side. Objects ahead initially appear as vague shapes in the distance, with our headlights bouncing light onto them to outline their form, catch a movement, or cast unusual shadows. When something blurry comes into view, we might slow down and place both hands on the steering wheel, giving ourselves more time and control to react. Then, as we keep moving and our beams grow stronger, the object becomes clearer, and we can identify it: a stray branch crossing the road or a child trying to cross. Having been alerted to its presence, we can make a more informed decision—whether to redirect, ignore, hedge, or bet. That captures the essence of the risk-thinking process and the scenario planning that supports it.
Our headlights don't cover the entire surroundings, so occasionally, when travelling on a dark road at night, we might see something suddenly appear. If we’re going too fast, we won’t have time to avoid it – which often happens in Eastern Canada when people run into moose at night, sometimes with deadly results. Essentially, as we drive in the dark and choose our speed, we’re betting that whatever jumps onto the road will leave us enough time to avoid a serious crash. Inexperienced or reckless drivers simply take the risk, unprotected.
The metaphor of headlights in the dark illuminating our future works well for risk thinking. We can only light up a partial view of the future (the scenarios we create). It is the scenarios we overlook or miss that represent the bets we are making – the parts of the road we have left unlit with our headlights. Therefore, in many cases of radical uncertainty, it makes sense to slow down (hedge) so we can handle the moose that might suddenly jump into view unexpectedly. Extending the metaphor, as we get closer to an object, our vision of it improves – just as in life, as we approach a future date, we often can refine our scenarios to better identify risk.
The opposite of this process would be our current way of forecasting. We would turn the lights on once, evaluate the situation, and decide that the road ahead was clear. Then we'd put the car on autopilot and switch off the lights. After all, what are the odds that a moose would leap out from the undergrowth right in front of us, right after we’ve just checked the road ahead?
There isn't a day that goes by without seeing another example of the need for a formal, science-based approach to risk, especially as we've entered a much faster-paced, data-driven world where the evident fragility of our economic systems has shattered recent wisdom on how to best manage it. Recently, I came across a series of articles on risk management from McKinsey, one of the leading strategy firms globally. Once again, they focus heavily on the problem, with vague suggestions about the solution. What they and others truly need is to adopt a formalized, science and mathematics-based method of analysis – risk thinking.
We must eliminate ad-hoc methods in our increasingly fragile and risky world. This book explains why a new approach is necessary and how to implement it. It is aimed at the sophisticated, yet not necessarily technical, individuals responsible for making complex decisions under uncertainty. Our aim is to formalize and systematize this approach, along with developing the tools, algorithms, and data required to apply it effectively.