Author: Ron Dembo
In a radically uncertain world where small, un-anticipatable events can send shockwaves through global financial systems, we must find a way to obtain forward-looking data. But when neither correlation nor probability mean much ([link to blog piece on History is (Practically) Useless]), we must turn to science to extract the causality that governs the events we are modelling and the inherent uncertainty around them.
Experts Can Help Us Identify Risk Factors
The very first thing we need to do when faced with any radically uncertain problem is go to the experts to understand what risk factors are involved. If it is a Covid-19 risk problem, you would go to epidemiologists. If we were looking at climate change, it is the climate scientists who understand the mechanisms that drive changes in the Earth’s climate. They can tell us which of the climate mechanisms affect which geographical region and how these changes are caused. They understand the causation!
For climate change, the combination of the risk factors, heat, drought and high winds, generated by rising greenhouse gas concentrations in the atmosphere, causes massive fires such as those in California and Australia.
They Can also Help Us Understand the Uncertainty in Each Risk Factor
As well as identifying the risk factors and their causality, our experts also hold valuable estimates of the future in any radically uncertain situation. Although they are influenced by their experience set, by the past to some degree and by the current state of knowledge, they are our best resource for understanding what might lie ahead, with views informed by years of study and experience.
That’s true whether they are traders in an investment bank, epidemiologists in a research center, or data scientists in a mathematics institute. Their views could be poor at first, but they do get better as science gets better, as mathematics knowledge grows and as computers get faster and handle more data.
Importantly, it is precisely through capturing the uncertainty in these expert views that we can understand the risk of radically uncertain situations.
Where to Go from Here?
The collective intelligence of experts is the secret sauce to managing radical risk. From it we get the risk factors and their causality, and also values for the uncertainty in each risk factor. We can use this information to generate possible scenarios about the future based on the uncertainty in combinations of risk factors – and from there it’s a matter of strategy. Find out more by reading the forthcoming book, Risk Thinking: Decision Making in a Radically Uncertain World.