Building blocks of the fourth dimension of risk
In the previous blog we explored how RiskRecon understands that if there is to be a scale on which change can be weighed, the following two poles can be applied, being: Marginal versus Non-Marginal Change.
Change with ‘Marginal’ impact on the equilibrium/stability of the system, will occupy one end of the scale, while the other will weigh change, or events that have a non-marginal impact (that upsets systemic equilibrium/stability).
One of the building blocks can be found in a paper published by the UCL Institute for Innovation and Public Purpose, entitled, Deciding how to decide: risk-opportunity analysis as a generalisation of cost-benefit analysis. The paper focuses on whether policy decisions will have marginal- or non-marginal change impacts on environments or markets when implemented.
It is indicated that under conditions where policy will not upset the systemic status quo, or where conditions of homogeneity and certainty apply to the system’s future outlook, assumptions of marginality apply.
The latter means that the system is in equilibrium, and policy interventions will not upset the status quo. Thus cost- benefit analysis can be applied to inform policy development. One of the key points of the argument is that cost-benefit analysis is only applicable when a system is in equilibrium. The importance of this for risk analysis is explored below.
However, the authors argue that when conditions of ‘marginality’ does not apply, it is necessary to understand that the system is not in a condition of status-quo, but that disequilibrium, and uncertainty has come to dominate the outlook of that system.
The implication of the above is that under conditions of non-marginal change: uncertainty characterises, and is what feeds the unpredictable monsters of operational- and strategic risks.
Under conditions of non-marginal change and systemic disequilibrium, it will be foolish, and suicidal not to acknowledge the dynamic nature of the economy (and society) as inherently complex dynamic systems that come to life through inter-activity and inter-relationships. When systems or markets become unstable it evident that instability is both a perception, and a reality shaped by the actual decisions and behaviours of the multitude of ‘actors’ it takes to make a national market system ‘tick’
This is why the ‘system’ is not seen as a singularity by RiskRecon: it is not an abstract philosophical idea, or merely an expression of market trends in an avalanche of numbers.
Instead, and especially under conditions of non-marginal change, it has to be accepted that systemic conditions are determined by the interactions, and inter- relationships between all the components included in the system. This implies that non-marginal conditions of change originate in dynamically complex interactions with all the multiple components of the system. Put simply, the fourth dimension of risk links to the dynamism of human societies, and markets ultimately shaped by outcomes of the interactions and inter-relationships that shape markets.
RiskRecon challenges current assumptions about systemic stability- and status quo, in a period of exacerbated turbulence. Under conditions of non- marginal change it is necessary to deploy risk-opportunity assessments.
A critical take-out from this section pertains to the factor of dynamic complexity inherent in systems, which is ultimately driven by the inter-relationships, and interactions between components of the system.
This paves the way for the identification of what RiskRecon to be the Fourth Dimension of Risk.