Risk, Surprises and Black Swans

Fundamental Ideas and Concepts in Risk Assessment and Risk Management

Terje Aven

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317626312
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Versicherung

Risk, Surprises and Black Swans provides an in depth analysis of the risk concept with a focus on the critical link to knowledge; and the lack of knowledge, that risk and probability judgements are based on.

Based on technical scientific research, this book presents a new perspective to help you understand how to assess and manage surprising, extreme events, known as 'Black Swans'. This approach looks beyond the traditional probability-based principles to offer a broader insight into the important aspects of uncertain events and in doing so explores the ways to manage them.

This book recognises the fundamental issues surrounding risk assessment and risk management to help you to understand and prepare for black swan events.

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• Complete with international examples to illustrate ideas and concepts

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• Integrates risk management and resilience based thinking

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• Suitable for a variety of applications including engineering, finance and security.

1 Introduction

This chapter presents some examples and cases that will be used throughout the book to illustrate the discussion about risk. The first example relates to pickpocketing and shows how the risk concept is used in such a daily-life situation. It also points to many fundamental issues of risk assessment and risk management – for example, how to determine what is acceptable risk and balance different concerns. The second example addresses a challenge that many people face: delivering a talk in front of a professional audience. The example illustrates the need for seeing the risks in relation to performance: one issue is the possibility of a bad outcome for the speaker. However, equally and probably more important is the goal of giving a very successful talk. Key means for obtaining a desirable outcome will be discussed. The third example points to the need to provide understandable interpretations of the risk and probability numbers produced by risk assessments. Such interpretations are often lacking, the result being poor risk communication, as demonstrated by this example. Also discussed is the common practice in industrial settings of describing risk through probabilities. It is argued that the strength of knowledge that these computed probabilities are based on also needs to be taken into account. The fourth example, which looks into the Deepwater Horizon accident in 2010, is used to illustrate the link between risk and unforeseen combinations of conditions and events, which characterise major accidents. Then some reflections are provided on the 2011 Fukushima Daiichi nuclear disaster in Japan. The accident demonstrates that events occur despite the fact that the risks are judged to be minor and acceptable. The sixth example relates to terrorism. Some reflections are made on the role of probabilities in describing risk. The final example relates to the concept of black swans, a term which is now commonly referred to in relation to the unforeseen occurrence of extreme events. The text addresses the issues of defining black swans, and, having done that, discusses how to identify and deal with them.

1.1 Pickpocketing on the Paris Metro

I was on my way back to Norway, buying a ticket to travel from Paris Gare de Lyon to Charles de Gaulle Airport. I had two pieces of luggage, and my wallet was in my left front pocket. Although it was filled with euro, I needed to use my visa card to get a ticket from the machine. I noticed a man behind me looking over my shoulder and I adjusted my position, ensuring that he could not see my code. It was rush hour, Friday evening, about six o’clock and extremely crowded. I did not give any more thought to this over-the-shoulder event; I certainly did not reflect on risks. My focus was getting onto the train. About twenty people were desperately trying to board the train where I was standing; there could hardly be space for even half of them inside the doors. I was among the first to board; all around me people were pushing. Then it happened. I felt an enormous pressure; somebody forced their way on to the train and pushed me and the people close to me so that it was difficult to breathe. My hands had to leave my luggage and my pockets. A few seconds later things calmed down a little. Then I noticed that my wallet was not there. Sweating, I looked around, but I quickly understood that it would be impossible to identify the thief. I had to accept that my wallet was gone. Three hundred euro and several credit cards were lost. Fortunately these cards were not misused, but the event was really stressful. When thinking about it today – several years later – I still experience strong negative feelings. It was a nasty experience.

Now, let us examine this event through the glasses of risk conceptualisation, risk assessment and risk management. Before entering the station to travel to the airport, we can obviously talk about risk related to pickpocketing. However, from my perspective, I was not thinking about this possible event at all before it happened. It came as a surprise to me. Of course, I was aware of the fact that pickpocketing occurs in such places, but I did not think about it during this particular trip. My mind was filled with other thoughts. Nonetheless, it seems natural to say that I faced risk. Using the term ‘risk’ in this way seems to indicate that risk exists independently of me; it has an objective status. On the other hand, however, it seems impossible to measure this risk without performing subjective judgements. Different people would judge the risk differently. Professional risk analysts may collect data concerning the occurrence of pickpocketing, but also a number of judgements need to be made: which periods of time should be included, what type of events, which stations, etc. The issue is the extent to which these data are representative of the situation I experienced, also taking into account specific circumstances related to my case.

Such measurements could obviously be of relevance for the authorities in supporting decision-making on how to run the trains safely and demonstrate the need for risk-reducing measures, but they do not seem so meaningful for me, the individual person exposed to the risk. I should be able to cope with the problem of pickpocketing without risk numbers. However, further reflection reveals that being informed about the magnitude of the pickpocketing problem in this area during rush hours could provide useful information for me to plan future train journeys. A natural question to ask is the extent to which the risk represented by the historical data on pickpocketing captures the risk the individual person is exposed to. I could introduce a number of risk-reducing measures, but they would not necessarily be reflected by the risk represented by the historical data. For example, I may decide to never board a train when there are more than (say) ten people trying to do this, or decide to avoid getting on the train when I have observed people that seem suspect. I could think about cautionary measures to reduce the consequences if I were unlucky and got robbed – for example, restricting the amount of money in my pocket to just a few euro and keeping all credit cards and the rest of the cash in a safe place in my suitcase.

I have been at that station many times and I will continue to use it. Reviewing all these occasions, statistical data can be produced showing some variation with respect to different factors, such as the number of pieces of luggage and their form, and how crowded the station is. A key question that I need to ask myself is: what level of variation in these factors should I consider to be normal or common? My first reaction after the event was that a crowd level such as that on the day of the robbery should not be seen as common, and special measures would be needed to avoid such peaks of overcrowding. However, later I thought that maybe I should allow such peak periods to be part of the normal variation – since I may need to take the train at such points in time – and instead think of ways to change my management of the risk, implementing a set of measures as indicated in the previous paragraph.

These are some of the conceptual issues we will address in the coming chapters. The meaning of key concepts such as risk, surprise, knowledge and variation will be thoroughly studied. The degree to which receiving and obtaining more knowledge about the phenomenon (pickpocketing) would change the risk will be questioned. Is the risk independent of the information/knowledge? It seems obvious that the measurement of risk is influenced by the information/knowledge, but is this measurement of risk the same as risk? Does some risk exist per se, which is not influenced by the measurements? And how do these types of reflections affect the way we manage the risk? Theoretical analysis has a value in itself, but the foundational ideas about risk addressed here also have implications for decision-making, as we have seen from the above considerations in this pickpocketing example.

1.2 Delivering a talk to an audience of scientists

The time of the talk is determined, and the speaker is planning its execution. Let us call this person John. His long-term goal is to give brilliant talks, in the sense that the audience listens with great interest to what he says and enjoys the way he communicates his message. In addition, for him success requires having a good feeling throughout the whole talk, a feeling characterised by a high level of confidence and ‘having the audience in the palm of his hand’.

To obtain the desired outcome, John implements some types of risk and performance thinking in line with the ideas in this book. The first one relates to the concept of risk and how it is understood. The talk can have many different outcomes, and before it is executed we do not know which one will occur. This is risk, and John is especially concerned about undesirable scenarios – for example, situations that make him feel incompetent. To assess the magnitude of the risk, he needs to introduce a measure (interpreted in a wide sense) of the uncertainties. John is most used to probability and thinks in accordance with this measure, but he is not assigning it at this stage. Rather, he thinks about the means he believes are necessary to ensure the desired results. A key factor is the process he has adopted recently for early preparation of the slides and carrying out a number of trial-talks with a critical audience of colleagues who provide feedback on his performance. These trial-talks can be viewed as elements of a continuous improvement process (plan, do, study, act). He also focuses on several other means to be successful:

(i) Preoccupation with failure

John is focused on failures that could occur – for example, the audience is bored (one person or more), the arguments used in the talk are not valid, the slides are confusing, the message is not clear, and so on. To a large extent risk is about the occurrence of such events – deviations, catastrophes, not meeting aims etc. – and the identification of them is a basic step in any risk assessment. To be able to give a successful talk, the list of potential failures is studied and a check is made that the means implemented are sufficient to avoid them. If not, additional measures are required. For example, the trial-talks should give a clear indication as to whether or not the slides are confusing.

Equally as important as the focus on failures is the preoccupation with early signals of failure – for example, if some members of the audience show signs of not listening, closing their eyes and so on. This focus on early signals and warnings is important in relation to risk, as signals and warnings are closely linked to the uncertainties and the knowledge dimensions of risk.

(ii) Reluctance to simplify

Following this principle, we will not allow judgements of risk to be based only on the result of the quantitative expression of risk, such as simple risk matrices showing probabilities of failures and expected losses given failures. Such a risk description on the basis of earlier talks may indicate that the risk that a person known for cavilling behaviour will be in the audience is small and negligible. Reluctance to simplify means that we should not base the judgement of risk only on such simple tools. Another example relates to the reliance on simple rules of thumb: for example, the idea that to ensure asuccessful talk it is sufficient that one smiles and has a good time on the stage, or that being knowledgeable is sufficient. Reluctance to simplify acknowledges the need for seeing beyond such rules. Such rules – ‘truths’ and assumptions – may lead to surprises. A ‘complete’ risk picture is sought, covering not only probabilities but also the ‘potential for surprises’.

(iii) Sensitivity to operations

The key here is to be sensitive to what is happening during the talk. For example, if some members of the audience show indications of being bored, actions may be taken, such as changing the focus to a topic one knows always gives a good, immediate response. Getting signals of something that might threaten the success of the talk, thereby increasing uncertainties and risks, requires compensating measures. During the talk information is continuously gathered and the risk description is updated, and proper risk management calls for measures. The risk is monitored during the talk, meaning that John is sensitive to everything that happens. If one is to be able to manage unforeseen events occurring during a talk adequately, not only is a lot of training required – there is also a clear need for preparation, as expressed by the next characteristic (iv).

(iv) Commitment to resilience

This principle concerns the ability to meet unforeseen events and surprises – for example, questions from the audience that the speaker has not thought about, or the fact that a person renowned for cavilling behaviour is among the audience. John needs to think about ways to meet such situations. One approach is to establish a general procedure, which is first based on general reflection, and then deferring the answer to an interval or referring to other experts. Being resilient requires a lot of work and training, and it is obviously very important in order to succeed. Resilience is a well-known principle in risk management to meet threats and uncertainties. Characteristic (iv) represents a commitment to highlight such thinking.

(v) Deference to expertise

This principle could be demonstrated by not trying to answer questions out of one’s competence area, but rather pointing to other experts who have the necessary knowledge to give an adequate response.

These five principles constitute the key elements of the concept of (collective) mindfulness as interpreted in studies of so-called High Reliability Organisations (HROs). ...