Tagarchief: Risk

Thinking, Fast and Slow

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Daniel Kahneman | 2013

In this fascinating treatise by a giant in the field of decision research, the mind is a hilariously muddled compromise between incompatible modes of thought.

Psychologist Kahneman positions a brain governed by two clashing decision-making processes. The largely unconscious System 1, he contends, makes intuitive snap judgments based on emotion, memory, and hard-wired rules of thumb and the painfully conscious System 2 laboriously checks the facts and does the math but is so “lazy” and distractible that it usually defers to System 1.

Kahneman uses this scheme to frame a scintillating discussion of his findings in cognitive psychology and behavioural economics and of the ingenious experiments that tease out the irrational, self-contradictory logics that underlie our choices.

All the factors described play a direct and indirect role in public governance. All public leaders and managers should be aware of the thoroughly described systems of our brains and behaviour. They make things clear and understandable. The book is an epiphany.

Bibliography

Kahneman, D. (2013) Thinking, Fast and Slow. New York: Farrar, Straus and Giroux

The Limits to Growth

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Club of Rome | 1972

In March 1972, a report by a group of young scientists at the Massachusetts Institute of Technology (MIT) commissioned by Aurelio Peccei, founder of The Club of Rome, shook the world. The report excels in system thinking and modelling and in that it is more actual than ever.

Today, 50 years after its publication, “The Limits to Growth” is considered one of the most important and controversial environmental books of all time and it continues to influence conversations around sustainability and our continued existence on this finite planet. Below is the story behind this ground-breaking publication.

Published 1972 – The message of this book still holds today: The earth’s interlocking resources – the global system of nature in which we all live – probably cannot support present economic and population growth rates much beyond the year 2100, if that long, even with advanced technology. In the summer of 1970, an international team of researchers at the Massachusetts Institute of Technology began a study of the implications of continued worldwide growth.

They examined the five basic factors that determine and, in their interactions, ultimately limit growth on this planet-population increase, agricultural production, nonrenewable resource depletion, industrial output, and pollution generation. The MIT team fed data on these five factors into a global computer model. Then it tested the model’s behaviour under several sets of assumptions to determine alternative patterns for mankind’s future. The Limits to Growth is the nontechnical report of their findings.

The book also contains a message of hope: Man can create a society in which he can live indefinitely on earth if he imposes limits on himself and his production of material goods to achieve a state of global equilibrium with population and production in carefully selected balance.

The Limits to Growth, 1972 – key messages:

    • With existing policies, the physical limits to growth would likely be exceeded within one generation.
    • The most likely outcome of reaching these limits would be overshooting them, followed by systems decline.
    • The findings, however, also suggested a viable alternative to these outcomes – one in which population growth and material production could be brought into balance with planetary limits.
    • The fourth conclusion was that it would realistically take 50 to 100 years, or even more, to make this alternative outcome a reality.
    • Finally, the team found that every year action is delayed toward reaching the alternative outcome, decreasing the number of options available to avoid overshoot and collapse.

Bibliography

Meadows, D. H., Meadows, D. L., Randers, J. & Behrens, W. W. (1972). The limits to growth: A report for the Club of Rome’s project on the predicament of mankind. New York: Universe Books.

Limits to Growth (digital scan version, source: https://donellameadows.org)

Short History

Comparative risk analysis of technological hazards (a review)

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Robert W. Kates and Jeanne X. Kasperson | 1983

Hazards are threats to people and what they value, and risks are measures of hazards. Comparative analyses of the risks and hazards of technology can be traced to Starr (1969) but are rooted in recent trends in technological evolution, hazard identification, risk perception, and societal activities.

These trends have spawned an interdisciplinary quasi-profession with new terminology, methodology, and literature. A review of 54 English-language monographs and book-length collections published between 1970 and 1983 identified seven recurring themes:

i. Overviews of the field of risk assessment.

ii. Efforts to estimate and quantify risk.

iii. Discussions of risk acceptability.

iv. Perception.

v. Analyses of regulation.

vi. Case studies of specific technological hazards.

vii. Agenda for research.

Within this field, science occupies a unique niche, for many technological hazards transcend the realm of ordinary experience and require expert study. Scientists can make unique contributions to each area of hazard management, but their primary contribution is in the practice of basic science.

Hazards are threats to people, and what they value, and risks are measures of hazards.

Beyond that, science needs to further risk assessment by understanding the more subtle processes of hazard creation, establishing conventions for estimating risk and presenting and handling uncertainty.

Scientists can inform the discussion of tolerable risk by placing risks in comparative contexts, studying the evaluation process, and participating as knowledgeable individuals, but they cannot decide the issue. Science can inform the hazard management process by broadening the range of alternative control actions and modes of implementation and devising methods to evaluate their effectiveness.

Bibliography

Kates, R. W., & Kasperson, J. X. (1983). Comparative risk analysis of technological hazards (a review). Proceedings of the National Academy of Sciences, 80(22), 7027-7038.https://doi.org/10.1073/pnas.80.22.7027

Starr, C. (1969). Social benefit versus technological risk: what is our society willing to pay for safety?. Science, 165(3899), 1232-1238.

ISO 31000

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The International Organization for Standardization | November 2009

The International Organization for Standardization (ISO) in Genève started in 2005 the development of a guidance standard on risk management. An ISO working group was established to develop a Committee Draft called ISO CD31000. The standard “gives generic guidelines for the principles and the adequate implementation of risk management. It is not intended to be used for the purposes of certification.”

ISO 31000 seeks to provide a universally recognised paradigm for practitioners and companies employing risk management processes, replacing the myriad of existing standards, methodologies, and paradigms that differ between industries, subject matters, and regions. For this purpose, the recommendations provided in ISO 31000 can be customized to any organisation and its context.

In some respects, ISO 31000 is similar to ISO 9000 and other broad-based international standards. Though it is not certifiable, it is a concise and comprehensive statement which can, in a practical sense, contribute to the awareness and implementation of risk management.

COSO Enterprise Risk Management

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Integrating with Strategy and Performance, June 2017

This project was commissioned by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is dedicated to providing thought leadership through the development of comprehensive frameworks and guidance on internal control, enterprise risk management, and fraud deterrence designed to improve organi- zational performance and oversight and to reduce the extent of fraud in organizations.

Foreword

“In keeping with its overall mission, the COSO Board commissioned and published in 2004 Enterprise Risk Management—Integrated Framework. Over the past decade, that publication has gained broad acceptance by organizations in their efforts to manage risk. However, also through that period, the complexity of risk has changed, new risks have emerged, and both boards and executives have enhanced their awareness and oversight of enterprise risk management while asking for improved risk reporting. This update to the 2004 publication addresses the evolution of enterprise risk management and the need for organizations to improve their approach to managing risk to meet the demands of an evolving business environment.

The updated document, now titled Enterprise Risk Management—Integrating with Strategy and Performance, highlights the importance of considering risk in both the strategy-setting process and in driving performance. The first part of the updated publication offers a perspective on current and evolving concepts and applications of enterprise risk management. The second part, the Framework, is organized into five easy-to-understand components that accommodate different viewpoints and operating structures, and enhance strategies and decision-making. In short, this update:

  • Provides greater insight into the value of enterprise risk management when setting and carrying out strategy.
  • Enhances alignment between performance and enterprise risk management to improve the setting of performance targets and understanding the impact of risk on performance.
  • Accommodates expectations for governance and oversight.
  • Recognizes the globalization of markets and operations and the need to apply a common, albeit tailored, approach across geographies.
  • Presents new ways to view risk to setting and achieving objectives in the context of greater business complexity.
  • Expands reporting to address expectations for greater stakeholder transparency.
  • Accommodates evolving technologies and the proliferation of data and analytics in sup- porting decision-making.

The figure illustrates the framework considerations in the context of mission, vision, core values, and as a driver of an entity’s overall direction and performance.

Sets out core definitions, components, and principles for all levels of management involved in designing, implementing, and conducting enterprise risk management practices.

Readers may also wish to consult a complementary publication, COSO’s Internal Control— Integrated Framework. The two publications are distinct and have different focuses; neither supersedes the other. However, they do connect. Internal Control—Integrated Framework encompasses internal control, which is referenced in part in this updated publication, and therefore the earlier document remains viable and suitable for designing, implementing, conducting, and assessing internal control, and for consequent reporting.

The COSO Board would like to thank PwC for its significant contributions in developing Enterprise Risk Management—Integrating with Strategy and Performance. Their full consideration of input provided by many stakeholders and their insight were instrumental in ensuring that the strengths of the original publication have been preserved, and that text has been clarified or expanded where it was deemed helpful to do so. The COSO Board and PwC together would also like to thank the Advisory Council and Observers for their contributions in reviewing and providing feedback.”

By Robert B. Hirth Jr. (COSO Chair) and Dennis L. Chesley (PwC Project Lead Partner and Global and APA Risk and Regulatory Leader)

2017 COSO ERM: Integrating with Strategy and Performance (Executive-Summary)

Risk Management at the Edge of Three Worlds

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City management in the perspective of ‘risk’

Jack P. Kruf | 2007

In this article, I focus on the specific characteristics of the roles and positions of local authority CEOs and city managers in relation to the three worlds of politics, society, and management. A specific focus on the role of risk management in supporting the CEO, and on the process of discussing these issues, should be made to emphasise that risk management belongs on the strategic agenda and demands a holistic approach.

The “best” job

Some might say it is the most attractive and fascinating job there is: serving as CEO in local public management (or city manager or secretary). Why? Because it is at the very heart of a dynamic society, close to politics and government, at the centre of the world of “power and influence”, and at the top of the management pyramid. This person is at the junction of necessary skills, ambitions, rights, stakes, and interests. He or she is, via society, close to disasters, successes, poverty, and environmental challenges, and, via politics, to elected officials like the mayor and local alderman, but always in close contact with officials in higher government and very close to the professionals within the organisation. Local government leadership is a very exciting job.

“It is clear that risk management should be seen as a core competence for every public leader.”

The CEO is a generalist, not a specialist. One might say that a realistic comparison of the job would be with the decathlon. As with decathletes, the CEO must be well-rounded, competitive, and competent in many areas. 

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Stern Review on the Economics of Climate Change

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HM Treasury UK | 2006

“The scientific evidence is now overwhelming: climate change presents serious global risks and demands an urgent global response. This independent Review was commissioned by the Chancellor of the Exchequer, who reports to both the Chancellor and the Prime Minister, to contribute to assessing the evidence and building an understanding of the economics of climate change.

The Review first examines the evidence on the economic impacts of climate change itself and explores the economics of stabilizing greenhouse gases in the atmosphere. The second half of the Review considers the complex policy challenges involved in managing the transition to a low-carbon economy and in ensuring that societies can adapt to the consequences of climate change that can no longer be avoided.

The Review takes an international perspective. Climate change is global in its causes and consequences, and international collective action will be critical in driving an effective, efficient and equitable response on the scale required. This response will require deeper international cooperation in many areas – most notably in creating price signals and markets for carbon, spurring technology research, development and deployment, and promoting adaptation, particularly for developing countries.

Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen. The economic analysis must therefore be global, deal with long time horizons, have the economics of risk and uncertainty at centre stage, and examine the possibility of major, non-marginal change. To meet these requirements, the Review draws on ideas and techniques from most of the important areas of economics, including many recent advances.

The benefits of strong, early action on climate change outweigh the costs

The effects of our actions now on future changes in the climate have long lead times. What we do now can have only a limited effect on the climate over the next 40 or 50 years. On the other hand what we do in the next 10 or 20 years can have a profound effect on the climate in the second half of this century and in the next.

No-one can predict the consequences of climate change with complete certainty; but we now know enough to understand the risks. Mitigation – taking strong action to reduce emissions – must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future. If these investments are made wisely, the costs will be manageable, and there will be a wide range of opportunities for growth and development along the way. For this to work well, policy must promote sound market signals, overcome market failures and have equity and risk mitigation at its core. That essentially is the conceptual framework of this Review.

The Review considers the economic costs of the impacts of climate change, and the costs and benefits of action to reduce the emissions of greenhouse gases (GHGs) that cause it, in three different ways:

  • Using disaggregated techniques, in other words considering the physical
    impacts of climate change on the economy, on human life and on the environment, and examining the resource costs of different technologies and strategies to reduce greenhouse gas emissions.
  • Using economic models, including integrated assessment models that estimate the economic impacts of climate change, and macro-economic models that represent the costs and effects of the transition to low-carbon energy systems for the economy as a whole.
  • Using comparisons of the current level and future trajectories of the ‘social cost of carbon’ (the cost of impacts associated with an additional unit of greenhouse gas emissions) with the marginal abatement cost (the costs associated with incremental reductions in units of emissions).

From all of these perspectives, the evidence gathered by the Review leads to a
simple conclusion: the benefits of strong, early action considerably outweigh the costs.

The evidence shows that ignoring climate change will eventually damage economic growth. Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.

At the same time, given that climate change is happening, measures to help people adapt to it are essential. And the less mitigation we do now, the greater the difficulty of continuing to adapt in future.

Download Stern Executive Summary

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