The Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses have been designed to help people develop a relaxed attitude to danger. They follow the principle “what you don’t know can’t hurt you” and turn completely dark and opaque at the first sign of danger. This prevents you from seeing anything that might alarm you. This does, however, mean that you see absolutely nothing, including where you’re going.
Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.
Just as the flap of a butterfly’s wing in the Pacific can supposedly lead to a storm in Chicago, Risk management experts have long argued that complex, tightly coupled systems inevitably break down.
In his 1984 book Normal Accidents: Living with High-Risk Technologies, Charles Perrow, visiting professor at Stanford University who specializes in the inherent risks of complex systems, argues that disasters in complex, tightly coupled systems are inevitable for three reasons:
People make mistakes, Big accidents almost always escalate from small incidents, Many disasters stem not from the technology but from an organisational failure.
Nor can engineering redundancy eliminate the risk, he wrote, because the redundancies add more complexity to the system, lead to a shirking of responsibility among workers, or to pressures to increase production speed.
In a survey of 250 companies’ chief information security officers, McKinsey found that on average, few believe their companies are prepared: the typical security executive gives his company a C or C- grade on six of seven key measures institutions are using to reduce the potential for cyber attacks. Only in incident response and testing did they give themselves a C+. And most CIOs told McKinsey they don’t put their company’s most sensitive data on an IT cloud.
As long as human behavior is coupled with free enterprise, it is unrealistic to expect that market crashes, manias, panics, collapses, and fraud will ever be completely eliminated from our capital markets. The best hope for avoiding some of the most disruptive consequences of such crises is to develop methods for measuring, monitoring, and anticipating them. By using a broad array of tools for gauging systemic exposures, we stand a better chance of identifying “black swans” when they are still cygnets.
Measuring Systemic Risk in the Finance and Insurance Sectors
Monica Billio, Mila Getmansky, Andrew W. Lo, and Loriana Pelizzon