Understanding and managing systemic risks

^ In this thought-provoking article, Ortwin Renn explores the meaning of 'systemic risks', why they are so problematic, and what he sees as the only feasible approach to their management. Also, he only mentions coronavirus ONCE! Which is quite refreshing.  

To those who don't have access, I will try and summarise it as best I can: 

Systemic risks are riddled with complexity; they are not spatially or temporally delimited, they are produced by nonlinear cause-effect patterns, they are stochastic in nature....and most people don't care about them until they materialise.  

Given their inherent complexity, systemic risks do not lend themselves to dimensionality reduction or staged assessments, leaving actuarial approaches to their management virtually redundant. Regardless, the need to try and understand them is great, but the will is weak for a number of reasons:

1. Human intuition reduces conceptions of causality to the immediate proximity in time and space.

2. The non-linearity and catastrophic potential of systemic risks means there is no opportunity for the preferred 'trial and error' approach.

3. The 'common pool problem' means everyone feels that their contributions to the issue are insignificant, producing little incentive for action.

4. There is always the hope that the extensive costs of risk reduction will be borne out by someone else, leading to 'institutional freeloading'. 

Frameworks for the assessment and management of systemic risks have been proposed on numerous occasions but haven't gained traction. They can only be managed ex-ante, and given that two (and arguably more than two) systemic risks have taken shape since the turn of the century, it is perhaps time they received serious attention. 

It is hard to argue with Renn's conclusion that the management of systemic risks relies almost entirely on good governance, and good governance requires; inclusive knowledge, systematic deliberation and constant monitoring.

Whilst almost every big player in industry and government would argue they have such structures in place, they are not being used to their full potential. It is only through their collective capacity that we can hope to implement the kind of enhanced observational and learning systems required to prevent, mitigate and control systemic risks. But as highlighted, it is the matter of encouraging collaboration that poses the greatest obstacle.