Complexity, Risk & Resilience – (Part 1)

molokSeveral years ago a colleague asked me a simple question: “Think about how your work might help business leaders to better understand their environment.” I took a couple of days and sent him a brief letter and paper.

(I haven’t written anything on Prologue for almost 4 years. Maybe this will break the dry spell. I will keep it close to the original text, only adding a couple of notes to clarify). The first part of the post is the letter I sent as a Forward to the paper…)

Hello John…Here are some thoughts on the environment and business leaders.

“In terms of risk, it is worth mentioning that there are dis-economies of scale driven by connectedness. If a network has on average more than one connection per node, then as the number of nodes grows, the number of connections will scale exponentially with the number of nodes. This means that the number of interdependencies in the network grows faster than the network itself. And here’s the problem – as the interdependencies grow changes in one part of the network are more likely to have a ripple effect on other parts of the network.

network diagram

The ramifications for the above network played out in 2008 as investors systemically withheld capital from the market in the mash-up of collateralized debt obligations, credit default swaps, and other innovations of the global financial supply chain.

The bottom line is that things are going to be a lot less stable in the future and a lot less predictable – for governments and for business. If there is only one insight to take away this is it”

The most significant conceptual problem of our age is increasing uncertainty.

People, especially business professionals, love certainty and will, as the situation demands, occasionally settle for predictability. (Note – the most interesting and most profitable & high risk situations are neither certain nor predictable). They will not abide the “I don’t know” answer because every bone in their bodies has been conditioned from grade school through grad school and into the professions in the belief that uncertainty can be tamed, chaos can be eliminated and rational decision making will triumph.

Click here for the paper which gets to the fundamental models.

Very best,

John Marke

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