The wrong way to approach risk identification and assessment

The World Economic Forum’s (WEF) annual Davos global elite “love-in” is now behind us, and life goes on. As usual, just prior to its convening, the WEF published its “Global Risks Report”- a document we have written about before. This is intended to act as a mechanism to identify and publish a Top 10 list of risks in the categories of “Likelihood” and “Impact” by canvassing the views of those who form part of the self-same, self-selected elite at the WEF.

While the document is full of colour (and confusing diagrammes), and is supposedly the product of much effort, its value in any real sense is becoming debatable. The FT’s Alphaville column used the telling phrase that the product was the result of “conference room homeopathy”- so diffuse as to have no demonstrable efficacy. And we doubt the “placebo effect” works on risks!

The Report’s content does demonstrate what its creators are most concerned about. However, as one reads through the lists, one notices that the wordings used are so vague and broad as to be practically meaningless, or laughably obvious- “Extreme Weather Events (#1 in Likelihood), or Weapons of Mass Destruction (#1 in Impact.)The “insights” are stunning in their banality.

We are quite sure that, individually, there are many deep-thinking and original minds within the group surveyed. Unfortunately, assessing risk by survey of a self-referential “elite” has completely obscured their existence, to such an extent that there is nothing controversial or thought-provoking in sight.

If one adds to that the “interconnections” maps, showing the supposed key links between various risk categories, one is then left with a presentation of information that has essentially lost any value. It conveys nothing other than visual noise- cognitive dissonance, not cognitive diversity.

Of course, it is easy to mock such earnest and well-meaning efforts, but one has to ask whether any policy-maker is going to have an epiphany as a result of reading the document, thus leading to a significant shift in behaviour or actions.

Turning to the real world (something whose existence seems to escape many Davos attendees), to have any value, risk assessments have to be specific, concrete and probabilistic in terms of timing and scale. The contrast between the approach of the WEF and that of, for example, Philip Tetlock’s Good Judgment Project is quite telling. While the latter also uses the “wisdom of crowds” it asks very specific questions and seeks probabilistic answers which can then be analyzed ex post facto to identify so-called “superforecasters” who have a demonstrable capability in assessing risk, even if only in relative terms.

As “ground up’ underwriters of very specific risks, the Awbury Team recognizes that it is much more effective to focus carefully on what actually matters in a particular set of circumstances rather than worry about nebulous concepts that provide no additional value to the process of trying to obtain a deep understanding of the risk being underwritten. Contexts, connections and correlations truly matter, but only to the extent that they are relevant to the matter at hand.

Reading the WEF Report itself is merely an exercise in witnessing “groupthink”, because an unexacting consensus is the goal- not a reasoned dissent, a difference of perspective, or true originality.

The Awbury Team

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