Risk analysis for a complex world

November 18, 2014, International Institute for Applied Systems Analysis
Risk analysis for a complex world

Developing adaptable systems for finance and international relations could help reduce the risk of major systemic collapses such as the 2008 financial crisis, according to a new analysis.

The increasing complexity and interconnection of socioeconomic and environmental systems leaves them more vulnerable to seemingly small risks that can spiral out of control, according to the new study, published in the journal Proceedings of the National Academy of Sciences.

The study examines risks are perceived as extremely unlikely or small, but because of interconnections or changes in systems, can lead to major collapses or crises. These risks, which the researchers term "femtorisks," can include individuals such as terrorists, dissidents, or rogue traders, or factors like climate change, technologies, or globalization.

"A femtorisk is a seemingly small-scale event that can trigger, often through complex chains of events, consequences at much higher levels of organization," says Princeton University professor and IIASA Distinguished Visiting Fellow Simon Levin, who adopted the term (originally suggested by co-organizer Joshua Ramo) together with an international group of experts during a 2011 IIASA conference on risk modeling in .

Levin explains, "A complex adaptive system is a system made up of individual agents that interact locally, with consequences at much of organization, which feed back in turn to affect individual behaviors. The individual agents can be anything from cells and molecules, to birds in a flock, to traders in a market, to each and every one of us in the global environment."

The complexity of such systems makes it difficult or even impossible to model the outcomes of specific changes or risks, particularly very small or seemingly insignificant ones. The study examines several examples of such femtorisks that set off major crises, including the credit default swaps that led to the 2008 , the recent protests in the Middle East and Ukraine that led to the broad upheavals in both regions' political systems, and the warming temperatures in the Arctic that have led to massive international interest in the region for mining and economic development.

Risk management for an unpredictable world

In light of such unpredictable risks, the researchers say, the most resilient management systems are those that can adapt to sudden threats that have not been explicitly foreseen. In particular, the researchers suggest a model drawing on biological systems such as the vertebrate immune system, which have evolved to respond to unpredictable threats and adapt to new situations.

"In practice it is generally impossible to identify which of these risks will end up being the important ones," says Levin. "That is why flexible and adaptive governance is essential."

The general principles of such management include: effective surveillance, generalized and immediate initial responses, learning and adaptive responses, and memory, say the researchers. Levin says, "We need to design systems to automatically limit the potential for catastrophic contagious spread of damage, and to complement that with effective and flexible adaptive responses."

Explore further: Cyber risks can cause disruption on scale of 2008 crisis, study says

More information: Frank AJ, Collins MG, Levin SA, Lo AW, Ramo J, Dieckmann U, Kremenyuk V, Kryazhimskiy A, Linnerooth-Bayer J, Ramalingam B, Stapleton Roy J, Saari DG, Thurner S, von Winterfeldt D. 2014. Dealing with femtorisks in international relations. Proceedings of the National Academy of Sciences. DOI: 10.1073/pnas.1400229111

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srikkanth_kn
not rated yet Nov 18, 2014
Isn't this connected or similar to chaos theory - Flap of butterfly wing can create tornados in distant part of globe?. Don't know why nothing on that is mentioned here
Noumenal
not rated yet Nov 18, 2014
As long as such adaptive systems do not inhibit or countermand the social and economic changes necessary to overcome the environmental and dehumanizing potential of out of control technological development and reductive mechanistic thinking.

What we don't want is to create an organism that is damaging to both its constituent parts as well as its environment, but with an immune system that prevents its timely natural death or evolution.

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