Over the past several weeks we have been deluged with the usual year-end predictions about what will occur in 2010. Some suggest that it will be the beginning of a transition to a fourth dimensional existence; others insist that the economic meltdown that will occur will make the collapse at the end of 2008 seem like child’s play. Some are based on trend analysis, others on psychic information. They all seem to have one message in common; get ready, something big is coming.
Several decades ago Daniel Kahneman and Amos Tversky did a series of experiments that demonstrated, among other things, that we all suffer from cognitive dysfunction; we never have enough information to make a well reasoned decision. Perhaps we should modify that conclusion as a result of the explosive evolution of the Internet; we cannot absorb enough information to make a well reasoned decision. The data is there if only we could make sense of it.
The unexpected event or Black Swan as Taleb calls it is supposed to be an occurrence that no one anticipates. Yet, if we look at the major and usually catastrophic events that we have experienced over the past decade we will always find someone, and in most cases, a goodly number of people who saw it coming. In retrospect their perceptions seem self-evident; at the time they were either ignored or met with derision. Our acceptance of what is predicted about the future seems always to be colored by what we wish would happen in the future based on what we are experiencing now. We limit ourselves.
The fact is that we know a great deal that we constantly ignore every day. Let’s assume that you are sitting at a heavy oak table. You know from middle school physics that the table is mostly empty space; the mass of the atoms in the table is minute while the “empty space” consists of electromagnetic fields. Your head, its bones, skin, and the brain itself have the same characteristics. However, if you bang your head on the table the solid density that you, I and everyone else perceives will become more “real” than the facts that we know. So we continue to act as though things are solid when we know that they are not and we learn to live with the paradox of our perceptions being out of kilter with what we know to be true. Invention is the attempt to reconcile these two experiences. The impossible becomes possible and prior experience seems quaint.
The Bureau of Labor Statistics tells us that productivity in the non-farm category went up 8.1% in the 3rd quarter of last year. In the manufacturing sector it went up 13.4% in the same time period. I can’t remember a quarter where the productivity of the US labor force went down. Regardless of the shape of the economy we seem to be able to crank out the work at an ever accelerating pace. Technology is a major factor. That and the fact that people are doing the same work for less money contribute to these amazing statistics. And yet at the same time our educational system is producing more and more people who lack the skills to secure and maintain anything but the most marginal employment. Does all this mean that there will be fewer jobs as a result of the mushrooming efficiency of technology or greater unemployment because the available workforce lacks skills? It probably means both. Will we perceive this lack of work as a tragedy or as an example of the advancement of our species? It’s hard to tell but it certainly means that our old models of employment and productivity are going to be exposed as inept measurements in the fairly near future.
The first commercial oil well was drilled in the middle of the 19th century; the last one will be drilled well before the middle of the 21st. Will this be the result of carbon taxes and global warming initiatives? I would suggest that those efforts will have marginal impact. What we know is that it takes us about five times the amount of energy to get oil out of the ground than it did a few decades ago. We know that demand is increasing and supply can only diminish. We also know that energy that we extract from the earth requires a tremendously complicated infrastructure to distribute and use it (find it, dig or drill it out, transport it, refine it, transport it, burn it).
There are those who insist that we will experience the modern equivalent of the Dark Ages when the oil runs out. It would be foolish to think that the transition from a fossil fuel economy won’t be disruptive but to insist on catastrophe suggests limited imagination.
So, given the acceleration of change that seems to be upon us, what should those of us in the risk management profession be doing these days? I would suggest the following:
1. Never attend a meeting unless you are absolutely sure that you are the dumbest guy in the room. Once there, ask questions the answers to which seem self-evident.
2. Assume that what you know is a very small percentage of what there is to know.
3. Take the results of models and methodologies with a shaker of salt.
4. Be leery of those who say our problems are the result of the exponential function but our solutions can only be linear
5. Above all, pay attention.
