About Morgan O'Rourke

Morgan O’Rourke is editor in chief of Risk Management magazine and director of publications for the Risk & Insurance Management Society (RIMS).
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Nassim Taleb: “Let’s Not Be Turkeys”

black swan

In today’s keynote luncheon at RIMS 2010, Nassim Nicholas Taleb, best-selling author of The Black Swan, told the story of a turkey who is fed by the farmer every morning for 1,000 days. Eventually the turkey comes to expect that every visit from the farmer means more good food. After all, that’s all that has ever happened so the turkey figures that’s all that can and will ever happen. But then Day 1,001 arrives. It’s two days before Thanksgiving and when the farmer shows up, he is not bearing food, but an ax.

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The turkey learns very quickly that its expectations were catastrophically off the mark. And now Mr. Turkey is dinner.

Taleb’s advice: “Let’s not be turkeys.”

The lesson of our doomed turkey illustrates the central problem of unexpected, “black swan” events (or in this case “black turkey,” I guess). We simply do not have enough data to reach empirical conclusions about how a risk will manifest itself and to what degree. “Just because you never died before, doesn’t make you immortal,” said Taleb.

Part of the issue is in the semantics of how we talk about risk. We have created what Taleb called “an illusion of measurement.” By saying, we can “measure” the risk in a particular situation, we are implying that there is a definitive answer. “We should not be using the word ‘measuring,'” he said. “We should be using the word ‘estimating.'” It’s a psychological difference that allows us to gauge “riskiness” more appropriately.

Taleb pointed out that the issue is magnified by the increased complexities and interdependencies of today’s society. There is a greater potential for the unexpected in a society characterized by extreme randomness and connected in ways that it never has been before. You would only have to compare how a theoretical run on a bank would happen today as opposed to 50 years ago. Once upon a time, if you wanted to pull your money out of your bank after learning of its imminent failure, you would have to physically go to the bank, likely stand on line, and possibly even change your mind after being forced to wait half the day. Now you can get the news on your Blackberry, log into your bank and automatically withdraw the cash in seconds.

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And so can everyone other bank customer around the world. Voila. Instant crisis.

The situation may not be  encouraging, but Taleb put his faith in good risk management.

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“Unfortunately, we live in a world that doesn’t understand risks,” he said. “Hopefully, risk managers would run society and not bankers.”

They certainly couldn’t do any worse.

The Sun Hates You

You would never know it amid the cloudy, 40-degree weather here in Boston, but the sunny days of summer will be with us before you know it. The thing is that while many of us (particularly my fellow Northeasterners)  look forward to a little more sun in our lives, I’m not so sure the sun has our best interests at heart. I attended a session on solar storms the other day at RIMS 2010 and basically learned that there’s a good chance that the sun will be wreaking havoc on our cushy modern lives sometime in the not-so-distant future.

According to Dr. Sten Odenwald, a NASA astronomer, our sun is gearing up for what is called the 24th cycle–a period of increased sunspot activity, known to result in an uptick in solar flares and coronal mass ejections (massive jets of plasma that shoot out from the sun’s surface) that can effect the earth’s magnetic field. This sort of solar activity can damage GPS and satellite systems and cause power grid problems that evidently we are not prepared to deal with. In past periods of increased solar activity, earthlings have experience everything from TV and radio interference to a general increase in feelings of anxiety and panic. Airline traffic has had to be rerouted away from polar areas because radio communication is imposible. Satellites are degraded, shaving years off their useful lives and requiring millions of dollars of replacement or repair costs. Cosmic rays can fry sensitive computer components causing errors, glitches, of even total system failures. Basically it’s a mess.

But the real problem is that today, we are so much more dependent on technology than we ever were. We have a lot more to lose. John Kappenman of Storm Analysis Consultants pointed out that the power grid is particularly vulnerable. Many of the high-voltage transformers that we depend on to run just about everything are not adequately protected from exposure to cosmic rays and considering how costly and time-consuming these transformers are to replace (it takes a year or more just to build one), we would have a real problem if one goes down and,  say, takes out the power for the entire East Coast. According to estimates, about 130 million people are at risk in the most probable areas of power failure in the United States and we could see $1-2 trillion dollars in economic losses in the first year alone from a particularly bad, and unfortunately not unprecedented, solar storm. It’s a risk that sounds like the plot of a bad science fiction movie (I’m thinking something with Nicholas Cage) but its actually not even a little far-fetched.

The presenters were of the opinion that we need stronger design codes mandated by the government to prevent a sloar catastrophe. It certainly seems like a fine idea to me. Personally I’m thinking of starting my own sun worshipping cult. At the very least, it can’t hurt to get on the sun’s good side, right?

the sun

Joe Plumeri’s Top 10 Risks for 2010

It’s a risky world and according to Willis Chairman and CEO Joe Plumeri, it’s only getting worse. From volcanoes to oil rig fires to high-profile SEC investigations (and that’s only in the last few weeks), disasters that were once unheard of are becoming almost commonplace and outliers seem to be the rule rather than the exception.

“It’s almost like in a given week there are more black swans than white ones,” he said today in an entertaining and informative talk at RIMS 2010.

Plumeri doesn’t think that the increase in disasters is a coincidence–this is just how the world is now.

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And risk managers need to adjust their thinking to take this new reality under consideration. “The world has changed,” he said. You have to do what is necessary to prepare and protect your organization. If there’s a gap, you have to change it.”

To that end, risk managers need to think about what the biggest risks to their businesses actually are. Plumeri’s list kind of reads like the perfect editorial calendar for a risk management magazine, like, say, mine.

10. Reputation
9. Piracy
8. Cybersecurity
7. Globalization
6. Cost and availability of credit
5. Regulation and compliance
4. Market cap risk
3. Pandemics
2. Terrorism
1. Climate change

The interesting thing, Plumeri said, was that many of these risks are things that would never have occurred to risk managers years ago. “Growing up, the only terrorist I knew was my brother,” he joked. But, as he pointed out, these are the types of things that can have the biggest impact and risk managers need to be ready.

Makeshift Shelters in Haiti No Match for Hurricanes

The official start to the Atlantic hurricane season is about a month and a half away and many researchers are already predicting above average activity this year.

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 Colorado State University’s Philip Klotzbach and William Gray have forecasted 15 named storms and eight hurricanes and meteorologists at AccuWeather.com are calling for 15 named storms and five hurricanes. A typical season sees 10 or 11 named storms.

While an uptick in hurricane and tropical storm activity is never a good thing, it is especially worrisome for residents of Haiti.

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Four months after January’s earthquake, some 1.

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5 million people remain homeless in the country. The folks over at Slate have posted a must-see slide show that demonstrates how many Haitians are trying to make do with makeshift tents made out of bedsheets, sticks and scrap metal that seem unlikely to stand up to a modest breeze, let along hurricane-force winds. It is a stark reminder of how far Haiti still has to go in its recovery and another reason to hope that the country can be spared from another tragedy this summer.

Haiti shelter

Photo via Slate.