Black Swans means business
Managing its civil and national security risk is one of the greater challenges facing any government. The government should embrace modern qualitative and quantitative methods of risk management, as it is only with robust governance structures and cutting-edge risk management solutions created by modern enterprise that the government can begin to effectively cope with that elusive beast, the black swan.
‘This man, on one hand, believes that he knows something, while not knowing [anything]. On the other hand, I – equally ignorant – do not believe [that I know anything].’ – Socrates in Plato’s The Apologies. The notion of Socratic ignorance has been an ideological theme for centuries. As the notion goes, the wise man is not he who thinks he knows everything, rather he who knows that he does not know everything.
Sometimes, from seemingly harmless causes come harmful effects. When those effects make themselves known, it seems obvious what the cause of the effect was; that the effect was always going to happen. This paper also recommends that the UK government could do more to improve quantitative methodologies for aggregating risks across the country. Expertise needs to be gained to understand correlations between risks, stress test modelling and scenario testing. The point of this exercise would be to design, using simulated scenarios of events that could significantly impact the country, effective contingency plans to mitigate the effect of these risks. Such a programme could help the Government to more to prepare better for risks and create an opportunity to allocate resources in a more effective way. Managing its civil and national security risk is one of the greater challenges facing any government. Since 2010, the UK Government has made great strides to firm up the way it predicts and manages these risks.
Sometimes, from seemingly harmless causes come harmful effects. When those effects make themselves known, it seems obvious what the cause of the effect was; that the effect was always going to happen. A Black Swan Event has three key characteristics:
(i) it occurs outside projected expectations (a fat tail to a distribution curve);
(ii) it carries extreme impact; and
(iii) it seems explainable after the fact.
Managing its civil and national security risk is one of the greater challenges facing any government. Since late 2000, the UK Government has made some strides to firm up the way it predicts and manages these risks. However, there is a great deal more it can be doing.The world of business, and in particular, the financial world, has seen considerably more progress than the public sector in this respect. But rather than lament this point, the Government should actively seek to replicate best practice techniques in risk management, which could have an enormous value impact on both the UK’s finances and the life of the nation.
As a starting point for this process of reform, we make the following policy recommendations:
1. Setting up of an Office for Risk Management (ORM). This would be structured as an enlarged base for the UK’s Foresight Horizon Scanning Centre.
2. Bringing in external experts to advise the ORM, which should have the effect of reducing ‘groupthink’ within the Government’s risk management processes.
3. Encouraging a more effective ‘risk culture’ across Government Departments by raising the level of awareness about these black swan type events, but also take additional risks in order to deliver change.
4. Introducing ‘best practice’ risk management structures from business, including the ‘three lines of defence’ approach.
5. Introducing more qualitative assessments and quantitative risk modelling strategies to both the ORM and Government Departments. These techniques are increasingly used by business and might usefully be replicated by Government in managing Black Swan risk.
It is essential that the Government acts to reform its risk management framework. The policy proposals put forward in this paper and summarised above are a pragmatic and cost-effective way of achieving meaningful results for the country. The Government must act swiftly, as what is at stake is nothing short of the life of the nation and the security of our citizens.