Risk and complexity – on complex risk management

Abstract

Purpose

Industries lament the current situation of approaches that have resulted in huge losses in the face of complex risks. The purpose of this study is therefore to review complexity theory in the context of risk management so that it is possible to research better approaches for managing complex risks.

Design/methodology/approach

The approach is to review complexity theory and highlight those aspects of complexity theory that have relevance for risk management. Then, the paper ends with a discussion on what direction of research that will be most promising for the aforementioned purpose.

Findings

The paper finds that the most challenging aspect is to identify the weak signals, and this implies that the current approaches of estimating probabilities are not going to produce the desired results. Big data may hold a solution in the future, but with legislation such as the General Data Protection Regulation, this seems impossible to implement on ethical grounds. Hence, the most prudent approach is to use a margin of safety as advocated by Graham roughly 70 years ago. Indeed, the approach may be to assume that a disaster will take place and use risk management tools to estimate the impact for a given object.

Research limitations/implications

The literature review is a summary of a much larger work, and in so doing, the resulting simplification may run the risk of missing out on important details. However, with this risk in mind, the review holds rich enough discussion on complexity to be relevant for research about complex risk management.

Practical implications

The current implication for practice is that the paper strongly supports the notion of using a margin of safety as advocated by Graham and his most famous disciple Warren Buffet. This comes from the fact that because context is king, risk management approaches must be applied in their right domain. There is no one right way. In the future, the goal is to develop a quantitative approach that can help the industry in pricing complex risks.

Originality/value

The main contribution of the paper is to bring complexity theory more into the domain of risk management with sufficient details that should allow researchers to get conceptual ideas about what might work or not concerning complex risk management. If nothing else, it would be a significant contribution of the paper if it could help increasing the interest in complexity theory.

Citation

Emblemsvåg, J. (2020), "Risk and complexity – on complex risk management", Journal of Risk Finance, Vol. 21 No. 1, pp. 37-54. https://doi.org/10.1108/JRF-09-2019-0165