This document discusses adaptive risk management in an age of disruption. It outlines three main points: 1) adaptive risk management requires moving from "predict and control" to "sense and respond" using dynamic steering; 2) identifying phase transitions and tipping points through monitoring emerging risks and amplifying tremors; 3) key challenges are dynamically monitoring complex environments, uncovering vulnerabilities through stress tests, and navigating uncertainty through risk culture and communication. The document argues adaptive risk management is needed to navigate disruptive changes in areas like energy, technology, and finance.

1. RISK MANAGEMENT
IN THE AGE OF DISRUPTION
Moscow
13 November 2015
FNA
Alan Laubsch
Director
alan@fna.fi

2. 2
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Navigate Emerging Risk

3. 3
s
2015 Map of the Internet
Connected

4. 4
Ris
k

5. 5
Implication of Complexity
From “Predict & Control” to “Sense and Respond”
with Dynamic Steering

6. 6
Seek to understand hidden fault lines…
While Qantas & CX rerouted, many continued business as usual:
“We've flown this route for many years, it's safe and that's the reason
why we are taking this route”
Source: BBC

7. 7
Market linkages
Asset price data
Clustering
Balance sheet data
Financial Cartography reveals connected
risks and hidden patterns
Bilateral exposure data
Central nodes

8. 8
How to manage emerging systemic risk?
As in healthcare, our best chance lies is early detection
Source: MULTIPLE SCLEROSIS: ORIGIN OF ABNORMAL CELLS FOUND
UC DAVIS (2011)

9. 9
Adaptive Risk Management:
Powered by Polarities
I. Macro: identify potential scenarios
See: Adaptive Stress Testing: Amplifying Network Intelligence by Integrating Outlier Information
(Laubsch 2014)
II. Micro: monitor visible risk
Amplifying tremors
Structural Risk

10. 10
Diffusion of Disruptive
Innovation
Source: Wikipedia; see Geoffrey Moore’s “Crossing the Chasm” (1999)
1.Macro: Scenarios from Innovators
2. Micro: Market signals from Early Adopters

11. 11
U.S. Subprime Bond Early Warning Case Study
300%+ increase in vol
from Dec 12 to 21 '06
99% VaR bands vs 2006-1 AAA spread changes
HSBC subprime disclosure triggers a 12 sd move on Feb 23
'07, the day after the $10.5bn HSBC loss announcement
Ratings agencies initiate reviews and/or
downgrades week of July 9 '07
Source: Alan Laubsch “Subprime Risk Management Lessons”, RiskMetrics
2. GS exits
subprime
(Micro)
1. Robert Shiller warns of housing Bubble in 2005 (Macro)

12. 12
Three Stages of Risk
Dec ’06: first tremor
(vol up 300% Dec
12-21)
Feb 23 ’07: HSBC
subprime loss disclosed
AAA Subprime Bond Spreads (2006-1)
AAA) First ratings agency
downgrades week of
July 9 '07
bp's
1. Hidden Risk
Innovators
2. Emerging
Early
Adopters
3. Crisis
Early Majority

13. 13
Tipping Point Dynamics require early
detection and action
● Look for exponential rates of change
Source: “Building A Reputation Risk Management Capability”, Diermeier & Loeb, 2011
Invisible/Potential Visible & amplifying

14. 14
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Navigate Emerging Risk

15. 15
Dragon King
(Sornette 2009)
Black Swan
(Taleb 2001, 2007)
Two kinds of crises
What are you afraid of?
The future is already here. It’s just not very evenly
distributed.
- William Gibson

16. 16
Energy Disruption:
No escape for fossil fuels

17. 17
Solar: Half way to 100%…

18. 18
What precipitated Energy’s 24 June
2014 tipping point?

19. 19
24 June Risky Business Report

20. 20
Divestment Tipping Point

21. 21
Disruptive Energy “Dragon Kings”
The future is already here. It’s just not very evenly
distributed. - William Gibson
Alternatives
Divestment
Carbon Price

22. 22
Nokia’s iPhone Moment

23. 23
Tesla vs Model T trajectory

24. 24
Media got Netflixed

25. 25
Accelerating Rates of Adoption

26. 26
Rise of the machines…

27. 27
… and robo-advisors

28. 28
Bank unbundling… and
re-aggregating?

29. 29
How important is Bitcoin?
“Like Internet in the
1990s…”

30. 30
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Navigate Emerging Risk

31. 31
Key Risk Management Challenges
1. Dynamically monitor a complex environment
• Systemic pressure points
2. Uncover key vulnerabilities
• Macro scenarios, rapid & reverse stress tests
3. Make decisions
• Risk culture and communication

32. 32
Dynamic maps build environmental
awareness for navigating challenging terrain
“MIT scientists develop Prometheus like environment scanner”Source:
computerstories.net

33. 33
Systemic implications?
Amplifiers?
Focus on systemic pressure
points

34. 34
Mass collaboration platforms empower
social intelligence
“…if you have an idea and I have an idea and we exchange them, then we both have
two ideas. It's nonzero.“ -- Dean Kamen (“Abundance” by Diamandis & Kotler)

35. 35
Manage polarities for virtuous
cycles
Outcomes reflect compounding feedback loops which create virtuous
cycles or death spirals (“Rethinking capitalism,” Hanauer & Liu, 2012)

36. 36
Conclusions: Key Polarities
• Fault lines & tremors
• Think big & move fast
•
Core & Periphery
All interesting things happen at the edges of the system.
They do not happen at the solid core. In the edges where
things are uncertain is where the evolution happens.
- Vinod Khosla

37. FNA
Alan Laubsch
Director
alan@fna.fi
Thank
You