A New Theory of Risk and Rating
New Rules for Surviving in a Complex and Turbulent Economy
Giulio Sapelli, a Professor in the Department of History at the University of Milan, reviewed ‘A New Theory of Risk and Rating'and suggest that Dr Marczyk offers ‘a remedy which is essential in times characterized by high perceptions of risk and uncertainty.'
Sadly the message and remedy offered, is not one that most individuals, organizations and even countries will want to hear. Because the message of avoiding risks going forward in our future, requires us all to practice frugality.
Professor Sapelli goes on to say ‘If we want to avoid aggregations and repetitions of new risks, frugality is like the truth: it is reached only via subtraction, not by addition.'
Dr Marczyk offers the example of people not following the practices of frugality (the very people who today govern global financial circles) who continue to practice the very same actions which have created conditions of high risk.
In this book Dr Marczyk also addresses one of the taboos of contemporary consulting rhetoric. He demonstrates how the techniques of risk management are actually responsible for an increase, not a reduction, of risk.
Citing the example of Lehman Brothers, whose credo "The effective management of risk is one of the core strengths that has made Lehman Brothers so successful" yet they were the first bank to fall when the economic melt-down began and just before their collapse, the triple-A rating of the bank pointed to a tiny probability of default!
He goes on to cite the Space Shuttle, which was designed to a nominal failure rate (degree of risk) of 1 out of 10000, yet two catastrophic failures occurred in just over 100 launches.
In his introduction Dr Marczyk discusses why we don't learn from history, but more importantly, why we can't - because no two crises are ever the same. And he uses the example of the two World Wars; the fact that if we look at history, every 50 years or so, we go to war. So using those statistics, can we safely predict that every 50 years we will go to war? No.
Bringing the book back to today and the financial challenges the whole world is wrestling with, Dr Marczyk suggests that companies will have to re-think their strategies, focusing on stability and on survival rather than on growth because complexity management is a pivotal component of this new strategy. But in order to manage complexity one has to be able to measure it.
In the second chapter of his book, Dr Marczyk describes his complexity metric and OntoSpace, a unique system for the quantification and management of complexity; chapter 3 illustrates the concept of robustness and chapter 4 introduces new complexity-based rating schemes for corporations, markets and financial products.
This brave book is a revolutionary and radically innovative complexity-based approach to Uncertainty, and any owner or manager who thinks he/she understands managing risk, may need to think again. It will drastically fast-track faulty thinking process so that businesses and society will finally stop repeating the same mistakes over and over again.