Rethink Risk Through the Lens of Antifragility

hydra

Editors Note: 

The following is a slightly adapted article written by Bill Murry of the Leading Edge Forum appearing in June 2017 edition of ComputerWeekly.com. While the article is geared to CIO’s and other IT professionals, the concept of antifragility can help project managers, regardless of their responsibility:

  1. By not only mitigating the risks of projects within the triple constraints of time, cost and scope.
  2. Focus on the greater good of their company by using the concept of antifragility as new risks emerge by the need to create and measure the desired business value within competing constraints.

We thought this article might make an interesting read while sitting around the pool of this comming 4th of July holiday!

By way of introduction to the antifragility concent, here is a quote from Nassim Taleb, the author of Antifragile: Things That Gain from Disorder:

"Consider that Mother Nature is not just “safe.” It is aggressive in destroying and replacing, in selecting and reshuffling. When it comes to random events, “robust” is certainly not good enough. In the long run, everything with the most minute vulnerability breaks, given the ruthlessness of time— yet our planet has been around for perhaps four billion years and, convincingly, robustness can’t just be it: you need perfect robustness for a crack not to end up crashing the system. Given the unattainability of perfect robustness, we need a mechanism by which the system regenerates itself continuously by using, rather than suffering from, random events, unpredictable shocks, stressors, and volatility.

By grasping the mechanisms of antifragility we can build a systematic and broad guide to nonpredictive decision making under uncertainty in business, politics, medicine, and life in general— anywhere the unknown preponderates, any situation in which there is randomness, unpredictability, opacity, or incomplete understanding of things.

It is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it. Fragility can be measured; risk is not measurable (outside of casinos or the minds of people who call themselves “risk experts”). This provides a solution to what I’ve called the Black Swan problem— the impossibility of calculating the risks of consequential rare events and predicting their occurrence. Sensitivity to harm from volatility is tractable, more so than forecasting the event that would cause the harm. So we propose to stand our current approaches to prediction, prognostication, and risk management on their heads."

The Hydra (pictured above) is considered by many advocated of antifragility to represent the prefect system.

 

Rethinking Risk Through the Lens of Antifragility

AAEAAQAAAAAAAAL6AAAAJDRkNWI3MzkyLTdiNjYtNGZiNi05ZDZiLTFjNTY3NmViNzQwYgBill Murry
Leading Edge Forum
June 2017

Antifragility is an exciting alternative that fuses value and risk, and CIOs and IT executives are well positioned to help.

We live in a networked world where everything – from nuclear power plants, factories, vehicles, fridges and hospital equipment to wearable and invasive devices – is increasingly connected, inspectable and controllable. Businesses are remarkably adaptive, but we are increasingly designing fragility into our systems and processes, particularly through efficiency and cost-cutting initiatives.

Are we ready for such unpredictable levels of risk? Businesses and government agencies have sleepwalked into the 21st century with organizations that are not fit for purpose. We need to evolve many aspects of our organizations, including how we think about, sense, manage, monitor and, more generally, address risk.

The traditional approach to risk management in business has significant flaws. First, we are, to some extent, managing risks that we have already seen or can imagine. This could be cruelly labelled as “managing risk through the rear-view mirror”, and does not address unexpected risks.

Achieving Solutions Through Robustness is No Longer Enough.  The current approach to risk management fools us into thinking we have risk under control, because we understand and have mitigation plans for expected risks. As author Nassim Nicholas Taleb points out:

Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, despite the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it "antifragile".

Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes (say, chicken soup or steak tartare with a drop of cognac), the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance … even our own existence as a species on this planet. And antifragility determines the boundary between what is living and organic (or complex), say, the human body, and what is inert, say, a physical object like the stapler on your desk.

The antifragile loves randomness and uncertainty, which also means— crucially—a love of errors, a certain class of errors. Antifragility has a singular property of allowing us to deal with the unknown, to do things without understanding them— and do them well. Let me be more aggressive: we are largely better at doing than we are at thinking, thanks to antifragility. I’d rather be dumb and antifragile than extremely smart and fragile, any time.

It is easy to see things around us that like a measure of stressors and volatility: economic systems, your body, your nutrition (diabetes and many similar modern ailments seem to be associated with a lack of randomness in feeding and the absence of the stressor of occasional starvation), your psyche. There are even financial contracts that are antifragile: they are explicitly designed to benefit from market volatility.

Antifragility makes us understand fragility better. Just as we cannot improve health without reducing disease, or increase wealth without first decreasing losses, antifragility and fragility are degrees on a spectrum."

Consider that many historical events have been caused by so-called “black swans” – large, unexpected risks. The Fukushima nuclear incident was a negative black swan; Google’s creation of Gmail was, arguably, a positive black swan.

Another issue is that many aspects of risk management continue to require what was once considered a strength - human intervention, which is sometimes impractical in a hyperconnected, high-speed world. This becomes particularly important around adverse events when drilling for oil or operating nuclear or chemical plants.

Intelligent Risk

But the most troublesome aspect of risk management is its separation from value creation and growth. We often miss the considerable upside of taking intelligent risks because of crude approaches to risk assessment. If we are to survive and thrive in today’s 21st century world, we must change our way of thinking and dealing with risk. Antifragility is an exciting alternative that fuses value and risk, and CIOs and IT executives are well positioned to help.

If, instead of the “engineering” view of risk, we think of risk as an inherent, and not always bad, feature of all business, all processes and all value flows, then we approach what we might call a “financial” view of risk. In this view, companies choose activities that have attractive risk/return profiles or “yield curves”, and try to bend those yield curves to be even more attractive.

LEFrisk-chartThe goal of antifragility is to bend luck. An antifragile approach tries to bend the downside risk portion of the yield curve upwards, through what we might call “robustification”, and amplify the positive outcomes of the upside of the yield curve. In other words, we try to create an organization that stands to gain more in the good times than it stands to lose in the bad times. If a company can do that consistently, it will get stronger and more successful over time. Why would the world’s leading internet television network, Netflix, with more than 100 million members in over 190 countries, showing more than 125 million hours of TV shows and movies each day, deliberately break parts of its delivery infrastructure, regularly, and do so on a larger scale every year?

Let’s be clear – if that infrastructure fails, its programs don’t show. Subscribers cancel. Revenue growth slows. Executives lose jobs.

Netflix gets antifragility. It was antifragile before Nassim Taleb coined the term. Every time Netflix shocks its critical infrastructure (intelligently), the firm learns, restructures it and makes it perform better.

Toyota was antifragile before Netflix. Its massive 2009 car recall and the 2010 tsunami shocked its supply chains (and competitors’ supply chains). Yet Toyota’s 2013 profits were more than four times its 2010 earnings, and three times those of 2012. The firm built alternative suppliers and logistics into its supply chains and deployed crisis teams. The car maker examined its options, coped, learned, restructured and improved.

Similarly, the recent IT failure at a well-known airline could have been avoided by adopting antifragile practices, such as creating contingency and redundancy through cloud-based services and multi-cloud deployment, and adding architectural resilience by moving to “design for failure” approaches.

Such preparation creates options. Antifragility is a new term but an old concept. Whereas the term “options” could be considered old, it has many new applications. There will be a price – call it an option price – paid for avoiding catastrophes and having options in disasters. But it is a small price to pay compared with losses in the hundreds of millions from sustained global systems outages.

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