Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Conclusions
s2015 Map of the Internet
Connected
Risk
Implication of Complexity
From “Predict & Control” to “Sense and Respond”
with Dynamic Steering
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
Market linkages
Asset price data
Clustering
Balance sheet data
Financial Cartography reveals connected risks and hidden patterns
Bilateral exposure data
Central nodes
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)
AdaptiveRisk Management: Integrate Macro and Micro intelligence
I. Macro: identify potential scenarios
See: Adaptive Stress Testing: Amplifying Network Intelligence by Integrating Outlier Information (Laubsch 2014)
II. Micro: monitor visible riskTremors
Fault Lines
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
U.S. Subprime Bond Early Warning Case Study
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-52.5%
0.0%
52.5%
105.0%
157.5%
Date
Spre
ad C
hang
e
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)
Three Stages of Risk: U.S. Subprime Crisis
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125
250
375
500
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 RiskInnovators
2. And the biggest surprise?1. When was the biggest risk?
2. Emerging
Early Adopters
3. Crisis
Early Majority
Tipping Point Dynamics require early detection and action
• Look for exponential rates of change
Source: “Building A Reputation Risk Management Capability”, Diermeier & Loeb, 2011Invisible/Potential Visible & amplifying
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Conclusions
Dragon King (Sornette 2009)
Black Swan (Taleb 2001, 2007)
Two kinds of crisesWhat are you afraid of?
The future is already here. It’s just not very evenly distributed. - William Gibson
Energy Disruption: No escape for fossil fuels
Solar: Half way to 100%…
Nokia’s iPhone Moment
Tesla vs Model T trajectory
Media got Netflixed
Accelerating Rates of Adoption
Rise of the machines…
… and robo-advisors
Bank unbundling… and re-aggregating?
How important is Bitcoin?
“Like Internet in the 1990s…”
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Conclusions
Manage polarities for virtuous cycles
Outcomes reflect compounding feedback loops which create virtuous cycles or death spirals (“Rethinking capitalism,” Hanauer & Liu, 2012)
Build a Risk Culture with Dynamic Shared Maps
Energy Phase Transition
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)
facebook graph of social relationships
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