OD Concept of Uncertainty and Risk – the limits of human understandability


A recent (12 July. 2012) article by Edward J. Waitzer in the National Post (page FP11) titled: “A new threat: Too Complex to understand” explores the perils of trying manage uncertainty and risk (U&R) through sophisticated systems. Witness (N.B. Bold emphases are added):

  • A rent paper by Henry Hu (Law Professor University of Texas) “argues that technology has fuelled increasing complexity both in financial flows and instruments and within financial intermediaries themselves. The result … (they are) too complex to depict.”
  • “The so-called Volcker rule has been transformed from an initial 11 pages in the 848 page Dodd-Frank act into 298 pages that are unintelligible to a lay reader. An interactive Volcker “rule map” that one of the leading U.S. law firms has prepared … involves 355 distinct steps.”
  • The whole approach to disclosure of conflict of interest “tends to put psychological pressure on the client to comply with advice while reducing the advisor’s sense of personal responsibility. The result is often opposite to what regulatory disclosure requirements seek to achieve.
  • “The CEO of JP Morgan recently testified that its multi-billion dollar trading loss arose from introducing a new value-at-risk model to be compliant with the new international banking regulation.
  • “In a dynamic environment, more of the same often leads to perverse outcomes. Think … how relevance and reliability of accounting standards (or credit ratings) have run down over time as they tend to be gamed and become a shield against liability.

 In a recent post (An Organizational Development’s Perspective on Uncertainty and Risk) I note that: “understand that when we introduce measures to mitigate our known U&R we are introducing a new set of U&R exposure. A U&R defensive or counter play has its own unique U&R.” I believe that Waitzer’s article provides evidence to this contention.

I personally encountered this issue a number of years ago when I was tasked with looking after a complex (to me at least) workforce planning spread sheet model. This was a client’s critical tool for determining intake of skilled technical people in operationally critical roles.

I could not understand its outcomes when I used it. The people who set the model up had left. The model had been “unquestioning” been used to drive financially impacting decisions on intake prior to their being operationally needed. This organization would make planning decisions that were 4 – 6 years out depending upon the technical skill relied upon.

I had two basic choices: accept what I did not understand or have confidence in (as a consultant this could be an easy choice); or, propose an updated modelling choice that was easier to fathom by those using it in the future (i.e., the key modelling assumptions were apparent). I chose the second option and the client was happy to pay for the “extra”.

I suspect many of us have been unwitting users of spreadsheet models that are flawed in some fashion or other.

The message in my post I referred to above is that the very act of managing U&R is an act of introducing additional U&R into the system. If the introduction of managing U&R is done well the effect is at least some form of “offset” in U&R – what we added sufficiently reduces what U&R we previously had. If we do not do it well the effect can be additive: we end up with more U&R than we had before AND it is more difficult to discern what and how it can play out.

The latter situation is a function of inappropriately adding complexity to our circumstance. The argument that complex issues requires complex solutions is one I take issue with. Complexity and incoherence are not the same. They may be found together. When they are together it usually incoherence that is driving the evidence of complexity. Incoherence is a fundamental lack of having a useful theory of how something works. Complexity simply means many parts and inter-relationships.

From an OD perspective, what does incoherence and complexity mean to us?

I am still attracted to the saying often accredited to Alcohol Anonymous: “Change what you have control over and ignore what you can’t and have the wisdom to know the difference.” (I apologize for any error I have committed here).

(For a fuller more thoughtful exploration of the above AA advice visit my post: OD Concept of Uncertainty and Risk: Taking Issue with “ignoring what we have no control over”)

In OD we work with people in a variety of contexts: individually and in groups. We help people deal with their myriad decision issues in a variety of ways. The question for us as practitioners is: “How are we ensuring that our client(s) are dealing with their total exposure to U&R through use of our decision making tools?”

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About 123stilllearning456

As a management consultant I am passionately interested in talent management and risk/uncertainty issues. In the area of talent management I propose that we seek strategies that look beyond the staffing/employee centric frames of reference. I have been frustrated at the "closing down on possibilities" by these more conventional staffing/employee centric approaches. I have been impressed where people have found systematic solutions to their talent management issues by going beyond the conventional approaches. In the area of risk and uncertainty, I am interested in making this topic relevant to more normal decision making situations. My conceptual foundation is to use the micro-economist's fixed/variable cost theme. I also think it is important to look at these issues for people through their emotional and psychological lens. As a premise I think risk and uncertainty only exist where there is a person who cares about possible events and its consequences. Hence, risk and uncertainty are social based concepts (no sentience, no risk and uncertainty). A major influence on my thinking in this area is Nassim Taleb of "Black Swan" fame. This BLOG provides me with an opportunity to express my thoughts on topics that interest me. As this is an online diary, content is more important to me than polish. I apologize if this distracts from readers' enjoyment and learning. Still I find this a useful way to live up to my namesake, learn more from others and hopefully provoke creative thoughts and ideas in others.
This entry was posted in Decison Making, Risk & Uncertainty, Strategy, Talent Manangement, Values and tagged . Bookmark the permalink.

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