PREDICTABLE SURPRISES
Figure 5: Recognition, Prioritization & Mobilization Against Emerging Threats
Emerging Threat or Problem
Recognition No Was it Recognized? Yes Prioritization No Was it Prioritized? Yes Mobilization No
Was a Response Mobilized?
Yes No
Should Have Mobilized?
Yes
Predictable Surprise
Unavoidable Surprise
No
Should Have Prioritized?
Yes
Predictable Surprise
Unavoidable Surprise
No
Should Have Recognized?
Yes
Predictable Surprise
Unavoidable Surprise
events in a particular market or business area into the whole firm. As an example, Goldman Sachs decided to purchase insurance against a downturn in the housing market when the firm-wide stress tests showed that Goldman’s exposure could put the survival of the firm at risk. Risk Committees can also be made explicitly accountable for recognizing, prioritising, and mobilizing against emerging threats. The following three questions can help organizations assess whether a disaster or organisational crisis could have been avoided. The following three questions can help
organizations assess whether a disaster or organisational crisis could have been avoided:
• Did the risk committee recognize the threat?
• Did the risk committee appropriately?
• Did the risk committee mobilize effectively?
Once a predictable surprise has been
Effective Preventive Response
Source: Watkins & Bazerman. Predictable Surprises. HBR 2003
Carlos Blanco is co-founder and Managing Director of NQuantX LLC, a financial engineering firm that develops decision- support software for hedging programs and
trading strategies, as well as valuation and risk measurement of energy derivatives, long term contracts and physical assets. He is a faculty member of the Oxford Princeton Programme, where he heads the Energy Derivatives Pricing, Hedging and Risk Management Certificate courses (DPH), as well as other courses on energy trading and risk management.
E:
carlos@nquantx.com www.
nquantx.com
36 March 2012
identified, the organization needs to decide whether it should mobilize resources to protect against that event. To deal effectively with a ‘predictable surprise’ a significant short-term investment is often required that will not payoff until later (and in many instances, it will never pay as the event may not end up materializing). Those costs may be financial (e.g. purchase insurance) as well as organisational (e.g. changes in culture as well as the organization structure), and those in charge may not have strong incentives to incur in them for a potential future reward. To offset the natural tendency towards inaction when dealing with extreme events, organizations can made risk
committees accountable for material omissions and significant underestimation of material risks, as well as failure to pursue mitigation measures against ‘predictable surprises’. There is widespread perception that Iran has been accelerating
its development pace and is now too close to being able to build a nuclear bomb, which would be a game changer for all parties involved. The current state of affairs suggests that unless Iran backs down and succumbs to foreign pressure regarding the future of its nuclear programme, a military solution is unavoidable. •
Footnotes: 1. Watkins and Bazerman. Predictable Surprises. Harvard Business Review, 2003
References: Stress Tests and Unprecedented Events Blanco, C. Commodities Now. June 2011. Can Game Theory Predict When Iran Will Get the Bomb? Thompson, C. The New York Times. August 12th
, 2009.
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