”Risk comes from not knowing what you’re doing” says Warren Buffett. As true as that seems, there is a very powerful second dimension to it: If you don’t anticipate what’s coming, you can do as well as you want and still be squashed by events taking place around you!
When starting off the New Year on BaveNewFinance, we shared our findings about the biggest financial issues in 2011, and provided more detailed insight into three of the biggest, Euro bonds, short positions, and the US economy. Thinking about these topics, I asked myself just how they have been identified by analysts as global risks, and decided to take a closer look at this identification process. Now I would like to share some of the wisdoms I found with you!
First of all, why is the identification of risks so important? I’ll go with Dominique Strauss-Kahn, head of the International Monetary Fund, who elaborates that anticipating risks means maintaining the plumbing of the global financial world:
Now, how exactly is this identification done? Check out this video explaining the methodology behind the Global Risk Map 2011 by the World Economic Forum:
Also, read up further on the identification process in this excellent post on financial blog “Seeking Alpha” by Paul Kedrosky.
But there is also sustained criticism of the methodology, mainly stating that the wider the range of the assessed risks, the more uncertainties about the numerous variables arise. Have a look at this document for an elaboration on the vast imprecision of the risk calculation. Additionally, I recommend this article on early warning signs by George Sugihara in natural sciences magazine “SEED”, providing a scientifical approach to the imprecisions.
Case in point: The political risk in Tunisia has been deemed as low in a global risk map 2011 by leading risk identification provider Control Risk – in the first days of the New Year, the dictator was ousted, and mayhem on the streets ensued!
So concluding, I think there are two major aspects to global risk maps: They are incredibly important, as they raise awareness and provide means of preparing for disruptive events; a better understanding of how these risks might impact on our everyday’s lives is mandatory to find away to overcome them. On the other hand, they are however very generalist and imprecise, thus nobody should think that they are more than a starting point when it comes to proper risk management in their business or market!
To read up more on the risk predictions for 2011 have a look at this visualization and the following recommended sites: