The World Economic Forum Annual Meeting begins in Davos-Klosters, Switzerland, tomorrow, January 25 2012. In advance of the meeting, the Forum has published its 7th Annual Global Risks Report, created with its partners - Marsh & McLennan, Swiss Re, the Wharton Center for Risk Management, and Zurich Financial Services.
A most interesting read, the report develops 5 major global risk categories – Economic, Environmental, Geopolitical, Societal and Technological, and reports results of a broad survey of risk perceptions among representatives from 5 broad categories of Stakeholder Groups – Business, Academia, NGO, Government, and International Organization. Within the 5 risk categories are a total of 50 risk scenarios, roughly 10 in each risk category, each differing in likelihood and impact – e.g., in the Economic risk category: Chronic Fiscal Imbalances is considered to have the highest likelihood-impact combination; while Major Financial Systemic Failure is considered less likely, but considered to have the highest impact. Unmanageable Inflation or Deflation is considered least likely, while Unforeseen Negative Consequences of Regulations is considered to have the least impact.
The report proceeds to define, in each of the 5 Risk Categories, a Center of Gravity (CoG) – as the risk scenario with the highest (judgment-weighted) combination of likelihood and impact. Thus, the Economic Risk CoG is Chronic Fiscal Imbalances, while the Environmental, Geopolitical, Societal and Technological CoGs are respectively Rising Greenhouse Gas Emissions, Global Governance Failure, Unsustainable Population Growth and Critical Infrastructural Systems Failure. The survey also included a feature where respondents could write in ‘X-factors’ – risk scenarios that had unknown likelihood and impact, but which were nevertheless felt important enough to be thought about. This resulted in risk scenarios such as Volcanic Winter, Mega-accidents, and Neotribalism.
The report develops a series of risk constellations, where the cascading effect of different consequential risk scenarios across the 5 categories is explored. Three major cases are examined – a socio-economic dystopia, a governance dystopia and a technological dystopia, in each case setting out the different combinations of the 50 risk scenarios which could lead to each. The concept of 'critical connectors' is elucidated as the set of risk scenarios which link to the CoG of more than one risk category. Four critical connectors, all of them Economic risk scenarios, link 3 or more of the 5 CoGs.
Finally, the report presents detailed data and analyses of the Survey itself, and I found the data on the differential risk perceptions across the 5 Stakeholder groups, as well as across geographic affiliations particularly interesting. For example, on geographic variation, Europeans rank Chronic Fiscal Imbalances more likely than Middle Easterners and North Africans; while Asians see Unmanageable Inflation or Deflation as more likely than either Europeans or North Americans. Across stakeholder classes, Business saw the likelihood of Negative Consequences of Regulation as being higher than did Academia, while NGOs saw Negative Consequences of Nanotechnology as being more likely than did Academia.
Even more interestingly, subject matter experts (across the 5 stakeholder classes) ranked the likelihood of the scenarios within their area of expertise (among the 50 risk scenarios) higher than generalists across the board (with the exception of nanotechnology, where generalists ranked the likelihood of unforeseen negative consequences higher than subject matter experts). This is very interesting, in that, on macroeconomic, socio-economic or environmental issues, where the risk is more easily grasped by generalists, the general level of concern appears lower than might be warranted, while on 'esoteric' technological issues,which by their nature are harder to properly grasp, the general level of concern appears higher than might be warranted strictly on an existing-knowledge basis.
I have sketched here a rather broad summary of the report, but it is well worth a detailed read. In addition to the themes I have outlined, the report also contains a Special Section on the Great East Japan Earthquake of 11 March 2011 (the Tohoku quake). In the video clip below, David Cole, Chief Risk Officer at Swiss Re, talks about the WEF's Global Risk Report 2012. He points out that risk assessments conducted by governments and companies in the past have been inadequate, subjecting nations to extreme economic risks. He urges that a Country Risk Officer be appointed for each country, who would aggregate and prioritize different kinds of risks, and bring them to the attention of policymakers.
In another clip within the same playlist, Axel Lehmann, Chief Risk Officer of Zurich Financial Services emphasizes that no single individual, company, or even government can fully appreciate all aspects of the risks involved, and urges, on as many levels as possible, the formation of public-private partnerships for risk identification, analysis and mitigation. Erwann Michel-Kerjan, Director of the Wharton Risk Management Center, in another clip, points out that for high level decision makers, it is necessary to become familiar with all kinds of risks, not only the ones that their training or background predisposes them to consider. He emphasized also that the other side of risk is always opportunity, and the winners are those who not only protect themselves from the negative consequences of risk events, but those who positively profit from them :
