–Consider the quip of a fund manager in the lead-up to the 2008 financial crisis: “The fact that the risk was diversified was a good thing. Now everyone is panicking because they don’t know where it is”.
But what kind of “it” was this risk? What kind of “diversified” is it if the risk includes unknown-unknowns?
–As the answers are not clear, what reformulation could produce more useful insights? One answer: a reformulation of the situation entailing different messes, differently good and bad than those posed by the fund manager. As in: one that did not revolve around “knowing where the diversified risks are.”
What could such a reformulation look like? To that end, undertake a thought experiment. Assume we are actively in the lead-up to another huge financial meltdown and fund managers are making the same or similar points as in the last one. Ask now: What would be success or effectiveness for these managers under the now-current conditions?
–There are many possible answers. The one I highlight is that of a senior emergency manager who recently told us: “Success in every disaster is that you didn’t have to get improvisational immediately. You can rely on prior relationships and set up a framework for improvisation and creativity.”
More formally and back to our thought experiment, management success in this lead-up to the next financial meltdown is no longer just one of preventing that meltdown from happening. It’s better to think that this lead-up is its own disaster and now ask: Where is effective emergency response gong on presently or should be going on?
Part of that answer is identifying where sets of working relationships (and allied resources) are in place for better matching now-and-here resource capabilities to the now-and-here task demands of financial management, today as you read these words. In other words, you’d expect to see a great deal of collective improvisation under these circumstances requiring real-time requisite variety.
—Of course, there are their own messes that have to be managed in seeking to real-time requisite variety on the task demand and resource capability sides. (In fact, that’s the point!) But in this reformulation you’d be drawing from a cumulatively diverse and established body of literature on responding to socio-technical emergencies rather than relying on, say, “macro-prudential regulation of systemic financial risk.” (Is that even a field by way of comparison, let alone a craft?)
While the devil is in the details, what could this “immediate emergency response” look like on the ground? No detailed failure scenarios are possible here, but the thought experiment can be extended in illustrative ways. For example, assume all or several of 12 US Federal Reserve Districts and their respective Banks officially activate as Emergency Operations Center under the Incident Command System. Each Bank retains its mandates for price stability, maximum employment and interest rate regulation within its specific, widely varying regions. What then could/would/should each Bank-EOC do differently in the next two months?
–So what’s the bigger point?
In this reformulation, “knowing where the diversified risks are” is in no way dispositive for requisite variety or improvisational behavior. All that more knowledge on the risk management side brings you is greater recognition of just how transparently complex are the risks and uncertainties in the lead-up. But that is not the point from the perspective of this reformulation.
Which is: When it comes to immediate response to this disaster called the lead-up to the next financial meltdown, there is and can be no workaround for improvisation.