Friday 6th of November - Modern Society and Exposure to Tail-End Risks: Lessons from the Financial Crisis.

Has modern social organization unknowingly exposed society to low-probability, high cost risks? To put it another way, are there facets of technology and society that have decreased our exposure to smaller, known risks, but have exposed us to larger low-probability or unknown risks?

The current financial crisis has provided a sobering lesson in humans’ understanding of risk. One way to conceptualize the crisis is to say that financial engineering lulled the sector into a false sense of security. Complex derivatives and hedging strategies made all the known risks appear small and manageable, leading to increased leverage and interdependence. However, this situation set up the system for a harder crash if unperceived negative events (such as the burst of the housing bubble) were to strike the system.

Using this as an analogy, has technology and interconnectedness made modern society more vulnerable to catastrophic tail-end risks? Are we/can we internalize these risks?

Some possible examples:

1. Modern medicine allows us to deal with most contagious diseases, which has allowed unprecedented levels of urbanization. What happens if a virus evolves that is deadly, spreads quickly, and cannot be solved by medicine?

2. Monocultures of modern agriculture have allowed unprecedented levels of food output, leading to huge population growth. What happens if a disease takes out a major strain of wheat or rice?

3. Computers and viruses?

Many of these ideas are explored in ‘The Black Swan’ by Nassim Taleb. You can see links to some of his ideas here:

http://www.fooledbyrandomness.com/tenprinciples.pdf

http://www.fooledbyrandomness.com/imbeciles.htm