How Much Resilience Do We Need?
Much too much of what we do relies upon the simplest idea of linear extrapolation. It must be hard wired into human brains to always think first of that process. Because we frequently seem to miss when extrapolation does not work.
Risk managers desperately need to understand the idea of system capacity. The capacity of a system is a point beyond which the system will fail or will start to work completely differently.
The obvious simple example is a cup with a small hole in the bottom. If you pour water into that cup at a rate that is exactly equal to the rate of the leak from the hole at the bottom, then the water level of the cup will be in equilibrium. A little slower and the cup will empty. A little faster and it will fill. Too long in the fill mode and it will spill. The capacity will be exceeded.
The highly popular single serving coffee machines are built with a fixed approach to cup capacity. The more sophisticated will allow for two different capacities, but usually leave it to the human operator to determine which limit to apply.
For the past several years, there have been a number of events, the latest a hurricane that damaged an area the size of Western Europe, that have far exceeded the resilience capacity of our systems. The resilience capacity is the amount of damage that we can sustain without any significant disruption. If we exceed our resilience capacity by a small amount, then we end up with a small amount of disruption. But the amount of disruption seems to grow exponentially as the exceedance of resilience capacity increases.
The disruption to the New York area from Hurricane Sandy far exceeded the resilience capacity. For one example, the power outages still continue two weeks after the storm. The repairs that have been done to date have reflected herioc round the clock efforts by both local and regional repair crews. The size of the problem was so immense that even with the significant outside help, the situation is still out of control for some homes and businesses.
We need to ask ourselves whether we need to increase the resilience capacity of our modern societies?
Have we developed our sense of what is needed during a brief interlude of benign experiences? In the financial markets, the term “Great Moderation” has been used to describe the 20 year period leading up to the bursting of the dot com bubble. During that period, lots of financial economics was developed. The jury is still out about whether those insights have any value if the world is actually much more volatile and unpredictable than that period of time.
Some weather experts have pointed out that hurricanes go in cycles, with high and low periods of activities. Perhaps we have been moving into a high period.
It is also possible that some of the success that mankind has experienced in the past 50 years might be in part due to a tempory lull in many damaging natural phenomina. The cost of just keeping even was lower than over the rest of mankind’s history.
What if the current string of catastrophes is just a regression to the mean and we can expect that the future will be significantly more adverse than the mild past that we fondly remember?
We need to come to a conclusion on those questions to determine How Much Resilience Do We Need?
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