Plural Rationality and ERM
Plural Rationality Theory is from Social Anthropology.
More commonly known as Cultural Theory of Risk or simply (but much less descriptively) as just Cultural Theory.
Plural Rationality Theory suggests that there are four different belief systems regarding risk, that the world goes through stages of risk that at times conform to each of the four risk belief systems, that the actions of human groups that are driven by the four belief systems helps to move the world from one type or level of risk to another.
Dave Ingram has been working with Michael Thompson to link up the ideas from Plural Rationality with Risk Management. Thompson had written about how Plural Rationality helped to explain the Global Financial Crisis, Beyond Boom and Bust.
The connection to financial risk management started with a keynote speech at the 2009 ERM Symposium that introduced the ideas of Cultural Theory and gave a quick idea of how they connected with risk management issues. This speech was later published by the Wilmott Magazine in an article titled The Human Dynamics of the Credit Crisis and Implications for the Afterlife,
The ideas of multiple stages of risk environment was developed further that summer and eventually published in the SOA’s Actuary Magazine as The Many Stages of Risk.
In the fall of 2009, Ingram was the keynote speaker at the CAS Underwriting Cycle Seminar and presented the Cultural Theory ideas, showing how they could be adapted to explain the dynamics of the Underwriting Cycle with help from Alice Underwood. Alice and Dave wrote up that speech into a paper that was presented at the 2010 ERM Symposium, and was awarded the prize for Best Practical Paper.
Later that fall, Ingram started to collaborate with Michael Thompson. Thompson is a social anthropologist who has played a very large part in the development of the Plural Rationality Theories, especially as co-author of the 1990 book Cultural Theory and most recently as the author of Organising and Disorganising along with about 10 other books along the way. (By the way, if you are interested in buying a book on this topic, I would recommend Organising and Disorganising. Cultural Theory is a 20 year old text book written for anthropologists and anthropology students. O&D was published in 2008 and was written for non-anthropologist audiences.) You can also get a taste of Thompson’s take on the relationship between his Plural Rationality work and the financial crisis in the article Beyond Boom and Bust and in a related interview.
Ingram and Thompson have collaborated on three more articles for Wilmott Magazine. The Universe in Four Parts tells the story of the four environments, showing how it links up to environmental theories as well as to Hyman Minsky’s Financial Instability Hypothesis. Surprise, Surprise which tells about the dynamics of the four part system, including some discussion of the Surprise Game agent based model that was created by Thompson and Paul Tayler in the early 1980’s. And finally, Rational Adaptability tells how we can use these insights in managing financial affairs.
A paper that collected many of the ideas from the four Wilmott articles as well as the ERM Symposium presentation was presented at the “Human Brain and Social Bond” workshop in Austria in September 2010 and was published in 2012 in the ASTIN Bulletin 42-2. This paper presents details of the Surprise Game, an agent based model that demonstrates the dynamics of Plural Rationalities.
The latest work in this project is another joint paper by Underwood and Ingram that specifically ties all of the Plural Rationality ideas to four different ERM strategies which also has the working title of Rational Adaptability. Versions of that material have been published in several places including here. The ideas in that paper were presented in a webinar sponsored by PRMIA on August 10, 2010. An article which described the ideas of four risk attitudes with four risk regimes and four ERM strategies was published in the Actuary titled The Full Spectrum of Risk Attitude. This eventually became a three article series. The next article The Fabric of ERM provides more detail about the different styles of ERM that are practiced by firms with different risk attitudes. The fourth article is a collaboration with Ingram and Thompson summarizing the material presented at the ERM Symposium regarding how firms end up changing risk attitudes. It is in the February edition of The Actuary as The Changing Seasons of Risk Attitudes.
These ideas were presented at the Groupe Consultatif meeting -eca2012: The first European Congress of Actuaries – June 7/8 Brussels 2012 and at the FIA Risk and Investment Conference: Risk under the macroscope 28/29 June 2012 Leeds UK. Slides from GC Congress are available here.
Covered by Gillian Tett in the Financial Times on 2 August 2012. Anthropologists join actuaries to teach us all about risk
Also in 2012, InsuranceERM has also run a series of articles by Ingram, Thompson and Underwood that summarize the talks given in Brussels and Leeds. Now available in a single pdf from InsuranceERM, titled “Rational adaptation for ERM in a changing environment”
Featured on the HBR Blog 11 June 2012. What’s Your Risk Attitude? a post based upon the article “The Changing Seasons of Risk Management” from The Actuary.
In 2013, the North American Actuarial Journal will feature a paper by Bush and Ingram that provides readers with the basics of plural rationalities and references to many source texts in anthropological literature. And InsuranceERM will be publishing a PDF of the six articles that they had previously published by Ingram, Thompson and Underwood. A working paper by Ingram, Thompson and Varnell was also presented at the AFIR meeting in Lyon on the application of plural rationality theory to financial regulation.
Various aspects of Plural Rationalities have been featured many times here at Riskviews. https://riskviews.wordpress.com/category/cultural-theory-of-risk/
And in these posts: