Standard risk management tools generally hold the implicit assumption that risks are normalized. Indeed the usual representation of risks on a matrix showing probability on one axis against impact on the other requires the risk to be quantified in the first place. Quantification is possible for many risks, but not for all.
Systemic risks are different – or more precisely risks in complex systems are different. Such systems are far from equilibrium and exhibit fat tail risks – i.e. rare high-impact events. Taleb eloquently popularized this familiar concept from statistics as black swans (although obfuscating the fact that swan colour is statistically predictable!). An important drawback of fat tail risks is that their probability is not defined – it cannot be assigned a numerical value. As a consequence, they need to be dealt with in a different way from the normal risk management process.
These risks may not occur often, but they are far from rare. In fact they are part of all familiar complex systems such as the economy, the financial markets, our bodies, healthcare, the climate, ecosystems, politics – in short they are a common feature of our day-to-day world.
Fortunately complex systems have a property that helps deal with these risks: resilience. We have developed a set of tools that assist management teams assess the resilience of a system. The practical result is that the risk conversation should be held in two distinct parts: The first looking at the standard tools for normalized risk, and the second looking at the resilience of the system with its dedicated systemic risk tools.