In 2012, Thinking Ahead published a paper with the title The wrong type of snow. It was a paper about risk, one of the most studied and written about subjects in our investment world.
We saw the parallel between trains that couldn’t run because it was the wrong type of snow and portfolios that didn’t perform because it was the wrong type of risk. Historically, risk was mostly considered at a point of time and looking backwards, not over time and looking forwards. Our paper argued for an intertemporal perspective – we defined risk mostly as impairment to mission, which necessarily involves a journey through time.
In our opinion the paper has aged well, and is still a good read. But we now feel we have something new to say about risk – hence ‘fresh snow’ as the title for this paper.
As we have continued to learn about, and think about, systems, we have increasingly come to see current risk management practice within the investment industry as not paying enough attention to the bigger picture, the narrative along with the numbers, and the more distant future.
After a brief review of what risk is, we introduce the core idea of this paper – risk 1.0 and risk 2.0 are different because they are built on different (mental) models of reality.
Find out more about:
- Systems thinking – visit our hub
- Read: ‘The wrong type of snow’
