Financial Econometrics and Empirical Market Microstructure
Adaptive Learning
Risk management is a core discipline in a rapidly changing world. From finance to ecology, we face unprecedented systemic risks from increasingly coupled global systems. Non-linearities render long term predictions futile, and require consideration of many possible paths. Indeed we’ve seen a paradigm shift from “Command and Control” to “Sense and Respond” (Haeckel 2004). As in an ocean sailing race, organizations must navigate changing conditions using dynamic steering (Robertson 2010) with continuous feedback. “Managing Uncertainty” has replaced “Change
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Fig. 25 Macro and micro polarity management. Source: Laubsch (2010a, b)
Management” in leadership seminars (change management makes no sense if the direction of change is not clear).
Figure 25 shows how we can spark a positive organizational learning spiral by managing macro and micro polarities.
This general macro to micro framework applies universally in risk management. Duhigg (2012) describes a tragic case study of the consequences of macro & micro level breakdowns in the 1987 London King’s Cross Fire case study. Outside experts (fire brigade) who pre-diagnosed the fire hazard were ignored for years by an overconfident organization with disaster myopia (no previous loss of life from fire). Actionable early warning signals (a passenger reporting smoke) were not transmitted in a siloed organization. A brief window of opportunity to extinguish the fire and/or evacuate was lost, and 81 people were killed when the fire erupted in a giant explosion.
