Financial Econometrics and Empirical Market Microstructure

Levels of Development

Both individual and collective learning progresses through sequential stages of development (or Levels, in AQAL terminology). In simplified terms, you could represent three sequential stages of development.

1. Intuitive risk management is dominated by a subjective view of risk. Risk management (or lack thereof) is typically dominated by principals, who go with gut instinct and are unwilling to consider multiple of perspectives. The focus is on the parts, and not the whole.

2. Predict and control risk management is driven by objective classification and measurement of risks. Managers seek to minimize risk through traditional hierarchy, rules, and processes.

3. Integral risk management is characterized by networked intelligence. Risk management is a core competence and risk culture is pervasive. Risk is viewed as both danger and opportunity, and hence a higher tolerance for taking conscious risks that don’t endanger the organization as a whole. Individuals are empowered, risks are continually communicated, and the organization learns from survivable failures.

These simplified stages represent an organizational center of gravity, where of certain perspectives are predominant.

To summarize, risk management depends on healthy organizational development, which is driven by the integration of ever more perspectives (e. g., from Subjective to Objective to Integral). Perspectives from each stage are important.[27] For example, the qualitative opinion of a trader may give essential color, while a researcher might provide useful objective analysis. To excel at managing risk, however, organizations must efficiently process multiple streams of intelligence. Therefore, Integral risk management builds on all previous stages (e. g., with checklists[28] and metrics that were implemented at the “Predict & Control” stage), but goes beyond measurement to include qualitative dimensions such cultivating a broad range of ideas, promoting a pervasive risk culture, and embracing risk as danger and opportunity.