Risk management and the Foundation Trilogy

In the INARM actuarial blog, Dave Ingram made the following comment:

I had an interesting discussion over the weekend with someone about the original Foundation Trilogy.

It seems that those books provide a very good paradigm for risk management.

1. As mentioned by Steve, the "psychohistory" which I always envisioned as a massive computer model that looked into the future and made probabilistic predictions of likehood of possible courses of events. From this work a plan was developed.

2. A "Black Swan" event that was not anticipated by the models in book two - "The Mule" . This Black Swan event invalidates the original models.

3. A group of people, "the second foundation", who were charged with updating the model for actual events as they deviated from the original projection. As well as implementing corrective actions to bend events back towards achievement of the original goals.

Asimov anticipated an extremely important aspect of this prediction business. The working of the original plan and the adjustments of the second foundation were kept secret from the world at large. Asimov understood the impact of knowledge of the plan on the actions of the people.

These books were written in the early 1950's and there are several fundamental ideas that we have not yet fully understood or mastered in risk management.

This prompted my reply:

Very good points! Now for a short riff on this theme with insights into modern risk management practice.

Unfortunately "Second Foundation" wouldn't work as Asimov assumed for his fictional work. The problem is how can we maintain a proper risk management culture? Culture evolves much more quickly than physical characteristics because its transmission mechanisms - memes - have a much greater mutation rate than the genes, and the environment in which the memes multiply is much more chaotic than the physical world (except when meteorites hit). Hence the memetic repair mechanisms needed to keep the culture semi-stable (analogous to the genetic repair mechanisms to cull out egregious mutations) need to have attention paid to them. Three important repair mechanisms for risk management culture are regulation, shareholder influence on Boards, and separation of duties. None of these are included in the "Second Foundation", hence the starting point of my riff.

The information now coming out on Countrywide shows the importance of all these mechanisms for the maintenance of corporate culture.

Another point Dave. Random statements - like mentioning the Foundation Trilogy - are an extremely effective way of getting thought patterns into new pathways - an essential thing for a risk manager (as distinct from a compliance manager).