Decision-making in a Time of Mega Risks (like COVID-19)

When García Márquez wrote his memorable novel “Love in the Time of Cholera” set at the turn of the 20th century, little did he know how hauntingly relevant the themes of disease, death and the vulnerability of the ageing would be in 2020 as the world grapples with coronavirus - the latest in a series of “mega risks” that have kicked off the year.

Mega risks are essentially existential risks – risks that have significant, permanent and irreversible consequences for humanity. The year commenced with devastating natural disasters in Australia, growing geopolitical tension, and now the deadly coronavirus that is currently rampaging around the world at a frightening pace. These mega risks, which are characterised by a multitude of inter-connected factors, stakeholders and possible outcomes, are extremely complex and uncertain. These characteristics challenge the capacity of individuals, businesses and government to make good decisions to effectively mitigate risks of this kind.

García Márquez’s novel illustrates how, during times of existential risk, emotion can affect rationality, sound judgement and good decision-making. While it is true that we are witnessing risks that, in many ways, go beyond what we have seen in the past and that we are in largely unchartered territory in terms of deciding how to respond to these mega risks, there are certain well-established tenets of risk management that are still relevant, albeit with some tweaks.

Comprehensive identification of impacts

Identifying the spectrum of consequences that can eventuate from mega risks is an important first step in deciding how to respond to such risks. However, this will undoubtedly be a challenging exercise.

The mega risks we have seen this year demonstrate how multi-faceted risk can be. The impacts associated with this type of risk can range from the obvious to the more obscure. So, for example, in the context of coronavirus, the immediate impacts on human health associated with the disease are relatively obvious. The economic implications of the disease are becoming more visible. However, the social impacts of the disease, such as the impact on society’s sense of security and well-being, are less clear and are only likely to become obvious in the longer-term.

In addition, some of the impacts may interact with each other, resulting in cascading and aggregated risk, which makes it difficult to differentiate one type of impact from another. By way of example, the health impacts of coronavirus result in people being unable to work, which can affect the operation of supply chains and productivity that, in turn, can influence investor perceptions of market risk causing volatility in financial markets.

Despite these complexities, taking comprehensive stock of the impacts that could eventuate and ensuring that the list of impacts is continuously updated and revised in line with an evolving context will help to ensure that decision-making in the context of mega risks has a sound and rational foundation.

Contextualised assessment of risk

Risk is most commonly defined as the product of the likelihood and the impact of an adverse event. What constitutes an adverse event and the relative likelihood of its occurrence will depend upon the context in which risk arises. The context for assessment of mega risks is likely to vary greatly because they have widespread effects across many sections of society and sectors of the economy.

In terms of the diverse contexts that exist in relation to coronavirus, in the case of an individual, an adverse event will include catching the virus, as well as the associated morbidity or mortality, and the likelihood of this adverse event will be affected by the individual’s behaviour, including whether or not hands are regularly washed and social distancing is practised. For a business, the various adverse events that could eventuate include halted production due to illness amongst workers and the likelihood of this occurrence will be affected by a range of factors, including the extent of automation of production as well as the health and safety practices of the business and, particularly, workers involved in production. From the perspective of government, adverse events will include negative growth and the likelihood of this impact will be the product of a complex array of factors, including the consumption behaviour of citizens during and after the pandemic has abated.

Apart from providing a sound basis for responding to mega risks, contextualisation of risk assessment also helps in communicating the response to those likely to be affected by the response. In particular, explanation of the contextual factors that have led to a particular risk assessment can provide comfort to those affected by the response to risk that there is a rational and realistic basis for the response.

Objective evaluation of risk

One of the most challenging aspects of decision-making in the context of mega risks is the evaluation of risk. Risk evaluation involves determining whether risks are acceptable (no response is needed), tolerable (some risk reduction measures may be needed) or intolerable (complete risk avoidance is required). Obviously, the evaluation of risk will depend upon who undertakes the evaluation and the lens through which the evaluation is undertaken.

The outcome of the evaluation of risks associated with coronavirus are likely to vary – potentially significantly – depending upon whether the risk evaluation is undertaken by individuals, business or government. An individual may base his or her risk evaluation on direct experience or information gained from public sources. A business will likely evaluate risk by accounting for the risks faced by the business as well as the risk for its workers and customers, and may seek information from relevant business or industry groups to help inform the evaluation. Government will evaluate risk by taking into account the extremely broad spectrum of stakeholders who will be affected by government’s response to risk and will typically rely upon expert information available at the national or international level.

The complexity and uncertainty of mega risks highlight the critical importance of clear, robust and valid information that can help inform decisions made by all those affected by the risks – spanning from individuals, businesses, as well as government bodies and agencies. As mega risks evolve, it will be essential to keep relevant information about such risks updated so that evaluation of risk can be undertaken on an objective and dynamic basis.

Creative identification of options to mitigate risk

Given the catastrophic implications of mega risks, they may require a suite of responses that have never been contemplated nor employed in the past. This has been well-illustrated in the context of actual or proposed responses to coronavirus.

For individuals, self-isolation and social distancing are unlikely to have ever been considered in the past when ill-health has occurred. In the case of business, shutting down entire offices after a single incidence of ill-health amongst the workforce is likely unprecedented. Closing borders and restricting movement within vast geographic areas and even whole countries have not been witnessed by most of us in our lifetimes.

The old adage of “desperate times call for desperate measures” is apposite in the context of mega risks. All those affected by these types of risks may need to take action that is beyond their experience and well out of their comfort zone. It will be critical for decision-makers to be open-minded and comprehensive in their identification of options to respond to risk and to ensure that the list of options keeps pace with risks as they unfold and evolve.

Stakeholder engagement

Perhaps the most important aspect of decision-making in the context of mega risks is to ensure that key stakeholders – including, the marginalised and vulnerable – are appropriately engaged so that they understand the basis for decisions about how such risks should be responded to.

In some cases, the options to respond to risk available to the decision-maker will be limited so there may be no scope for obtaining and incorporating stakeholder feedback on those options before they are implemented. Nevertheless, even in these cases, stakeholder engagement in the form of effective communication will go a long way in building trust in decision-makers and facilitate implementation of the measures that they have selected.

Making good decisions in the face of mega risks

Making good decisions in the face of mega risks will, no doubt, be challenging to say the least. Implementation of those decisions will probably also involve a raft of practical obstacles. However, basing decisions on sound risk management practices will help to take emotion out of the process and smooth what may well be a very rocky path ahead in combatting mega risks.

References

BOSTROM, N. (2002) "Existential Risks: Analyzing Human Extinction Scenarios and Related Hazards" Journal of Evolution and Technology, Vol. 9, March 2002. Available at http://www.nickbostrom.com/existential/risks.pdf

BOSTROM, N. (2013) "Existential Risk Reduction as the Most Important Task for Humanity", Global Policy, Volume 4, Issue 1. Available at: http://www.existential-risk.org/concept.pdf