High Impact, Low Probability events: Why the improbable can’t be ignored
It's easy to shrug off risks that are deemed unlikely to happen, especially when you have limited bandwidth to deal with them. Yet they can strike a catastrophic blow to your company's operations if missed or not addressed properly. Fortunately, you don't have to choose between going all-in or not bothering to track high-impact, low-probability risks. In this month’s edition of Oxford Analytica Insights, we lay out the third option.
We hope you find the insights useful. And if your organisation would like to find out more about Global Risk Monitor - which is designed to help you monitor high-impact, low-probability risks easily and effectively - please book a consultation with our specialists today:
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"The thought that disaster is impossible often leads to an unthinkable disaster.”
This aphorism comes from computer scientist Gerald Weinberg, who calls the concept the Titanic Effect. Ignoring warnings to prepare for the unlikely can cause expensive, reputation-damaging and sometimes fatal results.
Part of the work of analysing geopolitics is dealing with these high-impact, low-probability (HILP) events. They can manifest as “once-in-a-lifetime” shocks like the COVID-19 pandemic or the 9/11 terror attacks, or as known hazards like earthquakes or hurricanes. You can operate for years without encountering a HILP event, only to face one tomorrow, out of the blue.
But if Russia's February 2022 invasion of Ukraine showed us anything, it’s that almost-unthinkable developments can and do happen. Too few saw it coming until Putin's tanks rolled towards Kyiv.
Fast forward to today, and many businesses have been left financially, logistically and reputationally hamstrung by a situation they deemed implausible and thus did not prepare for — putting rare but highly consequential risk scenarios back on the corporate strategy map.
Still, planning for such risks is extremely challenging for most organisations.
The risks we miss
In an ideal world, companies would have endless time and resources to address all potential risks. In reality, there are always limitations on how much time and effort can be devoted to risk analysis. Low-probability events create extremely difficult decision-making processes, simply because it's hard to justify the investment for events that seem a remote possibility.
To effectively prioritise risks, we often think in terms of concentric circles. In the centre, the bullseye, sit the current risks that are important to your business. They're plausible and pressing, so they get the lion's share of attention and resources. Step out a rung, and you'll encounter risks of sufficient interest that you want to keep an eye on them and develop contingencies, just in case.
Remote risks sit in the outer circles. They're often ignored because you have bigger priorities to worry about. But as the Ukraine conflict has shown, HILP risks still are going to need some degree of attention because they can close your business down if you don't properly manage them.
How can you monitor this last category in an effective, and cost-effective, manner?
Risk professionals have a number of strategies at their disposal to better equip themselves for handling low-probability, high-impact risks. The following form the backbone of Oxford Analytica’s Global Risk Monitor, a tool that tracks the likelihood of 12 geopolitical and macroeconomic high-impact, low-probability risks the world faces in the years ahead.
How to monitor high-impact, low-probability risks
#1: Identify and narrow down the risks to a manageable number
You cannot manage HILP risks unless you identify them first. However, since global risks trend towards infinity, you'll need a procedure for flagging areas that need attention.
This is a balancing act. You don’t need to second-guess every black swan, asteroid-hitting-the-earth scenario that could possibly happen; but you will need to scan the global horizon for realistic shocks that have the potential to cause impacts beyond the everyday experience. A conflict in the Taiwan Strait, for example, could dry up the world's supply of semiconductors, so there's a clear business case for having it on the radar.
It can be challenging for risk leaders to identify a representative range of emerging risk scenarios. This often relies on expert judgement to provide advice, especially where quantitative data is sparse.
How we help: Available as a bolt-on to Oxford Analytica’s Daily Brief or as a standalone tool, the Global Risk Monitor (GRM) tracks the likelihood of our top 12 high-impact, low-probability global risks, from clashes on the Korean Peninsula to the destabilisation of democracy in Brazil. You’ll be able to see the top risks - determined by our geopolitical specialists - at a glance.
Having a ‘done for you’ risk radar removes analysis paralysis and introduces economies of scale. Instead of trying to parse the risks, you can focus resources on defining what they mean for your business. Prefer a more bespoke approach? The GRM can be also tailored to identify, assess and track risks pertinent to your business strategy so you're monitoring the risks that truly matter most to you.
#2: Assess and score the drivers and magnitude of risk
It’s not enough to identify the risks. You need indicators signposting whether each one of those scenarios is materialising, so you can immediately interpret the significance of events and explain the implications to your board and other stakeholders with confidence. Drivers (risk factors) are the triggers that make an event more likely to happen. Restrainers (mitigating factors) make it less likely.
First, identify these factors. Then rate them against each other and ascribe them an easy tracking number or strength factor, so you can easily identify early warnings that would increase or decrease the probability of a risk occurring. Finally, keep monitoring these factors for changes.
To do this effectively, you'll need to track events closely. Partner with experts in the relevant risk areas and territories to gather the intelligence you need to track your indicators. Decision-makers want assurance, not guesswork, so you'll need to have a credible methodology behind your work.
How we help: Behind the simplicity of the GRM sits much complexity. Each week, our in-house specialists and global network of experts assess and recalibrate the drivers and restrainers for each risk category - there may be 20-30 for each. Then they bring together all of that data from disparate sources and make it accessible in one place. Click on any event monitored in the GRM, and you'll be taken to an analysis of the possible impact of this event; an overall score reflecting the likelihood of this event coming to pass - including a history of how this score has changed; a list of relevant indicators (risk factors and mitigating factors), together with their individual score, and a history of when and how each indicator’s score has changed.
For example, one of the risks monitored in the GRM is Iran entering into military conflict. And we've identified Israeli-Iranian exchanges in Syria as a critical driver in this scenario. A recent Israeli strike on Iran’s Damascus consulate caused us to recalibrate the score for this driver, which raised the overall score for our risk of conflict involving Iran.
Analysis is no good to anybody if it does not reach decision-makers in a format they can trust and understand. The level of explanatory power behind the GRM, combined with our Daily Brief, tells decision-makers exactly why they should care so they can have faith that our probability estimate is correct.
#3: Map the direction of travel
It's easy to think of HILP events as out-of-the-blue shocks that no one could have predicted. This is simply untrue. When you track the drivers and restrainers over a two-to-three-year time period, you can see clear warning signs that an event may be on the horizon.
In this sense, the actual score at any point is far less relevant than its direction of travel. Minor back-and-forth fluctuations are normal and should be expected. But if the risk starts moving from the outer to the middle to the inner circles, it's crystallising and should be moving higher up on your risk management agenda.
How we help: GRM subscribers receive weekly emails with updated scores and a risk map so they see at a glance if a risk is increasing or decreasing. Most of the time, you won't have to worry. But if risk starts shifting across the concentric circles, you'll be able to see it, understand it and act upon it in a timely way.
Together, the three steps of this process are a force multiplier for how you look at the situation unfolding in front of you. It's essential to have management on board with any risk management efforts, even and perhaps especially if it concerns a HILP event.
The GRM can help you build a decision-ready business case that tells decision-makers why they should care right now — because failure to prepare may cost more than your business can afford.
Would you like to take a closer look at the GRM, and learn more about how it can help your organisation measure and understand the impact of emerging risks? We’d be delighted to show you its capabilities in a one-to-one demonstration. Simply book a consultation with our specialists below:
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About Oxford Analytica: Founded in 1975, Oxford Analytica is an independent geopolitical analysis and consulting firm.
Drawing on a worldwide network of experts, we advise our clients on their strategies, operations, policies and investments. Our trusted global insights and seasoned judgements on global issues enable our clients to navigate complex markets.
Our flagship product, the Oxford Analytica Daily Brief®, delivers timely, impartial and actionable analysis of emerging trends and developments in the global political economy, each working day.
Find out more about the Daily Brief here: https://www.oxan.com/services/daily-brief/
Request a Daily Brief trial here: https://www.oxan.com/services/daily-brief-trial-request/
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