PrefaceforRisco–theBraziliantranslationofRisk‐August2008

DeuséBrasileiro?

IfirstencounteredtheideathatGodmightbeaBrazilianfortyyearsago.IwasavisitingstudentattheUniversityofSãoPaulo.OnatripfromSãoPaulotoSantosIwasthepassengerofanextremelyskilfulBraziliandriver.Iwasterrified.Ibeggedhimtoslowdown.“Don’tworry,”hesaid,takingahandoffthewheeltopatmykneereassuringly,“DeuséBrasileiro.”

IamgratefulfortheinvitationtowriteaprefacetothisbookforBrazilianreaders.ItprovidesanopportunitytoreflectbothonmyexperienceofriskinBrazilandondevelopmentsinthefieldofrisksincethebookwasfirstpublishedin1995.

Iftherecanbesuchathingasatime‐lapseepiphany,IhadoneonthewindingroadtoSantos.Itwasonlysomeyearslater,whenIwasattemptingtoformalizesomethoughtsonperceptionsofrisk,thatIbegantoappreciatetheimportanceofGod’snationality.

Mostoftheliteratureonriskinsistsondistinguishing“real”or“objective”riskfrom“perceived“risk.Objectiveriskiswhattheexperts,usuallystatisticiansandactuaries,know,andperceivedriskiswhattherestofusbelieve.Butriskisawordthatreferstothefuture,andthefutureexistsonlyinourimaginations.Allriskisperceived;andperceptionisrootedinbelief.Whatthestatisticiansandactuariesknowishistory.Itistransmutedintoriskbypassagethroughthefilterofbelief(book,p43).

Thesefilterstakemanyforms.Someareoptimistic.ManyAustraliansliketoclaimthattheylivein“theluckycountry”–perhapsasecularversionofDeuseBrasileiro.Mightsuchfiltersinfluencebehaviour?ThestatisticianstellusthattheluckyAustraliansdieinroadaccidents50percentmoreoftenthanthelessfortunateBritish,andBraziliansdrivingundertheprotectionofapartisandeitydieontheroadthreeandahalftimesmoreoften.TheBritishForeignOfficeoffersthefollowingadvicetoBritonsventuringtoBrazil:”DrivecarefullyinBrazil.ThestyleofdrivingandstandardsareverydifferentfromtheUK.Brazilhasahighroadaccidentrate;in200519peopleper100,000ofthepopulationdiedinBrazilcomparedto5.5peopleper100,000ofthepopulationintheUK.”

Thebook(chapters7and8)exploresvariousexplanationsforthelargeandpersistentdifferencesinroaddeathratesbetweencountries,andwithincountries,overtime.Italsospeculatesbriefly(p.204)abouttheinfluenceofreligiousbeliefonjudgmentsaboutrisk.Since1995,andespeciallysince11September2001,theroleofreligiousfiltershasassumedgrowingsalience.InTheWaronTerrorGodappearstointercedeonbothsideswithdevastatingeffect.

Furtherthoughts

Thetwomainthemesaroundwhichtheargumentsofthebookareorganizedareriskcompensationandculturaltheory.Theyhavecometoseem,tome,almostembarrassinglyobvious.

TheversionofriskcompensationintroducedinChapter2isderivedfromtheworksoftheeconomistSamPeltzmanandthepsychologistGeraldWildethatIfirstencounteredinthe1970s.Formosteconomistsandpsychologiststodaytheideaofriskcompensationisaxiomatic;whileinpursuitofopportunities,wescanourenvironmentforevidenceofsafetyanddangerandmodifyourbehaviourinresponsetowhatweobserve.Wherethephenomenonisstillthesubjectofdebate,theargumentnowisusuallynotaboutitsexistencebutaboutthemagnitudeofitseffect–isthebehaviouralresponsetoperceivedchangesinrisk,partial,complete,ormorethancomplete?

Ifirstencounteredtheideaofculturaltheory,introducedinChapter3,intheworkofMaryDouglasandMichaelThompson.IthelpedtoorganizeinasystematicwaythediversityofpositionsthatIencounteredindebatesaboutthemostsensiblewaytomanagerisk.ItintroducedmetowhatThompsoncalls“pluralrationalities”,andbroughtasemblanceofordertowhatotherwiseappearedtobeincoherentshoutingmatches.

Thesetwomainthemesappeartobestandinguptothetestsoftimerobustly.SincethebookwaspublishedIhavecontinuedtoelaboratethemandexploretheirutility.BelowIsetoutsomefurtherthoughts.

TypesofRisk

InchaptertwoIcallattentionto“varietiesofuncertainty”andtheblurredboundarybetweenwhatiscalledriskandwhatiscalleduncertainty.Figure1inthisprefacesuggeststhatfurtherdistinctionscanbehelpful.Uncertaintyisnowconsignedtothecirclelabelled“virtualrisk”;inthesamecirclearealsotobefoundcontestedhypotheses,ignorance,andunknownunknowns.Ifanissuecannotbesettledbysciencewearecompelledtorelyonjudgment,somecombinationofinstinct,intuitionandexperience.Somefindthisenormouslyliberating;allinterestedpartiesfeelfreetoarguefromtheirbeliefs,prejudicesorsuperstitions.Itisinthiscirclethatwefindthelongest‐runningandmostacrimoniousarguments.Virtualrisksmayormaynotbereal,butbeliefsaboutthemhaverealconsequences.

Figure1

Thecirclelabelled“perceivedthroughscience”containsmostofthepublishedriskliterature.Herewefindbooks,reportsandarticleswithverifiablenumbers,cause‐and‐effectreasoning,probabilityandinference.Thisisthedomainof,amongstmanyothers,biologistswithmicroscopes,astronomerswithtelescopes,evidencebasedmedicine,highwayengineersandvehicledesigners,bridgebuilders,epidemiologists,statisticiansandinsurancecompanyactuaries.Andthecentralbankersandhedgefundmanagersnegotiatingasafecoursethroughturbulentfinancialseas?Wewillreturntothelattertwoinamoment.

Thethirdcircle,risk“perceiveddirectly”isacategorytowhichIwouldnowgivegreateremphasis.Weallroutinelymanagerisksinthiscircleineverydaylife.Aswithvirtualriskswemanagethemusingjudgement;wedonotundertakeformal,probabilisticriskassessmentsbeforewecrosstheroad.TheareainFigure1inwhichthiscategoryoverlapswithriskperceivedthroughscienceisfrequentlyazoneofconflict.Whileweallmightcrosstheroadexercisingourjudgementothers,institutionalriskmanagersarmedwithstatisticsanddifferentsafetystandards,oftenconcludethatourbehaviouroughttobemanagedtomakeussaferthanweapparentlychoosetobe.

AnotherwayofclassifyingriskstowhichIdevotedinsufficientattentioninthebookisillustratedbyFigure2.

Figure2:Riskacceptabilityandriskamplification:whatkillsyoumatters

Acceptanceofagivenactuariallevelofriskvarieswidelywiththeperceivedlevelofcontrolanindividualcanexerciseoveritand,inthecaseofimposedrisks,withtheperceivedmotivesoftheimposer.

With"pure"voluntaryrisks,theriskitself,withitsassociatedchallengeandrushofadrenaline,isthereward.MostclimbersonMountEverestandK2knowthatitisdangerousandwillinglytaketherisk(thefatalityrateonK2‐fatalities/thosereachingthesummit–isreportedtobe1in4).

Withavoluntary,self‐controlled,appliedrisk,suchasdriving,therewardisgettingexpeditiouslyfromAtoB.Butthesenseofcontrolthatdrivershaveovertheirfatesappearstoencourageahighleveloftoleranceoftherisksinvolved.

CyclingfromAtoB(IwriteasaLondoncyclist)isdonewithadiminishedsenseofcontroloverone'sfate.Thissenseissupportedbystatisticsthatshowthatperkilometretravelledacyclistismuchmorelikelytodiethansomeoneinacar.Thisisagoodexampleoftheimportanceofdistinguishingbetweenrelativeandabsoluterisk.Althoughmuchgreater,theabsoluteriskofcyclingisstillsmall‐1fatalityin25millionkilometrescycled;notevenLanceArmstrongcanbegintocoverthatdistanceinalifetimeofcycling.Andnumerousstudieshavedemonstratedthattheextrarelativeriskismorethanoffsetbythehealthbenefitsofregularcycling;regularcyclistslivelonger.

Whilepeoplemayvoluntarilyboardplanes,busesandtrains,thepopularreactiontocrashesinwhichpassengersarepassivevictims,suggeststhatthepublicdemandahigherstandardofsafetyincircumstancesinwhichpeoplevoluntarilyhandovercontroloftheirsafetytopilots,orbus,ortraindrivers.

Risksimposedbynature‐suchasthoseenduredbypeoplelivingontheSanAndreasFaultortheslopesofMountEtna–orbyimpersonaleconomicforces‐suchasthevicissitudesoftheglobaleconomy‐areplacedinthemiddleofthescale.Reactionsvarywidely.Suchrisksareusuallyseenasmotivelessandarerespondedtofatalistically‐unlessoruntiltheriskcanbeconnectedtobasehumanmotives.ThedamagecausedbyHurricaneKatrinatoNewOrleansisnowattributedmoretowillfulbureaucraticneglectthantonature.Andthesearchforthecausesoftheeconomicdevastationattributedtothe“creditcrunch”isnowfocusingontheenormousbonusespaidtothebankerswhoprofitedfromthesubprimedebacle.

Imposedrisksarelesstolerated.Considermobilephones.Theriskassociatedwiththehandsetsiseithernon‐existentorverysmall.Theriskassociatedwiththebasestations,measuredbyradiationdose,unlessoneisupthemastwithaneartothetransmitter,isordersofmagnitudeless.Yetallaroundtheworldbillionsarequeuinguptotakethevoluntaryrisk,andalmostalltheoppositionisfocusedonthebasestations,whichareseenbyobjectorsasimpositions.Becausetheradiationdosereceivedfromthehandsetincreaseswithdistancefromthebasestation,totheextentthatcampaignsagainstthebasestationsaresuccessful,theywillincreasethedistancefromthebasestationtotheaveragehandset,andthustheradiationdose.Thebasestationrisk,ifitexists,mightbelabeledabenignlyimposedrisk;noonesupposesthatthephonecompanywishestomurderallthoseintheneighbourhood.

Lesstoleratedareriskswhoseimposersareperceivedasmotivatedbyprofitorgreed.InEurope,bigbiotechcompaniessuchasMonsantoareroutinelydenouncedbyenvironmentalistopponentsforbeingmoreconcernedwithprofitthanthewelfareoftheenvironmentortheconsumersofitsproducts.

Lesstoleratedstillaremalignlyimposedrisks‐crimesrangingfrommuggingtorapeandmurder.Inmostcountriesintheworldthenumberofdeathsontheroadfarexceedsthenumbersofmurders,butfarmorepeoplearesenttojailformurderthanforcausingdeathbydangerousdriving.IntheUnitedStatesin200216,000

peopleweremurdered‐astatisticthatevokedfarmorepopularconcernthanthe42,000killedontheroad‐butfarlessconcernthanthatinspiredbythezerokilledbyterrorists.

WhichbringsustoterrorismandAlQaida.Howdoweaccountforthemassivescale,world‐wide,oftheoutpouringsofgriefandangerattachingtoitsvictims,whosenumbersaredwarfedbyvictimsofothercausesofviolentdeath?InLondon52peoplewerekilledbyterroristbombson7July2005,aboutsixdaysworthofdeathontheroad.ButthousandsofpeopledonotgatherinTrafalgarSquareeverySundaytomark,withathreeminutesilence,theirgriefforthepreviousweek’sroadaccidentvictims.

AtthetimeofwritingtheBritishGovernmentisproposinglegislationthatwouldpermitthedetentionofterroristsuspectswithoutchargefor42days.Themalignintentoftheterroristisamplifiedbygovernmentswhoseeitasathreattotheirabilitytogovern.Tojustifyformsofsurveillanceandrestrictionsonlibertypreviouslyassociatedwithtyrannies“democratic”governmentsnowcharacterizeterrorismasathreattoOurWayofLife.

Institutionalriskmanagementandbottom‐loopbias

Figure2.2(bookp15)describesthe“riskthermostat”,theessenceofWilde’sriskcompensationhypothesis.Itmakesthepointthatapropensitytotakerisksleadstorisktakingbehaviourthatleads,bydefinition,toaccidents:totakeariskistodosomethingthatcarrieswithitaprobabilityofanadverseoutcome.

TheRiskThermostat(bookpage15)

Frequentlyafteranaccidentpeoplechorusthatriskwasnotmanagedproperly.Notnecessarilyso.Culpablenegligencemustcontendwithbadluckastheexplanation.Ifpeopletakeriskstherewillbeaccidents.Azeroriskworldisunattainable.

Yetinthemostaffluentcountriesoftheworldthereisatrendtowardincreasinginstitutionalriskaversion.Mostofusinourdailylivesroutinelymanagerisksbybalancingperceivedrewardsagainsttheperceivedriskofaccidents.Butsomeus(notme)arepromotedtotheranksoftheinstitutionalriskmanagers.Theirjobisto

reduceaccidents,andthengetthemlowerstill.Forthem,oneaccidentisonetoomany.

Theyareenjoinednottohavetheirjudgementaboutwhatissafeordangerouscorruptedbycontemplationoftherewardsofrisktaking.IntermsoftheRiskThermostattheyhavebecomeinstitutionalmanifestationsofbottomloopbias.Thetoploop,therewardsloop,issomeoneelse’sconcern,perhapsthesalesormarketingdepartment.

Butinmanycases,inBritainthedomainofeducationprovidesagoodexample,thereisnoeffectivetop‐loopcounterweight.Theunopposeddemandsforevermoresafetyresultinsignificantopportunitycosts.Interestingexperimentsinchemistryclasses,fieldtrips,gamesandsportsarelost,nottomentiontheuncountedhoursofproductiveteachingandresearchtimedevotedtothefillinginoffatuousriskassessments.

InBritainatthetimeofwritingone‐sidedinstitutionalriskaversionandlackoftrustarepromotingdefensivemedicine,thepracticeofmedicineinwhichdoctors’fearsofliabilitycompromisethewelfareofthepatient.Thesystemisburdenedwithminutelydetailedaudittrails,riskassessmentsandexpensive,unnecessaryandsometimesriskytests.Fearofliability,evermorestringenthealthandsafetyregulations,andtherisingcostofinsuranceareleadingtotheabandonmentoftraditionalfairs,fetesandstreetparties,thechoppingdownofmanymaturetrees,theremovalofhangingflowerbasketsandthebanningofconkersplayedwithoutgoggles(ifyoudon’tplayconkersinBraziltryGoogle).Top‐loopbiasandweaponsoffinancialmassdestruction

Atthetimeofwriting(August2008)theworldisinastateoffinancialturmoilthatmightbeattributedtotop‐loopbias.The“subprimecrisis”andthe“creditcrunch”canbeviewedastheconsequenceoffinancialrisktakinginacontextinwhichtherewardsforplayingsuccessfullywithotherpeople’smoneywereenormous.InagoodyeartheChristmasbonusofaforeignexchangedealerorhedgefundmanagerwasenoughtoretireonforlife.Andifhehadafinancial“accident”andlosthisclientsorshareholdersalotofmoney,theworstthatwaslikelytohappenwasthathewouldneedtofindanotherjob–whilestillretaininghisearlierbonuses.Onamoremodest,butfarmorewidespreadscale,thisdistortionofincentivesledcommission‐hungrysellersofmortgagestopersuadelargenumbersofpeopletoassumedebtsthattheyhadnohopeofrepaying,especiallyinaclimateofcollapsingpropertyprices.

Theproblemhasbeencompoundedbythehubristhatconfusesluckwithfinancialgenius,aconditionnicelydescribedbyNassimNicholasTalebinFooledbyRandomness1.Thecomplexfinancialinstrumentsdevisedbytheso‐calledfinancial“rocketscientists”–famouslylabeledweaponsoffinancialmassdestructionbyWarrenBuffett‐havebecomebeyondthecomprehensionofmostpeopletrading

1NassimNicholasTalebinFooledbyRandomness,RandomHouse,NewYork2005.

them,andoftenbeyondthecomprehensionoftheirdevisers.TheirapparentmathematicalsophisticationledmanywhodealtinthemtobelievethattheyweresafelywithinthescientificcircleofFigure1.

InrealitytheywereintheVirtualRiskcirclewheretheavailablenumbersprovidedspurioussupportforjudgmentsbasedonspeculation,superstitionandprejudice–andgreedandvanity.AfamousexamplehasbeencompellinglydocumentedbyRogerLowensteininWhenGeniusFailed2.Itisthestoryofthespectacularfall,inSeptember1998,ofLongTermCapitalManagement,afallthatcameclosetobringingdowntheglobalfinancialmarkets.Theprincipal“geniuses”inthisstorywereRobertMertonandMyronScholeswhosharedaNobelPrizeforEconomicsin1997fortheirdiscoveryof“anewmethodtodeterminethevalueofderivatives”.Solongastheassumptionsembodiedintheirmodelheld,solongasthephenomenatheyweremodelingcouldbeconfinedwithinthescientificcircleofFigure1,theirgeniustrumpedallcompetitors,andproducedastonishingprofits.Buttheirvanity,arroganceandearlysuccessdeceivedthemintobelievingthattheyhadaformulaformanaginguncertainty.

CulturalTheory

Ifirstencounteredculturaltheory(seechapters3and4)whenwritingRisk.Sincepublicationofthebookin1995Ihavebeenincreasinglyimpressedbytheabilityofculturaltheorytobringamodicumoforderandcivilitytodebatesaboutrisk.Itisnotatypologyforpigeonholingparticipantsindebatesaboutrisk.Occasionallyoneencountersapuretype,butmostofusaretoocomplexandmulti‐facetedtobecapturedbyasimplelabel.Itdoeshoweverprovideausefulframeworkandvocabularyfordescribingtheattitudesencounteredindiscussionsaboutthebestwaytoapproachanuncertainfuture.Ithelpspeopletointrospectabouttheirownbiasesandprejudices.

OnnumerousoccasionssincepublicationofthebookIhavebeenofferedanopportunitytointroduceanaudiencetotheinsightsofculturaltheory,butofferedonlyafewminutesinwhichtodoit.ByhappychanceIdiscoveredthattheiconsofFigures3.1,3.2and3.3(bookChapter3)couldbetransformedintocartoons–Figure3.

ThecartoonversionreceiveditsfirstoutingwhenMichaelThompson(theauthorofthetypology)andIwerecommissionedbyBritain’sHealthandSafetyExecutivetowriteareportentitledSocietalConcernsaboutRisk3.WebeganbytellingtheHSE,inthewordsofMargaretThatcher,that“thereisnosuchthingassociety”,bywhichwemeantthatthereisnosinglesocietalviewonproblemsofrisk.

2RogerLowenstein,WhenGeniusFailed3TakingAccountofSocietalConcernsAboutRisk:FramingtheProblem:

ResearchReport035(withMichaelThompson)HealthandSafetyExecutive,London2002:http://www.hse.gov.uk/research/rrpdf/rr035.pdf

Weexplainedthatintermsoftheculturaltheorytypologythey,theHealthandSafetyExecutive,werestatutoryHierarchists.Theymadetherulesandenforcedtherules.FurtherwetoldthemthatfortheforeseeablefuturetheycouldexpecttobeattackedbyEgalitarians–suchasTheRoyalSocietyforthePreventionofAccidents,theConsumersAssociation,andenvironmentalgroups‐complainingthattheywerenotdoingenoughtoprotectsociety.AndbyIndividualistscomplainingthattheyareover‐regulatingandsuffocatingenterprise.

Asthe“sub‐primecrisis”withits“creditcrunch”and“toxicderivatives”unfoldsworldwidetherehasbeenasuddenanddramaticincreaseinthenumberofcommentatorswhohavediscoveredthattheHierarchists–theregulators–havebeenasleep.ThemostfamousIndividualistconverttoregulationisAlanGreenspan,formerlychairmanoftheUnitedStates’FederalReserveBankwhoconfessed:

“Imadeamistakeinpresumingthattheself‐interestsoforganizations,specificallybanksandothers,weresuchasthattheywerebestcapableofprotectingtheirownshareholdersandtheirequityinthefirms.”

Culturaltheoryshinesarevealinglightonthewords“selfinterest”.Therearecontendinginterests,andthoseofthehedgefundmanagersintentonmaximizingtheirChristmasbonusesdonotnecessarilycoincidewiththoseofthepensionerswhosesavingstheyaremanaging.Theroleofthehierarchist/regulatoristobalancethepotentialsocietalrewardsthatmightbeachievedbyuntrammelledfreeenterprise,againstthepotentiallossesthatmightresultfromitsexcesses.AsIwritethedamageofexcessisthepreoccupationofgovernmentsaroundtheworld.Thehandoftheregulatorwill,inthenearfuture,almostcertainlyweighheavier.

Figure3

TheseculturalperspectivescanalsobefoundinBrazil.Thewordsonthenationalflag“OrdemeProgresso”formaclassicHierarchistmantra.AndalthoughtheDOPS

(DepartmentodeOrdemPoliticoeSocial)nolongerexistsunderthatnamedoubtlessthesentimentsitembodiedstilllingeroninorderlybureaucratichearts.HadtheDOPSbeenallowedtocontinueitswork,themantraontheflagmightbynowhavebeenimproved,inthespiritofOrwell’s1984,toread“OrdeméProgresso”.

MyBraziliandriver,whomIintroducedatthebeginningofthisessay,wasaclassicIndividualist.“DeuseBrasileiro”capturesthespiritofoptimismthatunderpinstheirpropensitytotakerisks.Theyaregamblersbecausetheyexpecttowinmorethantheylose.Theyareimpatientwithbureaucracythattheyseeastheenemyoftheentrepreneurialspirit,andreassureeachotherthat“oBrasilcrescedenoiteenquantoosburocratasdormem”.

Theyalsohavearobustviewofnatureascornucopianandresilient,whichbringsthemintoconflictwithEgalitarianenvironmentalistswhoviewitasfragileandthreatened.Thisconflicttakesplace,mostconspicuouslyintheeyesoftherestoftheworld,inAmazonas.BothIndividualistsandEgalitariansarecriticalofGovernment(Hierarchist)action,orinaction,andbothprofesstobechampionsofthedowntroddenpoor,bycreatingemploymentandeconomicprosperity,orbyprotectingindigenouswaysoflifeandtheenvironmentonwhichitdepends.

Thedowntroddenpoor,theFatalistswhosefatewassomemorablycapturedbyJoãoCabraldeMeloNetoinMorteeVidaSeverina,aretoobusytryingtosurvivetotakemuchinterestinacademicdebatesaboutrisk.

Climatechange

Chapter9ofthebookisaboutthe“thegreenhouseeffect”.Sincepublicationin1995muchhaschanged,andmuchhasn’t.FocusedonreportsoftheIPPC,anapocalypticconsensushasbeenbuildingaroundtheviewthatglobalwarmingisreal,man‐made,andpotentiallycatastrophic;unlessanthropogenicemissionsofgreenhousegasescanbecurbeddramaticallyinaveryshortspaceoftimewearedoomed.

Iconcludedmysurveyoftheevidenceonthissubjectin1995observing“mysurveyoftheglobalwarmingdebatehasmadememoreopenmindedaboutthescientificevidence;Ibeganasafirmbelieverinman‐madeglobalwarming,andnowIammuchlesssure.Ithasmadememorefatalistic;iceagesandgreenhousesofthepasthaveoccurredwithouttheassistanceofmankindanddoubtlesswillagain.”(p.176)

MostadherentstotheapocalypticconsensusunderstandthescienceaboutaswellasIdo–notverywell.Iremainonthissubjectafatalisticagnostic.Relativetothecomplexityoftheproblemunderdiscussionthemodelsuponwhichcontendinghypothesesreststillseemtometobeextraordinarilysimplistic.Thedebatehasbecomepolitical,andtheevidenceliesmostlyintheVirtualRiskcircleofFigure1.Thisliberatesparticipantsinthedebatetoarguefrombelief,prejudiceandsuperstition.Thelesscertainthesciencethemoreinfluentialbecometheperceptualfiltersofculturaltheory,andthemoredogmaticbecometheparticipantsinthedebate.

Thelackofscientificcertaintyhasalsocreatedspaceinthedebateforreligiousbelief.Onehigh‐levelparticipant,SirJohnHoughton,formerDirectorofBritain’sMetOfficeandco‐chairoftheIPCC,haswarnedthatGodmayinducemantomendhiswayswithadisaster:“Godtriestocoaxandwoo,buthealsousesdisaster.Humansinmaybeinvolved;theeffectwillbethesame.…Ifwewantagoodenvironmentalpolicyinthefuturewe’llhavetohaveadisaster.”4

Themostsignificantchangeinthisdebatesince1995hasbeenthere‐emergenceofthedebateabout“peakoil”.InabookIpublishedin1981Iobservedthat“oilclearlyhasaseverelylimitedfuture;asitbecomesscarceritwillincreasinglybereservedforpremiumusessuchastransport,butultimately,bytheearlypartofthenextcenturyatthelatest,substituteswillhavetobefound.”5

Imakenoclaimtoprescience.Iwassimplyclimbingontothebandwagonofwhatwasthen,intheaftermathof1973oilshock,theconventionalwisdom.Oilwasrunningout.Butitwasrunningoutinparticularcountriesatparticulartimes.Thebell‐shapeddepletioncurveapplied,ofcourse,toparticularnationsordeposits,butthatsimplyhighlightedtheneedtofindotheroil‐bearingnationsordeposits.Nowweappeartobeconfrontingtheglobalbell‐shapeddepletioncurve.

Iventureaprediction.Oil,inthequantityneededtokeepglobaleconomicgrowthonits20thcenturytrajectory,willnotbethere.Substituteswillbecomeavailabletoolittle,toolate.Asthelightsgooutindevelopedcountriesusedtohavinglightondemand,theconcernaboutglobalwarmingwillbeovertakenbytheconcerntogetthelightsbackon.

ThispredictionalsoliesintheVirtualcircle.Itrestsonnumerouscontestedassumptions.Butitislikelythatthetheoryofimpendingoilapocalypsewillbetestableagainsthardevidencemanyyearsbeforethetheoryofimpendingclimateapocalypse.

Riskmanagement:wherearethekeys?

Themythicaldrunknotoriouslysearchesforhiskeysnotinthedarkwherehedroppedthem,butunderthelamppostwherehecansee.Thisisanaptmetaphorformuchofwhatiswrittenonthesubjectofriskmanagement.

4MeandmyGod,SundayTelegraph,10.9.955TransportPlanning:visionandpractice,RoutledgeandKeganPaul,1981,p.71.

Figure4.Wherearethekeys?

LordKelvinfamouslysaid:“Anythingthatexists,existsinsomequantityandcanthereforebemeasured.”Thisdictumsitschallenginglyalongsidethatofanotherfamousscientist,PeterMedewarwhoobserved:“Ifpoliticsistheartofthepossible,researchistheartofthesoluble.Bothareimmenselypracticalmindedaffairs.Goodscientistsstudythemostimportantproblemstheythinktheycansolve[myemphasis].Itis,afterall,theirprofessionalbusinesstosolveproblems,notmerelytograpplewiththem.”

Risk,asnotedearlier,isawordthatreferstothefuture.Ithasnoobjectiveexistence.Thefutureexistsonlyintheimagination.Therearesomerisksforwhichsciencecanprovideusefulguidancetotheimagination.Theriskthatthesunwillnotrisetomorrowcanbeassignedaverylowprobabilitybyscience.AndactuarialsciencecanestimatewithahighdegreeofconfidencethatthenumberofpeoplekilledinroadaccidentsinBritainnextyearwillbe3000,plusorminusahundredorso.Butthesearepredictions,notfacts.Suchpredictionsrestonassumptions;thattomorrowwillbelikeyesterday;thatnextyearwillbelikelastyear;thatfutureeventscanbeforetoldbyreadingtherunesofthepast.Sadly,thehistoryofpredictioncontainsmanyfailures–fromthoseofstockmarkettipsterstothoseofvulcanologistsseekingtopredicteruptions,earthquakesandtsunamis.

Inthearealitbythelampofscienceonefindsriskmanagementproblemsthatarepotentiallysolublebyscience.Suchproblemsarecapableofcleardefinitionrelatingcausetoeffectandcharacterizedbyidentifiablestatisticalregularities.Onthemarginsofthiscircleonefindsproblemsframedashypotheses,andmethodsofreasoning,suchasBayesianstatistics,whichguidethecollectionandanalysisof

furtherevidence.Asthelightgrowsdimmertheratioofspeculationtoevidenceincreases.Intheouterdarknesslurkunknownunknowns.Herelieproblemswithwhich,touseMedawar'sword,wearedestinedto"grapple".

Thereisadistinction,frequentlyinsisteduponintheliteratureonriskmanagement,between"hazard"and"risk".Ahazardisdefinedassomethingthatcouldleadtoharm,andariskastheproductoftheprobabilityofthatharmanditsmagnitude;riskinthisliteratureishazardwithnumbersattached.So,relatingthisterminologytoFigure4,itcanbeseenthatriskcanbeplacedinthecircleilluminatedbysciencewhiletheothertwocirclescontaindifferenttypesofhazard.Typing"hazardmanagement"intoGoogleatthetimeofwritingyielded120,000hits;"riskmanagement",36.6million‐300timesmore.Butthenumberofpotentialharmsinlifetowhichusefulnumberscanbeattachedistinycomparedtothenumberthroughwhichwemustnavigateusingunquantifiedjudgement.TheKelvinist,approachtorisk,withitsconvictionthateverythingintheouterdarknessmustbequantifiable,canonlyleadtoself‐deception.AndfollowingMedawar’sdictumthatweshouldconfineoureffortstothequantitativelysoluble,threatenstodivertattentionfromlarger,morecomplicated,moreurgentproblemswithwhichweoughttobegrappling.

Finally

Twocontendersforthetitleofthelargest,mostcomplicated,mosturgentproblemfacingtheworldtodayareclimatechangeandpeakoil.Inthe1970swhenIwasworryingaboutpeakoil,climatechangedidnotfeatureasaseriousenvironmentalissue.Themeteorologicalworldwasonlybeginningtorecoverfromitsconcernaboutanimpendingiceage.ButinthepeakoildebatetodayoneencountersmanyofthesameconcernsthatinspiredbookssuchasLimitstoGrowth,TheCostsofEconomicGrowth,BlueprintforSurvival,andTheSocialLimitstoGrowth.

Inthe1980s,1990sandtheearlyyearsofthe21stCentury,withafewpauses,commoditypricesfellandgrowthresumed.Weretheneo‐Malthusianconcernsofthe1970smisguidedormerelypremature?Willtechnologyandmarketsprove,yetagain,thattherearenolimitstogrowth?Orwillsuchlimitsfrustratetheeffortsofgovernmentsandcentralbankerstoavertadepression?Thesequestionsarelikelytoreceivedifferentanswersindifferentpartsoftheworld.HowwilltheybeansweredinBrazil?PerhapsDeussejarealmenteBrasileiro?

Boasorte!