Catastrophic Risk

Business Strategy for Managing Turbulence in a World at Risk

Richard Alfred

• Publisher: Productivity Press
• Year: 2021
• ISBN:
  9781000434675
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Gestión

Imagine that you are a corporate executive or small business owner in a midwestern city under water after weeks of extreme weather and drenching rainfall. Infrastructure has been damaged beyond repair, transportation arteries are closed, and your supply chain is broken. Families have been driven from homes, food and water are in short supply, and people are becoming unruly. Government agencies are not in a position to help. Declining revenue and partisan antipathy fueled by ideological differences have eroded confidence in government. The city is in total disrepair and unable to deliver desperately needed services. It is edging toward implosion and community leaders have turned to you for help.

Catastrophe that would have been unthinkable in earlier times is a reality in a world coming out of pandemic and facing existential threats such as climate change, inequality and global conflict. Catastrophic Risk: Business Strategy for Managing Turbulence in a World at Risk challenges business to step up and assume a pivotal role with communities under stress due to prolonged exposure to risk. When powerful societal forces meet behavior that deters response to risk, the consequences of risk are exacerbated. The compounding effect of behavior on risk has opened an important role for business in mobilizing people and communities in times of crisis. It is a role that cannot be fulfilled, however, without purpose, strategy and plans sufficiently robust to overcome the threat of risk. To prosper in this environment, business will need to make a significant contribution to society as well as to deliver financial performance. For companies, this will mean involvement in community in ways that significantly depart from current practice. For leaders, it will mean new skills—contextual sensitivity, a greater understanding of behavioral dynamics, and enhanced capacity to relate to people on an emotive basis.

This book is about the relationship between risk, societal forces and human behavior—a relationship informed by the sciences that is critically important for business. Its goal is two-fold: to bring catastrophic risk to the world of business and to further business engagement in service to the common good.

I
SETTING THE CONTEXT

Chapter 1
A World at Risk

There is no beginning without an end, no day without night, no life without death. Our whole life consists of the difference, the space between beginning and ending.

Angela Merkel
Chancellor of Germany, 2019

Our world is a rapidly changing amalgam of convention and chaos. In 2019, when this book was conceptualized and writing began, the driving force in catastrophic risk was climate change. COVID-19 changed everything. The coronavirus took the world by storm, spread with lightning speed, and outran efforts toward containment. Almost overnight, it shut down business and commerce, put millions out of work, brought economies to the brink of collapse, and dramatically reshaped human life. Life after COVID-19 would not return to a pre-COVID “normal.” A new normal would evolve and a retrospective look in its wake would reveal much about how we think and act. It would disclose that we are vulnerable to risk that can run the table on human life, we are interconnected as part of a world community, and we are capable of heroic deeds and episodes of stunning ignorance.

Lethal as it was, the pandemic was not risk at the level of climate change. It ran its course, exacted horrible suffering, and was eventually brought under control through human intervention. Climate change is different. It has evolved over time and much of its impact—both actual and potential—is already beyond human intervention. It is the very essence of catastrophic risk. When combined with societal forces and human behavior, its ultimate effect on civilized life is beyond our imagination. Scientists describe it as a “new abnormal—searing temperatures, rising sea levels, extreme weather events, flooding and drought that could lead to a collapse of civilization, and extinction of much of the natural world if met by reticence.¹

The upshot of the “new abnormal” is a dangerous sense of paralysis in which complexity on a scale never before realized splinters the civilized world into disparate groups that hinder one another. Catastrophic risk is an almost insurmountable problem in and of itself. When compounded by human behavior which exacerbates its effect, it defies resolution. Business is an entity with an extraordinarily important role in a world edging toward crisis. Its impact will not be felt, however, in the absence of a comprehensive understanding of catastrophic risk and behavior that deters response to risk. In the pages that follow, the reader is introduced to hazards and behavioral dynamics that bring catastrophe to the domain of risk.

What Is Risk?

Risk is part of every human endeavor. It is ubiquitous, enduring, and subject to multiple interpretations, some of which are contradictory. Is it risk only if it is quantifiable? Is it a function of probability? Is it an outcome or consequence? Is it positive or negative? Is it associated with reward and opportunity? Does it involve danger or threat?

Conventional Risk

Early thinking on risk centered on a distinction between quantification and uncertainty. Pioneering thinkers such as Knight (1921) defined only quantifiable uncertainty to be risk.² Almost a century later, Holton (2004) argued that two dimensions must be present for risk to exist: uncertainty about the outcome of an event and importance—the outcome must be important.³ Multiple conceptions of risk are at work in organizations today ranging from negative to positive, possibility to probability, and objective to subjective. Adding to its complexity are different forms of application in multiple disciplines from insurance to engineering to portfolio theory.

Risk has an attribute of paradox. There is a strong association between risk and negative occur-rences and between risk and reward.⁴ A primary focus of organizations is the elimination of risk, but it is almost impossible to achieve gains without some degree of risk. Risk also has quantifiable and non-quantifiable dimensions. In the objective domain, it can be quantified in terms of probability.⁵ In the subjective domain, it is an amalgam of feelings and emotions that cannot readily be quantified.⁶ Risk can be differentiated according to scale and consequence. Strategic risk is associated with high-level decisions focused on organizational purpose, objectives, and resources.⁷ Operational risk is centered on day-to-day operations that get work done.⁸ While seemingly less important than strategic risk, operational risk can impair performance if neglected because of an excessive focus on strategy.

Numerous forms of risk are at work in organizations—competitive risk, economic risk, legal risk, quality risk, reputational risk, pure risk, speculative risk, compliance risk, and resource risk. Most of the forms fall into the realm of unsystematic risk—risk related to a particular firm that can be reduced or eliminated through action taken by the firm.⁹ When risk shifts to factors beyond a firm’s control, systematic risk is introduced—risk embedded in events affecting aggregate outcomes such as the impact of extreme weather on a supply chain.¹⁰ Risk beyond organizational and industry boundaries driven by randomly occurring factors introduces yet another realm of risk—stochastic risk.¹¹ Examples include naturally occurring phenomena, unresolved conditions caused by human activity, and calamitous events orchestrated by humanity. The distinction between unsystematic risk, systematic risk, and stochastic risk is a function of scale, control, and impact. Unsystematic risk is specific to, and controlled by, an individual firm. Systematic risk is part of total risk caused by factors beyond the control of a firm. Stochastic risk is rooted in random factors beyond industry and market control; its impact is large-scale and volatile.

Catastrophic Risk

On January 23, 2020, the Doomsday Clock was moved to 100 seconds to midnight—an index of humanity’s proximity to destroying itself by twin threats of nuclear weapons and climate change.¹² Going into 2020, the hands stood at two minutes to midnight, the closest they had been in the 75 years the Bulletin of the Atomic Scientists has been issuing numerics on the Doomsday Clock. Multiple factors went into the 100-second setting: the U.S. decision to withdraw from the Intermediate Range Nuclear Forces treaty with Russia, Iran’s departure from the nuclear-control agreement reached under the Obama Administration, and North Korea’s announcement that it no longer felt bound by a self-imposed nuclear moratorium.¹³ On par with the threat of nuclear war was the ascent of human-caused climate change from an academic curiosity to a global threat. A sixfold increase in greenhouse gas emissions and warming of 1°C over a half century brought climate change center stage to world leaders.¹⁴

It’s 2020, and we’re closer than we have ever been to annihilation. It’s worth noting, that if Doomsday does arrive, it will not be the result of a global plague we did not see coming and were helpless to stop, or of an asteroid strike like the one that wiped out the dinosaurs. Instead, we will be the authors of our own end, a species, in effect, committing global suicide.

(Jeffrey Kluger, January 23, 2020)¹⁵

Catastrophic risk is global in scope and perceptible in intensity.¹⁶ When it becomes transgenerational in scope (affecting future generations) and “terminal” in intensity, it is classified as existential risk.¹⁷ Global catastrophic risk will extinguish the majority of life on Earth, but humanity could still potentially recover. Existential risk, on the other hand, will extinguish humanity entirely and prevent any chance of civilization recovering.

Bostrom has distinguished four classes of catastrophic risk as presented in Table 1.1.¹⁸ Catastrophic and existential risks threaten the survival of intelligent life and have become a global priority. For the purpose of simplicity, these risk forms are merged under the heading catastrophic risk throughout the book. They are interchangeable and their impact is terminal—they are a threat to humanity and all forms of life.

Human extinction	Humanity goes extinct prematurely before reaching technological maturity.
Permanent stagnation	Humanity survives but never reaches technological maturity.
Flawed realization	Humanity reaches technological maturity but in a way that is dismally and irremediably flawed.
Subsequent ruination	Humanity reaches technological maturity in a way that provides promising future prospects, yet subsequent developments cause the permanent ruination of those prospects.

Habitats of Catastrophic Risk

Global catastrophic risks take the form of risk caused by humans (anthropogenic risks) and risk caused by natural forces (non-anthropogenic risks).¹⁹ Natural forces include disasters of epic proportion which threaten life such as an outbreak of disease, supervolcanic eruptions, and earthquakes. Domains of risk caused by human activity include the spread of disease, climate change, global conflict, social inequality, and rogue technology—the potential for innovations such as biotechnology and artificial intelligence to grow out of control and become an insurmountable problem. The effect and consequences of risk are compounded by human behavior that deters response to threats. Illustrations are abundant—for example, the paralyzing effect of polarization that divides society into subcultures with divergent views that constrain collective action in response to threats.

Humanity has survived risk posed by natural forces for hundreds of thousands of years. Scientific models suggest that th...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• Foreword
• Preface
• Acknowledgments
• About the Author
• Part I Setting the Context
• Part II Challenges and Deterrents
• Part III Shaping the Future
• Index