The uncertainty of systemic risk

Abstract

This article responds to calls in the literature for a major shift in approaches to explaining systemic risk. It applies insights from multiple disciplines, but departs from the monistic positivist research orientations of many previous contributions by taking a carefully argued pragmatic approach from management science to address non-linear intractability. A new operational behaviour paradigm of systemic failure is summarized, in which notions from evolutionary economics and complexity science are combined with an interpretation of entropy as risk uncertainty, to explain systemic risk in terms of catastrophic bifurcations simulated in the operational state-space of an agent-based computational model representing a highly simplified global financial system. Then the key features of a recent programme of theory development research based on this approach are described, in which the results of a simulation of Iceland's financial system collapse were validated with empirical data from annual reports over that period. Findings suggested that a lack of diversity in participation strategies among system participants may have been a key operational mechanism of catastrophic tensions over supply versus demand for financial services, confirming academic commentary on that event. In conclusion, the operational definition of systemic risk proposed in this research is argued to be a practical basis on which future research may be able to construct computational solutions capable of measuring systemic risk more accurately by predicting systemic failure of the global financial system in more detailed and realistic simulations for diverse applications such as financial system regulation and cyber-warfare impact analysis.

The (De-)Contextualization of Geographical Knowledge in Forest Fire Risk Management in Chile as a Challenge for Governance

“…It is very common in the risk management literature to describe risks as complex, ambiguous, and uncertain in order to differentiate them epistemologically (Brugnach & Ingram, 2012;Cabantous, 2007;Ericson & Doyle, 2004;Ilin & Varga, 2015;Johansen & Rausand, 2015;Knight, 1921;Müller-Mahn et al, 2018;Perrow, 1986Perrow, , 1972. In short, the three characteristics of risk can be distinguished as follows (see also Rosa et al, 2014): Complexity characterizes a condition where it is difficult to identify and quantify exactly the potential causal relationships between aspects of risk and possible adverse effects of decision making on risk.…”

“…The fear of pyromaniac acts in the region in response to economic repression and exclusion is growing for years (see also the statements of economic actors quoted in Saavedra, 2017). 4 Systemic risks are uncertain until they materialize and therefore cannot be calculated ex ante (Ilin & Varga, 2015). To address them, a readjustment of risk perception is needed.…”

La (des)contextualización del conocimiento geográfico en el manejo del riesgo de incendios forestales en Chile como un desafío para la gobernanza

“…Es muy común en la literatura describir riesgos con estas tres características (Knight, 1921;Perrow, 1986;Ericson & Doyle, 2004;Cabantous, 2007;Brugnach & Ingram, 2012;Johansen & Rausand, 2015;Ilin & Varga, 2015;Müller-Mahn et al, 2018), que pueden distinguirse en pocas palabras de la siguiente manera (véase también Rosa et al, 2014): La complejidad caracteriza una condición en la que es difícil identificar y cuantificar exactamente las posibles relaciones causales y los efectos adversos específicos de la toma de decisiones sobre el riesgo. La ambigüedad corresponde al fenómeno de que los distintos agentes conocen el riesgo de manera diferente, lo que da lugar a una variabilidad de las interpretaciones legítimas del riesgo con respecto a las observaciones y evaluaciones de datos idénticos.…”

“…Los riesgos sistémicos son inciertos hasta que se materializan y, por lo tanto, no pueden calcularse ex-ante (Ilin & Varga, 2015…”

How does CEO power and overconfidence affect the systemic risk of China’s financial institutions?

“…Numerous studies have explored the factors that affect financial institutions' systemic risk with the primary objective of decreasing systemic risk and improving the financial system's stability. The firm-level key determinants of systemic risk have been thoroughly studied for the financial system (e.g., Ilin and Varga, 2015;Zeb and Rashid, 2019;Braiek et al, 2020;Cao, 2020;Choi et al, 2020;Kapinos, 2020;Wen et al, 2020). However, studies have ignored the behavioral perspective, which can provide useful new insights, including the overconfidence and CEO power perspective.…”