Managing risk in a creepy world

Didier Sornette and Peter Cauwels

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 1, 83-108

Abstract: Using the mechanics of creep in material sciences as a metaphor, this paper presents a general framework to understand the evolution of financial, economic and social systems and to outline visions for the future. Highly non-linear out-of-equilibrium open systems tend to exhibit long phases of slow apparent stable evolution, which are nothing but slow maturations towards instabilities, failures and changes of regimes. This framework emphasises the endogenous nature of the system's organisation towards crises, in which exogenous perturbations may just act as triggers when the system is ripe, if at all. With examples from history where a small event has had a cataclysmic consequence, this paper proposes a novel view of the current state of the world, avoiding the traps of an illusionary stability and simple linear extrapolation. It is explained how self-organised cooperative structures may catalyse macroscopic emerging structures that are resilient to stressors. The key insight is that non-linear processes, like creep, not only explain disintegration and collapse, but that they also are fundamental mechanisms that lead to structure and growth. In the end, global, systemic and multifaceted problems are likely to come to convergence in the following decades. But creativity, discoveries, success, value generation, and life will end up thriving somewhere in the available landscape, not at all uniformly and equally, but thrive nevertheless. The paper ends by explaining what risk managers at financial institutions, central banks, financial regulators, service providers and advisers as well as researchers should do in order to mitigate the risks to their firms and establishments.

Keywords: systemic crisis; change of regime; financial bubble; bifurcation; instability; precursors; prediction; scenarios; risk management (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:1:p:83-108

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