Creative ways to communicate the nature of risk – with Hector Ibarra
In the course of his work, our most recent podcast guest has come across some interesting examples of people looking to express how risk translates into everyday life
There is some irony in how communicating the idea of risk carries risks of its own – as Donald Rumsfeld discovered when he talked in early 2009 of ‘known knowns’, ‘known unknowns’ and ‘unknown unknowns’ in the context of the invasion of Iraq. The former US secretary of state may have been ridiculed in some quarters but his known/unknown framework is actually one ancient Greek philosophers would have recognised.
Regardless of any difficulties involved, communicating the idea of risk is a significant part of the job of our most recent guest on The Value Perspective podcast. Hector Ibarra is CEO of Global Parametrics, which was founded to develop financial products that give non-governmental organisations (NGOs) the best chance of responding quickly and effectively to natural disasters in the world’s poorest countries.
Without getting too caught up in complex definitions, parametrics is a branch of mathematics where calculations are influenced by particular variables or ‘parameters’. Extended to the world of insurance or hedging, then, it involves developing contracts where payments to an NGO, such as the Red Cross, are triggered by predefined events – for example, an earthquake or a cyclone of a particular intensity.
Arguably, then, Ibarra is operating in the realm of ‘known unknowns’ – natural disasters will happen but where, when and to what degree? – and you can hear more about this in the podcast. Human nature being what it is, though, people tend to ‘anchor’ on more recent events – meaning they are more inclined to worry about, say, earthquakes after one has just occurred, with the perceived threat receding with time.
So what can be done to recalibrate people’s understanding of risk – whether that be in Global Parametrics’ own sphere of climate or elsewhere? To illustrate what he believes is missing in his specialist area, Ibarra first points to how pilots are trained to cope with extreme events. “When they go into flight simulators, pilots are tested through what are called ‘realistic’ scenarios – even low-probability ones,” he says.
“But this is creating a view of the whole set of risks – giving the trainees an understanding of whatever scenario someone piloting an aeroplane can face. Now, we do not have that in climate because it is very complex – the uncertainty around how the climate will behave over the next 50 years is very high because there is not enough agreement about certain trends.
“I can illustrate to people how certain places could be flooded and create consciousness about extreme events but I do not have a way to tell a concrete story about how certain regions will see certain impacts. There is a consciousness about the importance of climate but we do not yet have the quality of the storyline to facilitate a more mature conversation and enable people to act in an efficient and rational way.”
Nevertheless, in the course of his work, Ibarra is coming across some highly creative attempts at communicating the nature of risk – most notably in a session run by the Red Cross at COP 25, the United Nations Climate Change Conference held in Madrid at the end of last year. “They have created this game that is played with dice where they are trying to create hypothetical scenarios,” he says.
“The game is played sequentially with a lot of groups and involves changing assumptions to see how people react – and encouraging them to draw conclusions on the uncertainty of risk. And the results are interesting as, once the players factor in the rules of the game and they see if they understand the weight of the risk, they tend to converge into solutions that point to an alignment with risk management mentality.
Ibarra has come across plenty of other examples too – further games, simulations and even visual art – of people looking to express how risk translates into everyday life. “So people are starting to think proactively about risk,” he concludes. “To return to the pilots analogy, however, clearly you need a person to run through the meaning of risk in their life so they can internalise it.
“And you need to provide a very comprehensive view of what risk means to that person – otherwise, they might associate with risk tangentially or partially and then that will not trigger any decision-making. Still, I do think people are thinking creatively about how to socialise the concept of risk – and, most importantly, about decision making on risk and the different implications.”
Please note: Blue Orchard, the impact investment firm in which Schroders owns a majority stake, is a significant shareholder in Global Parametrics.
Juan Torres Rodriguez
Research Analyst, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
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