How to make wise decisions in the global environment of ... · decisions in the global environment of surprises? ... capabilities or development ... • Complex Adaptive Systems theory

How to make wise decisions in the global environment of surprises?

December 8th 2014Leena IlmolaAdvanced Systems Analysis Program

Structure

1. Where do surprises come from?

2. How do we know what is needed?

3. How can we be prepared, when we do not know

what is going to shake our country?

4. How to make it happen?

1. WHERE DO SURPRISES COME FROM?Everybody speaks about resilience

Centralized financial power

Sources: The Economist Jan 14, 2014http://en.wikipedia.org/wiki/List_of_government_budgets_by_country

Challenge

Speed of change is increasing

Share price development of Nokia

Different uncertainties - different challenge

GDP

Employment

Modified from Walker W.,E., Marchau V.A.W.J., Swanson D.: Addressing deep uncertainty using adaptive policies, Technological Forecasting and Social Change 77 (2010) 917-923

Different uncertainties - different challenge

GDP

Employment

Modified from Walker W.,E., Marchau V.A.W.J., Swanson D.: Addressing deep uncertainty using adaptive policies, Technological Forecasting and Social Change 77 (2010) 917-923

Epistemological and ontological uncertainty

The percieved probability of the financialmarket events in Sept 2008 was0,00000000000000000000007

• Uncertainty with probability– Metro train uncertainty – Coconut uncertainty

• Fundamental uncertainty– Xevents– Black swans

Strategic planningRisk managementResilience building

Complex Adaptive Systems Theory

Holland, John H.(2006) Studying Complex Adaptive Systems. Journal of Systems Science and Complexity 19 (1): 1-8. Anderson P. (1999) Complexity Theory and Organization Science, Organization Science, Vol 10 No 3, pp. 216-232

• Non-linear emergent behavior– Path dependence

• Maximize the fit with changing landscape

• Interaction and feedback loops– Connectivity– Intensity

• System boundaries- Boundary shifts and their impact

• Feedback Management– Positive and negative feedbacks

• Self organization– Import of energy– Constraints

• Schemata: – Rules and recipes– Co-evolution– Perception of environment

Ecosystems resilience

Resilience is degree of:1) The system is able to

absorb disturbance and still maintain its purpose and operations

2) System is capable of self-organization

3) System can build and increase the capacity of learning and adaptation

Folke (2006 p. 259-260)

Gunderson and Holling 2002

What do we mean by resilience?

Awareness

Adaptation

AgilityActive learning

Capability to succeed in the environment that is dominated by uncertainty.

Performance

Time

Business as usual per-formance

2. HOW DO WE KNOW WHAT IS NEEDED?No survivors; succeed or die

The space of uncertainty

Our solution is to find a subset of actions that increase our capability to succeed in all of these potential situations.

internet

nuclear

EMU

FEDERAL EU

1. Shock environmentsDescriptions of shock environments

2. Success strategies for every shock environment

List of activities, capabilities or development items that produce success in the shock environment

3. Assessment of activities’ benefitsWeb enquiry

4. Potential portfolio that will produce success whatever happens

RPM method for quantitative analysis

x3p1

p2

p3

x5x1

x4

x7

x2

x6

Current activities that are sensitive for change

Watch List

New activities that seem to be relevant in many extreme situations

Activities that are valid in many extreme situations

Core Contingent

Curr

ent

New

Portfolio

EMU collapse

Federation of European Countries

Seven Shocks Portfolio Method

Ilmola and Rovenskaya (2014) Three experiments: exploration of unknown unknowns in foresight, Technology Forecasting and Social Change (in press)Liesiö J. and Salo A. (2012) Scenario-based portfolio selection of investment projects with incomplete probability and utility information, European Journal of Operational Research 217 (2012) 162-172, 2012

Pragmatic List of Actions

Current activities that are sensitive

for change

Watch List

New activities that seem to be

relevant in many extreme

situations

Activities that are valid in many

extreme situations

Core Contingent

Curr

ent

New

List of potential actions derived from uncertainty > leading criteria: resilience and fit with current development activities

Portfolio

Please note that these actions are already included in the existing policies/strategies

Ilmola and Rovenskaya (2014) Three experiments: exploration of unknown unknowns in foresight, Technology Forecasting and Social Change (in press)Liesiö J. and Salo A. (2012) Scenario-based portfolio selection of investment projects with incomplete probability and utility information, European Journal of Operational Research 217 (2012) 162-172, 2012

Example: Finland - Resilient Portfolio

25. Invest in trade outside the EU 24. Create Finnish Mittelstand to replace Nokia

23. Exploit our neutral and apolitical reputation 22. Specialize in fast piloting

21. Make Finland the center for Asian and Russian connections 20. Establish a Nordic monetary union

19. Switch to exchange economy with no currency 18. Train workforce as the reserve for global companies

17. Manage a single global service 16. Commercialize forest into an investment product

15. Build more nuclear power to hedge against price shocks 14. Let the forest industry disappear

13. Invest in new rapidly exploitable knowledge combinations 12. Finland a global IT-service center for public authorities 11. Invest in sustainable well-being know-how

10. Develop services that require little energy 9. Create an ICT-ecosystem 8. Tax incentives for urban local food

7. Tax incentives for energy self-sufficient housing 6. Promote innovation for a rainy-day

5. Increase respect for every type of work 4. Prepare to increase self-sufficiency in food production

3. Take care of small networked production2. Security and resilience requirements for information networks

1. Invest in maintaining trust in the society

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Portfolio sizeIIASA/ 7 Shocks and Finland project Liesiö & Ilmola

25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

16

Country level resilienceThe project that consisted of 200 actively participating experts and 30 decision makers from 20 government and industrial organization (From Prime Minister’s Office to the Federation of Financial Industries) generated a shared language and concrete ideas about the potential solutions.• Finnish Government chose risk & resilience as one of

the cross cutting themes of the Governments Futures Review 2030. The Review report is

– the basis of all strategic planning in government agencies

– the basis of the next Government Program– The Resilient Education Experiment

• Finnish Parliament asked IIASA to produce a specific foresight study on futures of the welfare society if economic growth is slowing down to +/- 1 % for the next 20-year period http://tulevaisuus.2030.fi/en/agile-finland/

3. HOW CAN WE BE PREPARED, WHEN WE DO NOT KNOW WHAT IS GOING TO SHAKE OUR COUNTRY?

Sources of resilience

Example: Discovery of sources of resilience

• Intermediate consumption

• Local owners• Small is beautiful

Example: Stress testing and policy options for South-Korea

4. HOW TO MAKE IT HAPPENFrom words to action

Diagnosis, development, results

0123456789

O cultureO speed

O trust

O experience

S structure

S investment

S motivation

S liquidityS layers

P focus

P key strategies

P environment

R comp. layer

R redundancy

R diversity

R mobility

Resilience profileTarget Country A Country B

IF possible in making decisions

Choose the option that

• Increases portfolio’s diversity• Increases multi-skilled people• Builds in automatic adaptation • Decentralizes operations and decision

making• Speeds up reactions• Increases connections to external world

Avoid solution that

• Ties your resources for long term investments

• Is producing/using only experts• Is only maximizing efficiency• Relies on one perception of the future• Increases centralization of systems

Thank You!

Please contact: [email protected]

Key references• Ecosystems theory

– Holling C.S. (1993) Resilience and stability of ecological systems How adaptation builds complexity– Holling C.S. (2001) Understanding the complexity of economic, ecological and social systems. Ecosystems 4, 390-405– Gunderson, L.H., Holling C.S. (2002) (Eds.) Panarchy. Understanding transformation in Human and natural systems, Island Press,

Washington D.C.– Folke C. (2006) The emergence of a perspective for social-ecological systems analyses Global Environmental Change 16 pp. 253-267)

• Complex Adaptive Systems theory– Anderson, P (1999) Complexity Theory and Organization Science, Organization Science, VOL 10, No.3, May-June 1999 pp 216-232– Berger P.R. & Luckmann T (1966) The social construction of reality, Doubleday, New York– Holland J. (1995) Hidden Order: How adaptation builds complexity, Addison-Wesley, Reading MA– Luhman N. (1995) Social Systems, Stanford, Stanford University Press

• Uncertainty– Lane D. and Maxfield R.R. (2005) Ontological uncertainty and innovation. Journal of Evolutionary Economics (2005) 15:3-50– Walker W.,E., Marchau V.A.W.J., Swanson D.: Addressing deep uncertainty using adaptive policies, Technological Forecasting and

Social Change 77 (2010) 917-923