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

Leena Ilmola

International Institute for Applied Systems Analysis (IIASA)

The Global X Network

Structure

1. What to think about uncertainty, surprises and

resilience?

2. How to be prepared if we do not know what is going to

shake our country?

3. How to make wise decisions in this environment?

4. How to know what is needed?

5. How to make it happen?

1. WHAT TO THINK ABOUT UNCERTAINTY, SURPRISES AND RESILIENCE?

Everybody speaks about resilience

Uncertainty

The percieved probability of the financial market events in Sept 2008 was 0,00000000000000000000007

• Uncertainty with probability

– Metro train uncertainty

– Coconut uncertainty

• Fundamental uncertainty

– Black swans

– Xevents

Strategic planning

Risk management

Resilience building

What do we mean with resilience?

Awareness

Adaptation

Agility

Active learning

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

Performance (GDP)

Time

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

Sources of resilience

Policy resilience

Basic Assumptions of the policy

Economic growth will continue after a dip

Our economy is based on our existing international companies

Political powers do not want to shake growth.

We belong to EMU Climate change is mitigated

WHAT IF …… Next low growth period will be 20 years long

A comp. bankruptcy, B chopped and C is acquired by a Chinese competitor

Sudden power play or window of opportunity opens

EMU collapses Next Ice Age hits

Strong education

Agile fast reaction

Strong Trust

Long term trade partners

We have access to cheap energy

Supports Strongly ------------------------- > No Impact ----------------------------------------> Lethal Impact

Policy as a source of resilience

Basic Assumptions of the policy

Economic growth will continue after a dip

Our economy is based on our existing international companies

Political powers do not want to shake growth.

We belong to EMU Climate change is mitigated

WHAT IF …… Next low growth period will be 20 years long

A comp. bankruptcy, B chopped and C is acquired by a Chinese competitor

Sudden power play or window of opportunity opens

EMU collapses Next Ice Age hits

Strong education

Agile fast reaction

Strong Trust

Long term trade partners

We have access tp cheap energy

Supports Strongly ------------------------- > No Impact ----------------------------------------> Lethal Impact

Basic Assumptions of the policy

Economic growth will continue after a dip

Our economy is based on our existing international companies

Political powers do not want to shake growth.

We belong to EMU Climate change is mitigated

WHAT IF …… Next low growth period will be 20 years long

A comp. bankruptcy, B chopped and C is acquired by a Chinese competitor

Sudden power play or window of opportunity opens

EMU collapses Next Ice Age hits

Strong education

Agile fast reaction

Strong Trust

Long term trade partners

We have access to cheap energy

Policy vulnerability

Basic Assumptions of the policy

Economic growth will continue after a dip

Our economy is based on our existing international companies

Political powers do not want to shake growth.

We belong to EMU Climate change is mitigated

WHAT IF …… Next low growth period will be 20 years long

A comp. bankruptcy, B chopped and C is acquired by a Chinese competitor

Sudden power play or window of opportunity opens

EMU collapses Next Ice Age hits

Strong education

Agile fast reaction

Strong Trust

Long term trade partners

We have access tp cheap energy

Supports Strongly ------------------------- > No Impact ----------------------------------------> Lethal Impact

Basic Assumptions of the policy

Economic growth will continue after a dip

Our economy is based on our existing international companies

Political powers do not want to shake growth.

We belong to EMU Climate change is mitigated

WHAT IF …… Next low growth period will be 20 years long

A comp. bankruptcy, B chopped and C is acquired by a Chinese competitor

Sudden power play or window of opportunity opens

EMU collapses Next Ice Age hits

Strong education

Agile fast reaction

Strong Trust

Long term trade partners

We have access to cheap energy

3. HOW TO KNOW WHAT IS NEEDED?

No survivors; succeed or die

How to make it to be resilient to everything?

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

situations.

internet

nuclear

EMU

0 eur ENERGY

FEDERAL EU

Example: Finland - Resilient Portfolio

12

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 production

2. 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. 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 production

2. Security and resilience requirements for information networks

1. Invest in maintaining trust in the society

0 1 2 3 4 5 6 7 8 910111213141516171819202122232425

Portfolio size

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

4. HOW TO MAKE WISE DECISIONS IN THIS ENVIRONMENT?

Policy decisionmakers ask

Example: Discovery of sources of resilience

• Intermediate consumption

• Local owners • Small is beautiful

Example: Stress testing and policy options for South-Korea

5. HOW TO MAKE IT HAPPEN From words to action

Diagnosis, development, results

0

2

4

6

8

10O culture

O speed

O trust

O experience

S structure

S investment

S motivation

S liquidity

S layers

P focus

P key strategies

P environment

R comp. layer

R redundancy

R diversity

R mobility

Resilience profile Target Country A Country B

IF possible in making decisions

Chose 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: ilmola@iisa.ac.at