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New Risk Management Avoiding Bias and Blindness. Presentation to Project Management Institute Monterey Bay Chapter March 21, 2013 Bill Wiltschko. We are Mere Humans. We ( even statisticians) are terrible at statistical thinking We are worse when thinking about extreme events

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New Risk Management Avoiding Bias and Blindness


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    1. New Risk ManagementAvoiding Bias and Blindness Presentation to Project Management Institute Monterey Bay Chapter March 21, 2013 Bill Wiltschko

    2. We are Mere Humans • We (even statisticians) are terrible at statistical thinking • We are worse when thinking about extreme events • We are worse yet at understanding the game around probabilistic events --but there are measures we can take to compensate

    3. What Would You Do – Case 1? Get $900 for sure Or 90% Chance to get $1,000

    4. What Would You Do – Case 2? Lose $900 for sure Or 90% Chance to lose $1,000

    5. The Four-Fold Pattern

    6. Which is Scarier? The risk of permanent disability from a given child vaccination is 0.001% Or One of 100,000 children will be permanently disabled by a given vaccination.

    7. What is the Ratio of Deaths from These Causes?

    8. AlarLove Canal

    9. Boeing 787 Batteries • “The battery that burst into flames two months ago on a Boeing Co. 787 jet in Boston experienced dramatic power fluctuations and other failures its designers had considered practically impossible, according to the latest report by U.S. air-safety regulators.” • “In another section, the report reiterates that Boeing initially determined that the likelihood of a 787 battery emitting smoke, without catching on fire, was one in 10 million flight hours.” Wall Street Journal, March 7, 2013, Based on NTSB Interim Factual Report 03-07-2013

    10. Fukushima • “In a discussion of the earthquake and tsunami that produced the 2011 Fukushima nuclear disaster in Japan, Taleb writes: "Not seeing a tsunami or an economic event coming is excusable; building something fragile to them is not." And in the case of the Fukushima disaster, authorities seem to be responding appropriately: not by developing better predictive models, but by building smaller and less vulnerable reactors. “ Nassim Nicholas Taleb on Accepting Uncertainty, Embracing Volatility, Knowledge@Wharton, December 17, 2012 • “According to NRC documents, between 42 percent and 59 percent of the most risk-significant accident scenarios aren't even modeled in nuclear risk assessments. The NRC and the nuclear industry have relied on risk models that leave them half blind to the very events they're attempting to avoid.” US News, July 1, 2011

    11. Black Swan • The Story • Black Swan characteristics • Outlier, high-consequence, rational only in retrospect • One Black Swan Lesson

    12. One Black Swan Lesson Absence of Evidence ≠ Evidence of Absence

    13. Black Swan Quadrant Complex payoff is nonlinear function of value x, say x2 or ex or worse

    14. Payoffs • “Trueand False [or right and wrong] play a poor, secondary role in human decisions; it is the payoff [benefit or harm] from the True and False that dominates – and it is almost always asymmetric.”

    15. Human Phenomena Are Often Not Gaussian • “Fat tails,” e.g. Power Law • Non-linear payoffs • Lack of independence • Of variables, instances, and with other systems

    16. Fragility “Triad”

    17. Examples

    18. What Fragility Looks Like Zero Benefit Benefit This is Fragility Increasing values

    19. What Antifragility Looks Like • “Antifragility implies more to gain than to lose, equals more upside than downside, equals favorable asymmetry.” • Equivalent to buying a put or call option • Having “out-sized” benefit is dependent on • Recognizing antifragility • Recognizing when you have a right-half situation Benefit Zero Benefit Increasing values

    20. How To Detect Fragility • Do a sensitivity analysis • For example, if add 1000 cars to traffic in a city, does drive time become linearly affected or drastically affected? • For example, if predictions are wrong by double the error band, • Will the benefit/harm increase non-linearly? • Will benefit increase more than harm, or vice versa? (compare results of the two sides of the error band)

    21. Antifragility Lessons • “Fools game” to guess probability or statistics of extreme events (cannot be measured or estimated) • “What’s the worst that has happened in the past?” • “Let’s use the statistics tools in Excel” • “All our observations are independent” • “We will use error bands (e.g. ± 5%) to guard against bad predictions” • Vulnerability can be measured and improved • Failure Modes and Effects Analysis (FMEA) • Mitigation of effects (i.e. risk)

    22. Forecasting - Two Teams • Team 1 - For your reference, you have been provided with the following formula for calculating the total amount of money (T) the investment will make three months after the initial investment (I) given the rate of return (R): T=I*R • Team 2 - For your reference, you have been provided with the following formula for calculating the total amount of money An the investment will make three months after the initial investment An-1 given the rate of return r. ++ • How did the two teams’ behavior differ?

    23. Last Word(s) • “Technology is the result of antifragility, exploited by risk-takers in the form of tinkering and trial and error, with nerd-driven design confined to the backstage. Engineers and tinkerers develop things while history books are written by academics;” • Suggested National Entrepreneur Day message: “Most of you will fail, disrespected, impoverished, but we are grateful for the risks you are taking and the sacrifices you are making for the sake of economic growth of the planet and pulling others out of poverty. You are at the source of our antifragility. Our nation thanks you. [italics in original] • “To be sophisticated you need to accept that you are not so.” • “While the gene is antifragile, since it is information, the carrier of the gene is fragile, and needs to be so for the gene to get stronger.” • “If you take risks and face your fate with dignity, there is nothing you can do that can make you small.”

    24. References • Thinking, Fast and Slow by Daniel Kahneman • The Black Swan by Nassim Nicholas Taleb • Antifragile by Nassim Nicholas Taleb Bill Wiltschko bill@wiltschko.org 831 596-5073