People love predictability. A long time ago, we tried to portray reality in clear models that allow us to control our world. At least that’s the point. According to Theo Cockin, this sense of control is largely an illusion. And in this illusion lurks another big risk: Companies that believe that all risks can be eliminated do not always take into account the underlying uncertainties.
Theo Cockin, 56, has been dealing with risk for nearly three decades. After various risk management positions at Nederlandse Gemeenten, ING and Rabobank, he founded Cardano in 2000, a company that covered pension risk. Since 2010 he has also been Professor of Risk Management at Victoria University.
He has also written numerous books and numerous articles on risk management and pension funds, and is a much coveted speaker and has produced numerous films, including Boom-Bust-Boom with Terry Jones of Monty Python and a list of notable speakers such as Nobel Laureate Daniel Kahneman Robert Shiller, Paul Krugman, and Willem Buiter.
Overall, Cocken is one of the most influential thinkers in the field of pensions and risk. And these risks have been mishandled structurally, as Jeroen told Brokema recently, who spoke to Cockin in his book. Pioneers in financePodcast: “I see people are mistaken for risks. They constantly monitor risks closely through statistical models and then be surprised at what happens.”
The problem is that people tend to overestimate themselves and their ability to control the world. We model reality and then think that we can predict what will happen.
People promote themselves as entrepreneurs by saying that they are thinking in terms of opportunities. According to Kocken, that’s by no means always a good idea. “What I always say from finance is: We shouldn’t think in terms of opportunities at all. As an econometricist, I was educated in opportunities and discovered in practice that those opportunities were always underestimated: We don’t know them.”
Instead, according to Cocaine, we should think about the consequences: “What do I not want? What cannot I lead as an organization, what risks do I have to remove and what risks can I accept?”
From prediction to suggestion
This does not mean that all risks should be avoided – rather, on the contrary: Cockan tries to explain that risk is an unavoidable part of life. In order to deal with this fundamental uncertainty as effectively as possible, it is necessary to look beyond economic models: We have to move from forecasting to proposition. We shouldn’t think we know what will happen, but just imagine what might happen.
“Economics must also become a science because it is now a form of astrology.”
“At ING we were really more involved in scenario thinking,” says Cockin. “Think larger, imagine worlds, and think about how you would behave when things go wrong.”
However, due to the regulations, this method of risk management has increasingly disappeared, with all of its consequences. We’re getting more and more regulations saying, “You have to count things like this and that and you have to follow those rules.” This was also one of the causes of the financial crisis, because we began to rely too much on one-dimensional rules and formulas. ”
They are certainty
Cockin wanted to do it differently. That’s why he founded Cardano. The company manages risks without assuming that these risks can be completely excluded. With the company, he wants to contribute to a community that is “resilient to fundamental uncertainty.”
“Later on, I also began to realize more and more that it was a complex field,” he says of Cardano’s philosophy. “Thinking in terms of complexity and chaos theory – that the world is constantly moving between order and chaos and how to deal with it – fits perfectly with the task.”
Kocken also tries to contribute to this mission through his role as a professor. He does not shy away from the strong criticism of the academic world: “Economics must also become a science because it is now a form of astrology.”
According to Kocken, education actively contributes to maintaining the idea that the world is both configurable and predictable. While the world proves the opposite over and over again. For example, Cocken was surprised how many people were completely taken by the financial crisis in 2008.
I still read every week about the people who call it black swan. Then I think: Black Swan? This has happened a lot. When I worked at ING, I saw it happen constantly in countries like Argentina and Brazil. When you read the books of John Kenneth Galbraith, you can read about the history of all that boom and bust. They are all the same. If you read Hyman Minsky, you can see exactly how the process continues regarding the constructive and euphoric debt that comes from that debt. Then people are surprised? Then I think, “What’s the problem with our education?”
Instead of giving the illusion of predictability, education should contribute to our imaginations so that people are not surprised every time the unexpected happens. “People are no longer flexible in the face of uncertainties at all. They can no longer imagine themselves at all. Predictability can no longer be imagined. Imagine something much more beautiful than forecast. Prediction for astrologers and proposition for economists.”
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