Systemic and Extreme Risks:Ways Forward for a Joint Framework

Hochrainer-Stigler, S. (2016). Systemic and Extreme Risks:Ways Forward for a Joint Framework. In: IDRiM 2016 7th International Conference on Integrated Disaster Risk Management Disasters and Development: Towards a Risk Aware Society, October 1-3, 2016, Isfahan, Islamic Republic of Iran.

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Abstract

Systemic risk is getting increasing attention in the science as well as popular press not to the least due to the growing complexity of the world as well as increasing data availability. The aim of this paper is to discuss selected topics in extreme and systemic risk modelling, measuring and management approaches.We find that from a purely quantitative modelling perspective, single and systemic risk assessment can be jointly performed via the concept of copulas and therefore can be embedded within an integrated framework without major difficulties. Consequently, we see single and systemic risks as not independent but indivisible which have to be assessed jointly. However, from a risk measure perspective we see some important differences as single risk measures focus on probability distributions while systemic risk measures focus on dependency measures. Hence, we call for ensembles of risk measures which should be a superior approach for studying single and systemic risks in complex networks as different events can cause systemic risk to realize (e.g. too big to fail, too interconnected to fail, keystone species etc.). From a risk management perspective, we conclude that the inclusion of human agents causes a fundamental difference in the management of systemic risks compared to other systems as their decisions are contingent and may cause unpredictable shifts due to mutual uncertainties that can evolve. Consequently, we argue for an iterative risk management approach similar to the call from climate change and adaptation science, for example discussed in the various IPCC reports. Last but not least, the idea of collective responsibility echoes the need to target risks that threaten whole societies. That such risks are reduced is foremost in the public interest and we therefore call for an institutional change that enables the effective handling of it in the future.

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