Monday, February 8, 2010
The Paradox of Imbalance
“Because systems at equilibrium are at a minimum of G and can do no work, a cell that has reached metabolic equilibrium is dead! The fact that metabolism as a whole is never at equilibrium is one of the defining features of life.” I can never forget the impression I was left with after reading these two statements from a Biology textbook. Perhaps the authors were deep in thought looking for a microcosm in Biology when they composed these or maybe they were just literally stating simple biological facts. In any case, however, I think that man’s commitment to developing models, systems, and predictive statistical tools is a satirical irony, if there was one, in the grander scheme of things in the Universe. A lot has been said after the financial crisis of 2008, on how the so called geniuses of Wall Street failed in doing their jobs, on how greed took the “financial system” to the edge of catastrophe, on how things could have been better if this or that was done; indeed there was a lot of blame to go around. But come to think of it, can man really attain for himself the sense of security, assurance and “perfection” that intellect and academic knowledge bring to his disposal? Is it really about the ends or is it about the means? Is the finish line the ultimate goal or is the struggle (in life) the only thing that actually matters? Models were instituted for their ability to dictate some degree of order in a system, but I doubt that these would provide the ultimate solutions to all the problems out there, because tomorrow is always uncertain. According to Murphy’s Law, “Anything that can go wrong will go wrong.” To discount even the minutest probability of occurrence of an undesirable event is a paradox within the context and practice of risk management. Who would need risk management if there was no risk to worry about at all? We can never discount the fact that among normally distributed frequencies there are anomalous events, skewed Gaussian bell curves and tail events that no definite confidence interval would cover and take into account. Uncertainty is risk, and models might mitigate the impact of undesirable events and conditions, but their counteractive effects are not equivalent to a precise tactical nuclear strike. Different problems have different symptoms. Models and systems might perform well above expectations and completely stop any crippling damage to a system or institution, but at the other end of the spectrum, they can definitely fall short as well. Man is destined to be humbled by the finiteness of his physical existence. That is why, I believe, that risk management is a continuing process, more so am I convinced that the Insurance industry is as relevant and critical as the type of civilization a society builds for its benefit. No, there is no ultimate weapon, no all-encompassing model that solves all the riddles of life, but even if there is no absolute shield to protect one against all the effects and manifestations of risk, man’s will to move forward (if not otherwise derived from his instinctual need to survive) and to create a better form (or model) of protection is already an assurance that once a model or system fails, a new and improved one will be there to replace it.