Improving finance and risk management foresight abilities: Growing past the ‘black swan’ mindset through integrative assessment

Abstract

Most professionals within finance and risk management, as in other professions, have sequentially failed to foresee and forecast large scale, large impact and rare events, as well as many more mundane real-world emergences. Often models and algorithms fail when most needed, as do most expert’s judgements. A common theme is that the world is complex and that therefore change within it is difficult — or as in the black swan mindset, impossible — to foresee and forecast. Either answer is not conducive to maintaining high career status and pay in the long run, especially when, as often happens, someone did ‘get it right’. This paper discusses several aspects of what doing better can look like for the majority of practitioners in finance and risk management professions — those who too often ‘missed it’. Particularly, it discusses what true integrative assessment within an iteratively holistic thinking mindset is. It discusses how integrative thinking differs from mere interdisciplinary or merely more networked thinking, and from modelling and other arithmetic approaches. Better models and arithmetic solutions alone cannot solve real-world foresight performance shortfalls because of a machine–human interface judgement problem. This paper will specifically address: Why are we doing badly? What can the finance and risk management professions do to build better forecasters? How does this apply specifically to financial institutions/risk managers? What should they do better or differently? How can education help develop better forecasters? What exactly is integrative thinking in the context of risk managers within a financial institution?