What is risk? For our purposes, risk is some event or set of events that interferes with a planned process or activity. Generally, in the business world, organizations seek to mitigate risks, to balance the need for quick response to changing conditions against risks that can harm a process’ performance. As administrators modify a process, especially a modern complex process with many moving parts, the changes introduced increase the possibility that unforeseen adverse events will occur. The authors define this evolution as “dynamic complexity.” Anyone who has worked in the information technology (IT) industry on a software system modified over many years will recognize the effects of dynamic complexity: patches, upgrades, and so on can produce unstable operation, poorer performance, increased tendency to fail under stress, and so on.
In this book, the authors show a new method of their design that seeks to identify future risks to existing systems, to show points of weakness that will result in failures if not addressed. Their system builds on work by Abu el Ata in perturbation theory [1,2]. He successfully applied this theory to produce a practical solution to the three-body orbit problem, a problem insoluble using Newton’s laws and classical calculus. Abu el Ata’s insight is that perturbation theory may be generally applicable to any complex system via an emulation of that system.
Briefly stated, the technique defines the elements of a process, and then emulates operation of the process in time. Perturbation theory is applied through an iterative mechanism wherein an element’s behavior is disrupted as the emulation proceeds. The effect of the perturbation is calculated and output. Successive iterations of impacts on the elements of a process ultimately disclose weak points, or singularities, that must be addressed to prevent future chaotic behavior.
The book is organized into three parts. Part 1 looks in great detail at what risk is and traditional techniques of risk management. Dynamic complexity is introduced early to show how it results in surprises, risks that were unanticipated by static risk analysis done during system development.
Part 2 describes the authors’ new process for emulating systems, using perturbation theory to disclose the effects of dynamic complexity. An emulator is built using “causal deconstruction,” the idea that all effects have a cause, that a complex system can be understood only by breaking it down into component parts that can be treated via emulation. Here also the authors present the mathematics of perturbation theory as used in their emulations. They discuss chaos theory and how it applies to the identification of singularities, with examples drawn from their experience in real-world application of their theories.
Part 3 provides case studies of their process applied to such diverse systems as credit card transaction processing, supply chain management, changes to the French postal system to adapt to changing use of mail, analysis of France’s healthcare system to improve its efficiency, an investigation of the financial collapse of 2007-2008, and an analysis of Greece’s financial problems. The book concludes with a discussion of disruption as a tool to remedy situations where crises have become chronic because a system has become too dynamically complex to be fixed using conventional means.
From the theoretical description and case studies, one gets the impression that the process has potential merit in a number of situations, especially for industrial systems such as transaction systems or complex networks typified by mail handling. In my opinion, the process is weaker when applied to systems where political decisions are involved. The analyses of the 2007-2008 and Greek financial crises prescribe a number of technical ways to avoid future problems, but fail to consider the root cause of the crises: poor political decisions. In the case of the 2007-2008 crash, in the 1990s the US federal government encouraged or coerced mortgage lenders to offer increasingly risky loans. We see the creation of the various derivative bundles as the financial industry’s attempt to mitigate the risk imposed by political policy. Unfortunately, the bundle approach proved useless when foreclosure rates reached a critical point. In the case of Greece, the country has a long history of repeated defaults on public debt and the European Union (EU) has no effective way to enforce its rules regarding public debt. How can any method provide prescriptions to avoid future risks when the initial conditions contain fundamental flaws?
A couple of other minor criticisms: there are a number of grammatical errors, and many of the charts were done in color but are presented in shades of gray and reduced to fit the page size, making them unreadable. That aside, the book offers a detailed and thorough analysis of risk, and a new approach to analyze and approach the mitigation of risks. The techniques described are well worth considering by large organizations utilizing complex systems that evolve over time to adapt to changing conditions.