World Economic Forum Global Risk Report

Each year as the great and the good (?) gather at Davos for their annual love-in, the World Economic Forum publishes its Global Risk Report. This year’s was the tenth such report.

The Risk Report takes as its start point a survey (Global Risk Perception Survey) among the World Economic Forum’s multi-stakeholder communities of leaders from business, government, academia and non-governmental and international organizations. Nearly 900 questionnaires were completed between mid-July and end of September 2014. 41% of respondents said their area of expertise was “economics” and 23% “society”; 41% were from business, 18% academia and 15% NGO; 33% from Europe and 22% North America.

For each of 28 risks, respondents were asked to score on a scale of 1 to 7 how likely it was to occur globally in the next 10 years, and what would be the impact globally if it were to materialize. They were also asked about connections between risks, selecting between 3 and 6 pairs of risks, and connections between 13 trends and the risks.

The top 4 risks as rated by respondents in terms both of likelihood and impact were:

• Interstate conflict with regional consequences: a bilateral or multilateral dispute between states escalates into economic (e.g. trade/currency wars, resource nationalization), military, cyber, societal or other conflict (Likelihood 5.7, Impact 5.2)

• Water crises: A significant decline in the available quality and quantity of fresh water, resulting in harmful effects on human health and/or economic activity (5.2, 5.3)
• Failure of climate change adaptation: Governments and businesses fail to enforce or enact effective measures to protect populations and to help businesses impacted by climate change to adapt (5.3, 5.1)
• High structural unemployment or underemployment: a sustained high level of unemployment or underutilization of the productive capacity of the employed population (5.4, 5.0).

The lowest rated risks included both unmanageable inflation and deflation (a surprising vote of confidence in economic forecasting and management given the experience of 2008), failure of critical infrastructure and misuse of technology (again a fairly optimistic view to my mind).

The most impactful trends were climate change, rising income disparity, and weakening of international governance.

As it was the tenth annual risk report, the authors also looked back over the period:

• The implosion of global financial markets that few had forecast plunged the world into a socioeconomic crisis from which it is still struggling to emerge
• The world was nowhere near as interconnected: Twitter did not exist, Facebook was still a student-only service, and the iPhone and Android had yet to be launched; the power of interconnectivity drove the Arab Spring, underpinned the NSA cyber espionages scandal and facilitated the development of new business models.
• Increased interdependencies means people’s lives are becoming more complex and more difficult to manage, businesses, governments and individuals alike are being forced to decide upon courses of action in an environment clouded by multiple layers of uncertainty
• The importance of risk management and the need to build resilience has become a top issue for decision-makers who are recognizing that risks are no longer isolated but inherently dynamic in nature and crossing many spheres of influence
• Some slower-moving trends have continued inexorably: the last 10 years have brought conclusive proof that the earth’s climate is changing and that human activities are to blame

The risk report is a very enlightening read but perhaps suffers from some methodological problems. The survey approach has considerable limitations:

• The 28 risks and 13 trends were pre-identified meaning that weak signals from the fringe and other novel ideas were not addressed; some horizon scanning might have been a useful adjunct
• The scoring 1-7 may be interpreted differently or with different weights by respondents; some risk-averse people could have scored everything highly
• Timing: respondents will have been influenced by what was topical – eg had it been done this January then the cyber-attack on Sony would have affected some scores.

But perhaps the biggest problem is with the survey respondents. Clearly, almost by definition, they are not a typical group; there is a considerable bias towards the West; and towards older people (25% aged 50 to 59). The respondents could claim to be experts – but then we also know from Tetlock’s book “Expert Political Judgement” published in 2005 (see Gill Ringland’s blog “Getting Better at Predicting the Future”) that experts are not very good at predicting risk. The scoring reflects a conservative perspective with over-confidence in “the system” and its ability to manage the economy and society. Really what it tells us is what the g&g think – and so could be used by others to identify missed risks and opportunities and to exploit them.

Written by Huw Williams.

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