Enhancing resilience of systems to individual and systemic risk: Steps toward an integrative framework
Individual events can trigger systemic risks in many complex systems, from natural to man-made. Yet, analysts are still usually treating these two types of risks separately. We suggest that, rather, individual risks and systemic risks represent two ends of a continuum and therefore should not be analyzed in isolation, but in an integrative manner. Such a perspective can further be related to the notion of resilience and opens up options for developing an integrated framework for increasing the resilience of systems to both types of risks simultaneously. Systemic risks are sometimes called network risks to emphasize the importance of inter-linkages, while, in contrast, individual risks originate from individual events that directly affect an agent and happen independently from the rest of the system.
The two different perspectives on risk have major implications for strategies aiming at increasing resilience, and we, therefore, discuss how such strategies differ between individual risks and systemic risks.
In doing so, we suggest that for individual risks, a risk-layering approach can be applied, using probability distributions and their associated measures. Following the risk-layering approach, agents can identify their own tipping points, i.e., the points in their loss distributions at which their operation would fail, and on this basis determine the most appropriate measures for decreasing their risk of such failures.
This approach can rely on several well-established market-based instruments, including insurance and portfolio diversification. To deal with systemic risks, these individual tipping points need to be managed in their totality, because system collapses are triggered by individual failures. An additional and complementary approach is to adjust the network structure of the system, which determines how individual failures can cascade and generate systemic risks. Instead of one-size-fits-all rules of thumb, we suggest that the management of systemic risks should be based on a careful examination of a system’s risk landscape. Especially a node-criticality approach, which aims to induce a network restructuring based on the differential contributions of nodes to systemic risk may be a promising way forward toward an integrated framework.
Hence, we argue that tailor-made transformational approaches are needed, which take into account the specificities of a system’s network structure and thereby push it toward safer configurations for both individual risks and systemic risks.
S. Hochrainer-Stigler, C. Colon, G. Boza, S. Poledna, E. Rovenskaya, U. Dieckmann, Enhancing resilience of systems to individual and systemic risk: Steps toward an integrative framework, International Journal of Disaster Risk Reduction 51 (2020) 101868