Not every top-risks list is cut from the same cloth. This matters when you consider whether to remain skeptical of a list or put some of its insights to work for you.
In Part I of this article, I raised five questions to ask when evaluating top-risks lists and their close relatives, outlook, forecast, prediction, trends and-so-on lists.
Here I’ll go into more detail on each of those questions, using examples of different kinds of lists. These are among the better-known lists. Although they represent a wide variety of approaches, they are by no means an exhaustive group.
Perspective Matters
1) What perspective is the list written from? Is it focused on industry trends? Market predictions? Geo-political trends?
Who is the intended audience of each list? (Does it include you?) And what is the list-maker hoping to achieve? Is it just to get attention to sell their services? To help members of a trade group get on the same page and work together? To guide investment or operational strategies?
Broadly speaking, most lists come from think tanks, consultancies, trade associations, investment banks and brokerages, insurers, and financial policy institutions (like the Philadelphia Fed, which surveys professional forecasters each quarter, or the Institute of International Finance’s survey -done jointly with EY- of member firms and other top banks each summer).
The Australian Risk Policy Institute uses a frame that I quite like: Top Vulnerabilities. “Vulnerabilities” in many ways is a better framing than “risk” for many of these lists because vulnerabilities more broadly describes challenges ahead, when the concept of risk is more useful when it’s defined in a more detailed way. For example, the risk that rising interest rates might affect a company’s ability to refinance its debt, or prompt an emerging-markets debt crisis, or tank the housing market.
Some are intended to inform financial market investment decisions, while others are aimed at generating insights that will be relevant to policy making, companies making operational decisions, or association members.
To be sure, many of these lists are marketing tools intended to draw attention to the list maker. This approach can bias a list toward risks that are the most likely to grab headlines, whether or not they are the most likely or impactful. Saxo Bank’s tongue-in-cheek nod to this reality is its always interesting Outrageous Predictions list, which despite its name is thoughtful and relevant.
You’ll find a treasure trove of lists from consultancies meant to inform clients as well as attract attention. Eurasia Group’s annual top-risks list mixes political risks with economic risks. Control Risks breaks out political, security, terrorism, cyber, and operational risks throughout the year. Look for other lists developed by analysts at other consultancies, many with “risk” in their names: Stratfor/RANE (security), Risk.net (operational risks), IHS Markit (top themes in global banking), Kroll (risks and opportunities); global fraud and risk report), to name just a few.
These are useful because of the focused risk expertise of these companies. Yet it’s important to look at risks from other perspectives as well -whether experts in other fields or generalists, who may see the same risk from a very different angle.
Media also are regular sources of lists -in no small part to fill their pages during the end-of year/New Year’s holidays when news slows down. Publications and columnists Reuters Breakingviews does an annual Predictions list and collection of essays. The Economist Intelligence Unit has its Risk Outlook. Bloomberg runs annual top risk coverage. Columnists at many publications try their hand at forecasting from time to time as well.
Methodology
2) Who decided what went on the list and in what order? An analyst, a group within one company, a survey of many participants? How were questions asked?
These are important questions when you look at how each list was developed. Some were done based on surveys of thousands of participants; others were based on the alchemy of intuition and data used by one or a handful of analysts. Some focus on one region or industry; others are global.
Survey-based lists offer you a look into the wisdom of the crowd. They can be even more helpful when they combine that global view with more granular breakdowns.
I’ve found PWC’s annual CEO Survey to be particularly useful in the years (like 2022) when it breaks out responses from CEOs in different countries and regions. Top concerns vary widely around the world, and understanding these differences is essential for companies and policy makers who work globally. PWC also carries out a regular Pulse Survey to track the changing sentiment and priorities of business executives from various perspectives.
Many survey-based lists offer a set of risks from which to choose or prioritize. This cuts both ways: it makes people more likely to answer and finish the survey since clicking options is easier than conjuring them. But it also puts certain risks top-of-mind and frames them a certain way. And even when respondents have the option to write in “other” risks, those are likely to get short shrift.
The Council on Foreign Relations’ Preventive Priorities Survey, based on responses from more than 6,000 survey participants around the world, focuses narrowly on traditional “hard” security and conflict. The Atlantic Council does an annual “top risks and opportunities/global foresight” list based on internal analysis. The US government’s Director of National Intelligence does an Annual Threat Assessment based on the insights of the intelligence community. Each approach has its own value.
Industry-specific lists from trade associations include NACD’s Governance Outlook Report, Association of Internal Auditors’ OnRisk report, and other groups. Look closely at who is being surveyed. CEOs? CFOs? CIOs? A mix of the above? Each group will be concerned with different issues. Many of these are useful aggregations of many members.
The number of individual analysts coming up with top-risks lists is long –far too many to attempt a representative list here. One of my favorites, however, is John Mauldin, who is completely up-front about a painful truth: “ ‘Forecast’ is a polite synonym for ‘guess.’ The better ones are informed guesses, but still inherently uncertain.” Nouriel Roubini (aka Dr. Doom) is closely watched on geopolitical and systemic risks.
Parameters
3) What are the parameters including time frame and risk definitions? Does the list consider impact, likelihood, or both?
Be cautious about making inferences from broadly described risks, like the name of a country or a broad business term. It’s easy to misinterpret these. Doing a workshop I was leading, one of the participants said technology was his top concern; initially, I assumed he meant strategy related to broad technological changes, digital disruption and the like –but he meant simply maintaining and upgrading the equipment at his company.
A risk description can involve very different things depending on what you care about most, particularly in polarized situations. When you see “political polarization,” or “terrorism,” remember that it may not mean what you think it means.
For example, a majority of Americans believe that “US democracy is under threat” –but they cannot agree on the reasons. A recent CBS News/YouGov poll found that 43% of Democrats see Republicans as “enemies who will destroy your way of life” and 48% of Republicans see Democrats that way. In other words, each envisions the danger –and the solutions to it—opposite from the other. That’s a problem.
“Terrorism” is another loaded, hot-button risk term. Some people think mainly of foreign terrorists like the 9/11 attackers; others worry about domestic terrorists, especially white supremacists.
Another frequent flyer on top-risks lists in recent years is “monetary policy errors.” For some people, that means raising interest rates too soon or too much, while for others, it’s the opposite: too little, too late. As the US Federal Reserve prepares to increase interest rates, this particular risk will begin to reveal which perspective is in the money.
The answers to top-risk questions change depending on the timeframe. A shorter timeframe changes the likelihood because it shrinks the parameters. It also affects how markets, policy makers, and CEOs prioritize their responses.
Throughout the year, the Good Judgment Project, a crowdsourcing initiative, attaches extremely specific time frames to its forecasting questions. Good Judgment also offers training in making accurate forecasts -useful if your organization is looking to make its own predictions
Protiviti’s Executive Perspectives on Top Risks 2022, which focuses specifically on business risks of concern to CEOs, includes both one year and ten year top risks in its survey of more than 1400 business leaders.
Similarly, the World Economic Forum Global Risk Report includes short and medium-to-long term time frames.
It’s also very much worth looking at lists made throughout the year, especially in a volatile environment. In 2020, for example, by the time most of the New Year’s lists were out, the Covid-19 pandemic had eclipsed them all.
Bloomberg’s Global Risk Briefing is updated throughout the year, as are crowdsourced forecasts via Wikistrat and Metaculus.
Evolution
4) How did this list shift from past years? Which risks moved up or down in the rankings and why?
When it comes to expanding your imagination to be able to conceive of things that others might not see, I agree that accuracy of outcomes is not necessarily the most important thing. That’s especially true when awareness of a risk leads to policy and business strategy changes that reduce the likelihood and/or impact of a threat.
So, even more important than evaluation is evolution. How did the things that kept a list-maker up at night change from year to year? What does this say about how leaders are doing in dealing with risks over time?
Evaluation
5) Did predictions from past years end up happening? (Corollary: How much does that matter?)
Do those who made predictions evaluate how well they did? If they’re trying to sell you services based on how good they are at predicting outcomes, it matters a lot.
But if the point of the exercise is to broaden the scope of possible scenarios, it may not be as important whether the forecaster hit the nail on the head or not. What’s more, an analyst who is right on one issue may then see other future risks through the same lens, which may or may not be appropriate.
I wrote about Byron Wien’s Top Surprises list in The Gray Rhino in part because of his novel approach –a back-of-the-envelope comparison of his predictions with those of market participants—but also because he took a look back each year to see which predictions panned out and which didn’t. He has a thick skin about criticism when he was wrong, precisely because his aim is to uncover under-appreciated possibilities.
Now done jointly with Blackstone Chief Investment Strategist Joe Zidle, the list describes its approach, a healthy one: “Our definition of a Surprise is an event that we believe is probable, with a better than 50% chance of taking place, but that the average investor would assign only around a 33% probability. While we speculate on the events of the year to stretch our own thinking and that of our clients, we don’t intend to get a high score. Even so, seeing that some of our non-consensus views were on target is gratifying.”
And that brings us full circle to the question of what the list in question is for. That purpose should be clear. If it’s not, find one that is.
Read more about risk perceptions in my new book, YOU ARE WHAT YOU RISK: The New Art and Science of Navigating an Uncertain World.
This article is part of my LinkedIn newsletter series, “Around My Mind” – a regular walk through the ideas, events, people, and places that kick my synapses into action, sparking sometimes surprising or counter-intuitive connections.
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