Power curves natural and economic disasters - McKinsey Quarterly - Strategy - Globalization

Power curves natural and economic disasters - McKinsey Quarterly - Strategy - Globalization: "‘Power curves’: What natural and economic disasters have in common
Parallels between the failures of man-made systems, such as the economy, and of similarly complex natural ones offer fascinating food for thought.

JUNE 2009 • Michele Zanini

Source: Strategy Practice
Energy, Resources, Materials, Environment article, Power curves natural and economic disasters
In This Article

This short essay is a Conversation Starter, one in a series of invited opinions on topical issues. Read the original essay, then let us know what you think. The author has also responded to the main themes in the letters, and asked a few follow-up questions below.

Executives, strategists, and economic forecasters, somewhat sheepish after missing the “big one”—last year’s global credit crisis—turned to the lexicon of natural disasters, describing the shock as a tsunami hitting markets and as an earthquake shaking the world economy’s foundations. Shopworn as these metaphors may be, they aptly capture the extreme and unexpected nature of the circumstances. In fact, the parallels between the dynamics and failures of man-made systems, such as the economy or the electricity grid, and similarly complex natural ones are bringing new ideas to economic forecasting, strategic planning, and risk management. This trend may have profound implications for policy makers, economists, and corporate strategists alike.

Scientists, sometimes in cooperation with economists, are taking the lead in a young field that applies complexity theory to economic research, rejecting the traditional view of the economy as a fully transparent, rational system striving toward equilibrium. The geophysics professor and earthquake authority Didier Sornette, for example, leads the Financial Crisis Observatory, in Zurich, which uses concepts and mathematical models that draw on complexity theory and statistical physics to understand financial bubbles and economic crises."