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From risk to opportunity Lecture 6 John Hey and Carmen Pasca.

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1 From risk to opportunity Lecture 6 John Hey and Carmen Pasca



4 We start with a short video clip about Global riskGlobal risk

5 Lecture 6 Political and social approaches to risk: the plan for today First, the Game (Monty Hall’s Three Door Problem) which I showed you last week. Those of you who chose not to switch doors are not the first to think that way. Many famous people have done so. The crucial point to note is that the host opens a door behind which he knows that there is not the car. There are obviously initially three possibilities - or cases, each of which has probability 1/3: case 1: The car is behind door 1 case 2: The car is behind door 2 case 3: The car is behind door 3

6 Lecture 6 Political and social approaches to risk: the plan for today There are obviously initially three possibilities – or cases, each of which has probability 1/3: case 1. The car is behind door 1 case 2. The car is behind door 2 case 3. The car is behind door 3 Suppose you have chosen door 1. In case 1 the host can open either of the other doors. If you switch you do not win. In case 2 the host has to open door 3. If you switch you win. In case 3 the host has to open door 2. If you switch you win. So in two cases if you switch you win; in one case if you switch you lose. So if you switch you increase your probability of winning from 1/3 to 2/3. You could also look at

7 Lecture 6: the revision lecture Second, the revision lecture: it is scheduled for next week in order to help you to clarify the concepts and theories that we have analyzed in the first part of the course and it will help to prepare you for the mid-time exam. One important thing about that: for preparing this exam, you need use only the information contained in the slides. You do not need to memorize all the details, but understanding the common thread of this course – the interdisciplinary approach to risk, from history to economics and finance. You need to look carefully at the conclusion of each lecture.

8 Lecture 6: the revision lecture I give you some examples: When I talked about risk approaches in the various social sciences, the important thing to remember here is that each social science has its own method of analysis. When we talked about probabilities, we emphasized the distinction between objective and subjective characteristics of probabilities When we discussed about rationality, we spoke about axioms and about consistency between axioms. About the economic parts, like the Independence Axiom, you will discuss that with Professor Hey when he comes back for his part of the course (lectures 8, 9, 10, 11 and 12).

9 Lecture 6 Political and social approaches to risk: the consideration of risk This lecture looks at the way that sociologists and political scientists consider risk perception and risk assessment as a key influence on our society. Risk today is marked by three major characteristics: risks are manufactured, risks are uncertain and risks are global. Also, we view risk in terms of regulative policies in the context of the “world society”. We focus on the social implications of these policies on environment, health, employment and finance because the social and political implications are strongly interconnected.

10 Lecture 6 Political and social approaches to risk: the effect of politics Politics influences how markets operate. Often the most unpredictable economic events are political in origin, the result of flagging political willingness or the incapacity to maintain a consistent and predictable economic environment. Today, four trends dominate the global investment environment: the interconnection of financial markets, increased reliance on off shoring, deteriorating national influence and energy dependence.

11 Lecture 6 Political and social approaches to risk: Risk of politics Anticipating the risks associated with each of these trends requires asking the right questions about how institutions’ and leaders’ preferences determine policy choices and, in turn, economic outcomes. Politics can make many economic decisions look foolish in hindsight. This is especially true in countries where autocratic leaders seem to personally steer policy and where quantitative data is often adulterated.

12 Lecture 6 Political and social approaches to risk: Anticipating risks The Committee Of Sponsoring Organizations (COSO) of the Treadway Commission is a joint initiative of the five private sector organizations and is dedicated to providing thought leadership through the development of frameworks and guidance on Enterprise Risk Management (ERM), internal control and fraud deterrence. ERM framework encourages companies to measure risks and make trade-offs based on their risk appetites/attitudes. For investors exploring emerging markets, the potential for rapid political shifts makes calculating those trade-offs a moving target. Global and country-level politics can act independently or interactively to alter the economic environment.

13 Lecture 6 Political and social approaches to risk: Risk of politics Conducting a political risk-analysis can turn uncertainty into calculable risk. Why? Businesses are often affected by political decisions in the countries where they operate, at home and abroad; all companies (should) factor the political environment into planning scenarios. You can find the Political Risk 2012 map

14 Lecture 6 Political and social approaches to risk: Risk of politics Political stability and regime’s market orientation are the conditions necessary for responding to shocks. “Decisiveness”, Credibility” or “Predictability”: the trade-off. Decisiveness represents the capacity to change policy rapidly and shift the political environment. How can the regime optimise both decisiveness and political stability? How can the regime avoid variation in political risk?

15 Lecture 6 Political and social approaches to risk: the government of risk and globalisation Globalization can be understood as a network of processes that tend to "denationalise“ those things which had been established as "national" in the nineteenth and twentieth centuries: policies, markets, capital, culture, through new institutions, new instruments of government and new subjectivities. Also, the understanding of the process of globalization should focus on relationship between openness and risk. The new governance of risks in the actual global context requires new methods of calculating and assessing risks for avoiding country risks, crises and crashes.

16 Lecture 6 Political and social approaches to risk: regulation Changes in the regulatory environment, local attitudes to corporate governance, reaction to international competition, labour laws, and withholding and other taxes, to name but a few, may all be influenced by shifts in the political landscape. High quality corporate governance helps to underpin long- term company performance. An example: the UK has some of the highest standards of corporate governance in the world, which makes the UK market attractive to new investment.

17 Lecture 6 Political and social approaches to risk: regulation Governments and politicians are crucial in determining the environment in which enterprises operate and in regulating markets. They can change the risk in any market by changing the rules and changing and enforcing the law. With international trade increasingly important, politicians also have a crucial role in working on international agreements which alter the risk in global markets

18 Lecture 6 Political and social approaches to risk: political uncertainty and globalisation For social and political actors it is necessary to take into account the consequences of uncertainty: uncertainty generates new social risks in terms of inequalities, poverty, natural catastrophes. Globalisation generates not only negative aspects but also opportunities or positive aspects. We observe in the global marketplace a constant push and pull (a dynamic tension) between government, business and civil society. How is possible to achieve the goals of sustainable globalisation?

19 Lecture 6 Political and social approaches to risk: politics and policy Risk is an implicit part of political decision making. Politics and policy: machinery for increasing risk. How do practicing political actors turn randomness into order and uncertainty into political risk? When you talk about the link between risks and politics you necessarily speak in terms of collective decision, regulation, or policies. When you talk about the emergency of social risks you speak in terms of political decisions and institutions.

20 Governing the future: governmentality and Risk. Sociologists like Foucault, Giddens and Beck argued on a new style of governance in modernity. This new style is characterized by the “ensemble formed by the institutions, procedures, analyses and reflections, the calculations and tactics that allow the exercises of power”. An important outcome at the political level is the transition in the role of the State throughout the developing modern period. Lecture 6 Political approaches to risk: governmentality and risk

21 Lecture 6 Political and social approaches to risk: Foucault Governmentality is a double process: social and political. On the one hand, governments try to control their citizens by a whole catalogue of measures that include the means whereby populations can be accurately counted, assessed, judged, disciplined and categorized. On the other hand, policy aims at instilling appropriate values to achieve particular outcomes. This is summed up in the compound notion of governmentality. From Wikipedia: Governmentality is a concept first developed by the French philosopher Michel Foucault in the later years of his life, roughly between 1977 and his death in 1984, particularly in his lectures at the Collège de France during this time. The concept has been elaborated further from an "Anglo-Neo Foucauldian" perspective in the social sciences, especially by authors such as Peter Miller, Nikolas Rose, and Mitchell Dean. Governmentality can be understood as: the way governments try to produce the citizen best suited to fulfill those governments' policies; the organized practices (mentalities, rationalities, and techniques) through which subjects are governed Governmentality may also be understood as: the "art of government" [ ;the "how" of governing (that is, the calculated means of directing how we behave and act); "governmental rationality“; "a 'guideline' for the analysis that Michel Foucault offers by way of historical reconstructions embracing a period starting from Ancient Greece right through to modern neo-liberalism“; "The Techniques and strategies by which a society is rendered governable"

22 Lecture 6 Political and social approaches to risk: Governability via insurance The logic of public or national insurance is one means through which both aspects can be linked. It includes the basis for a more precise estimate of the needs and ability to pay of particular groups, and the justification for different treatment of different risk categories. During the late nineteenth and early twentieth centuries, governments were able to accommodate to political pressures by extending and nationalizing. The existing friendly society (private insurance companies) effectively turn risk-sharing schemes into social insurance.

23 Lecture 6 Political and social approaches to risk: Welfare states This became the foundation of European Welfare States. The current pressures on welfare spending have led to retrenchment of these systems. In some contexts, this has meant a retreat from welfare inclusiveness to precise actuarial calculation (calculations based on probabilities) with the denial of benefit to those who have imperfect contribution records. Things have changed. In an ideal typical post- industrial society, economic growth rates are lower and more uncertain. Stable employment in the manufacturing sector is no longer available on a mass scale, with implications for semi- and un-skilled workers and for the class structure and the political interests associated with it.

24 Lecture 6 Political and social approaches to risk: insurance In others, it has led to the privatisation of areas of social insurance and the targeting of state help more accurately on clearly defined groups. Social insurance issues and institutions for managing them have played an important role in modern politics. Why? Because politics should take into account the social preferences of different groups about social policies.

25 Lecture 6 Political and social approaches to risk: the passage from Welfare society to the reflexive society Beck and Giddens anticipated the transformation of the nature of Welfare State from insurance to risk. Beck and Giddens maintain that the process of modernisation has spawned a unique collection of humanly produced risks “...generated by the individualisation of society...” The concept that individuals can no longer depend on continuity and security, creating a need to embrace change and uncertainty by constantly recreating their lives based on past experiences (reflexivity), is the basis of Giddens’ work.

26 Lecture 6 Political and social approaches to risk: reflexive modernity “...newly formed social relationships and social networks now have to be individually chosen; social ties, too, are becoming reflexive, so that they have to be established, maintained, and constantly renewed by individuals” (Beck, p.97). Reflexive choices according to Beck analysis are related with institutional dynamism on the one hand and self – referentiality and critical reflection on the other.

27 Lecture 6 Political and social approaches to risk: Beck’s “the Risk society” The term Risk Society is a new term by German sociologist Ulrich Beck introduced in his book Risk Society: Toward a New Modernity, first published in German in 1986 and translated into English in In this book, Beck point out the distinction between two societies: the industrial society and the risk society through the idea of modernity. Modernity is very much coextensive with industrial society and the new reflexive modernity with the risk society.


29 Lecture 6 Political and social approaches to risk: Beck fundamental concepts Reflexive society is the risk society based on the distribution of risks and uncertainty about the future. Inside this society the old social classes are replaced by the communities around dangers. Reflexivity is the process of the late modernity in which the motor of social change is the agency, the individualization or creation of autonomous identities ( self monitoring of life). Reflexive Modernity is dominate by the agent primacy Self is agent reflects on itself Structural reflexivity: agent reflects on social structures (rules and resources) Networks of flexibility, communications and technologies, Knowledge based Client–centered–co-production

30 Lecture 6 Political and social approaches to risk: Beck fundamental concepts Reflexive modernization A term which refers to the way in which advanced modernity ‘becomes its own theme’, in the sense that ‘questions of the development and employment of technologies (in the realms of nature, society and the personality) are being eclipsed by questions of the political and economic “management” of the risks of actually or potentially utilized technologies- discovering, administering, acknowledging, avoiding or concealing such hazards with respect to specially defined horizons of relevance’ (see his Risk Society: Towards a New Modernity, 1992.

31 Lecture 6 Political and social approaches to risk: Beck fundamental concepts In contrast with reflexive modernity, traditional societies were dominated by the influence of traditional institutions and structures. The Church as shaping center of meaning and purpose in life. Extended family and village community had a place in terms of role and identity. Early modernity (17 th century): the structures and institutions of these traditional societies were challenged in the name of individual freedom and autonomy. Churches became less critical, extended family replaced by the nuclear family. Nation state – in the place of village came the corporate, bureaucratic state, which impersonally, took responsibility for the ordering of people’s lives.

32 Lecture 6 Political and social approaches to risk: Beck For Beck, the concept of risk society is a theoretical frame. The frame comprises three inter-related components: risk, individualisation, and reflexive modernisation. Also, in Beck’s theory of risk society the keystone element is the role of science. Beck sees a dynamic that is driven by an increase in risks and in the ability of science to detect increasingly minute risks, leading to a fundamental re-ordering of social positions in society, and to a transformation in the cultural meanings of risk. Separating the present era from its past are new species of risk that, unlike in the past, are no longer circumscribed spatially or temporarily.

33 Lecture 6 Political and social approaches to risk: Beck’s Risk society Beck’s “Risk Society” is not a society in which we live more dangerously, but a society where the issue of industrial and technological risks have become firmly established in the political field. In Industrial Society, the central political issue was the distribution of goods and services, the distribution of wealth. In Beck’s Risk Society, it is the existence of risks and their distribution that dominate the society. Before the Risk Society institutions dominated the social order. In Reflexive Modernity (which corresponds to the Risk Society), individuals themselves become the motor of social change.

34 Lecture 6 Political and social approaches to risk: The transformation of Risk Society Beck argued that the risks of nuclear radiation, many modern technologies, the greater mobility of diseases, global warming, invasive species and many other challenges expose virtually all people around the globe to common risks. The risk society, then, is now World Risk Society, to cite the title of one of Beck’s many follow-on books on the topic.

35 Lecture 6 Political and social approaches to risk: Beck’s typology of risk Risks, as opposed to older dangers, are consequences which relate to the threatening force of modernisation and to its globalisation of doubt. Is necessary to distinguish between what Beck consider to be natural risks and what they have come to define as manufactured risks. Natural Risks: the dangers came from such as floods and epidemics. Manufactured risks: are created by industrialisation, pollution and other urban poverty-related conditions.

36 Lecture 6 Political and social approaches to risk: Beck’s typology of risk He analyses contemporary society at the structural and action levels, blaming the increase in manufactured risk on science. “Science has become the protector of a global contamination of people and nature. In that respect, it is no exaggeration to say that in the way they deal with risks in many areas, the sciences have squandered until further notice their historic reputation for rationality” (Beck, 1992, p.70).

37 Lecture 6 Political and social approaches to risk: Beck’s typology of risk Social risks, which defined the problems and solutions of industrial society are still here. A number of changes in population, family structure, labor markets generated new social risks (social exclusion, income inequalities, the increase in the absolute and relative numbers of elderly people has implication for social care). New social risks are defined as the risks that people now face in the course of their lives as a result of the economic and social changes associated with the transition to a post-industrial society. They are combined with new risks arising from science and technology, which can be summarized in one phrase: the risk of the disaster resulting from the global contamination of man and nature.

38 Lecture 6 Political and social approaches to risk: Beck and Contemporary risks Contemporary risks are invisible and often hard to measure. Contemporary risks involve social inequalities. As Beck (1992, p 35) put it “wealth accumulates at the top, risks at the bottom.” Contemporary risks are not just limited to national boundaries. Is globalisation risky? Or opportunity?

39 Lecture 6 Political and social approaches to risk: Conclusions Politics has a dramatic effect on the way that risk impacts on society and the world. Politicians can reduce risk by various schemes of social insurance and by manipulating the population. They can also increase it. Politicians can make a huge difference on the risks faced by companies. Changes in society (either induced by political actions or by technological change) are changing the way that risk impacts on members of society. In present modern society it is less true that institutions affect the impact of risk on its members. In a paradoxical way it is individual members of society who can change the way that risk impacts on them and their fellow members. Risks are different now than they were before, partly as a result of political, but also social, changes. Risk is becoming globalised.

40 Lecture 6 Goodbye!

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