Yesterday, our Chief Scientist Robin Hanson presented at the Society for Risk Analysis 2010 Annual Meeting. We mention it because risk management is one of the primary domains of problems to which our Foresight platform can be applied.

Robin is known for thinking big and thinking about the future, and his talk yesterday was representative in both regards. Here’s the abstract:

Catastrophic Risk Forecasts from Refuge Entry Futures
Speculative markets have demonstrated powerful abilities to forecast future events, which has inspired a new field of prediction markets to explore such possibilities. Can such power be harnessed to forecast global catastrophic risk?

One problem is that such mechanisms offered weaker incentives to forecast distant future events, yet we want forecasts about distant future catastrophes. But this is a generic problem with all ways to forecast the distant future; it is not specific to this mechanism. Bets also have a problem forecasting the end of the world, as no one is left afterward to collect on bets. So to let speculators advise us about world’s end, we might have them trade an asset available now that remains valuable as close as possible to an end. Imagine a refuge with a good chance of surviving a wide range of disasters. It might be hidden deep in a mine, stocked with years of food and power, and continuously populated with thirty experts and thirty amateurs. Locked down against pandemics, it is opened every month for supplies and new residents. A refuge ticket gives you the right to use an amateur refuge slot for a given time period. To exercise a ticket, you show up at its entrance at the assigned time. Refuge tickets could be auctioned years in advance, broken into conditional parts, and traded in subsidized markets. For example, one might buy a refuge ticket valid on a certain date only in the event that USA and Russia had just broken off diplomatic relations, or in the event a city somewhere is nuked. The price of such resort tickets would rise with the chance of such events. By trading such tickets conditional on a policy that might mitigate a crisis, such as a treaty, prices could reflect conditional chances of such events.

Okay, so that’s not a traditional business problem. But if you’re an executive who’s uncomfortable with uncertainty, you should get in touch with Consensus Point.

Just before the Labor Day weekend, business and academia came together for a roundtable at the University of Miami School of Business Administration, “featuring presentations that highlighted various approaches to the discipline of risk management.” We were delighted to read about a roundtable of this sort bridging business and academics because we think such collaborative efforts are important, but we also have an important solution to a number of risk management problems. So we were especially delighted that after a clear statement of problems of risk, an especially incisive member of the faculty introduced the concept of prediction markets to the group.

Here are Brian Rice and Henry Pujol, a pair of executives from Royal Caribbean Cruises, explaining the risk scenario:

Brian Rice, executive vice president and CFO of Royal Caribbean Cruises and a member of the School’s Board of Overseers, spearheaded iniatives to develop the roundtable and kicked it off by explaining the importance of risk management in today’s business culture. He pointed to the familiar crises Toyota and BP faced this year, and stressed how corporations are charged with preparing for the inevitable.

“Risk is a big part of our culture. It’s something we’re very focused on at Royal Caribbean,” Rice said. Henry Pujol, the company’s principal accounting officer and a member of the School’s Accounting Advisory Board, explained the cruise line’s top-down approach to risk management in the first presentation. Royal Caribbean has moved from a once-a-year risk management process to an around-the-clock audit.

“Some risks are easy to identify, like the price of fuel,” Pujol said. “Others are more difficult to recognize. The biggest challenge is the unknown. We’ve learned that we may not be able to prevent every risk, but we can react so there is not a panic moment. We prepare ourselves for the unexpected using what-if scenarios.”

And here’s David Kelly, an associate professor of economics, on the value of prediction markets:

“Prediction markets give us a very low-cost way to measure risk precisely and continuously,” Kelly said. “In most cases, it’s more accurate than expert opinions and surveys.”

We’ve already helped customers experience profound success managing risk in the enterprise, and we invite you to explore examples of our customer success.

Maybe, in addition to our world-renowned Chief Scientist Robin Hanson, we need to add a Chief Economist…