Prepare instead of predict: Integrating an engineering discipline to improve risk management

John Kay’s “simplicity, modularity, redundancy” risk framework elements applied to risk management: 3 components that help build a resilient and robust portfolio.

Simplicity indicates having a few moving parts - and the parts that are in the system interact with each in straightforward ways. Straightforward, no brainer picks. Think Steve Jobs’ incessant focus on simplicity in terms of Apple products’ functional design and usability.

Modularity, as opposed to interconnectedness, means pieces can be removed or replaced without materially affecting the whole. Think Lego blocks.

Redundancy means key components have alternatives in case of failure, even if that may not be optimal during good times. Think backup power systems in airplanes, or many of the fail-safes in nuclear reactors.

If you have all three of these items come together, you might be able to balance things out, smooth out any sharp edges that can cause a problem when the world (market) gets crazy. So, it’s a lot like carrying an umbrella instead of every day trying to say exactly when there’s going to be a thunderstorm and what you’re going to do if it happens.

Listen to the entire episode here. Or read the article here.