By Célian Colon, PhD student at the Ecole Polytechnique in France & IIASA Mikhalevich award winner
How can we best tackle risks in our complex and interconnected economies? With globalization and information technologies, people and processes are increasingly interdependent. Great ideas and innovations can spread like wildfire. However, so can turbulence and crises. The propagation of risks is a key concern for policymakers and business leaders. Take the example of production disruption: with global supply chains, local disasters or man-made accidents can propagate from one place to another, and generate significant impact. How can this be prevented?
Risk propagation is like a domino effect. Credit: Martin Fisch (cc) via Flickr
As part of my PhD research, I met professionals on the ground and realized that supply risk propagation is a particularly tricky issue, since most parts of the chains are out of their control. Supply chains can be very long, and change with time. It is difficult to keep track of who is working with whom, and who is exposed to which hazard. How then can individual decisions mitigate systemic risks? This question directly connects to the deep nature of systemic problems: everyone is in the same boat, shaping it and interacting with each other, but no one is individually able to steer it. Surprising phenomena can emerge from such interactions, wonderfully illustrated by bird flocking and fish schooling.
As an applied mathematician thrilled by such complexities, I was enthusiastic to work on this question. I built a model where firms produce and interact through supply chain relationships. Pen and paper analyses helped me understand how a few firms could optimally react to disruptions. But to study the behavior of truly complex chains, I needed the calculation power of computers. I programmed networks involving a large number of firms, and I analyzed how localized failures spread throughout these networks, and generate aggregate losses. Given the supply strategy adopted by each firm, how could systemic risk be mitigated?
With my collaborators at IIASA, Åke Brännström, Elena Rovenskaya, and Ulf Dieckmann, we have highlighted the key role of coordination in managing risks. Each individual firm affects how risks propagate along the chain. If they all solely focus on maximizing their own profit, significant amounts of risk remain. But if they cooperate, and take into account the impact of their decisions on the risk profile of their trade partners, risk can be effectively mitigated. Reducing systemic risks can thus be seen as a common good: costs are heterogeneously borne by firms while benefits are shared. Interestingly, even in long supply chains, most systemic risks can be mitigated if firms only cooperate with only one or two partners. By facilitating coordination along critical supply chains, policy-makers can therefore contribute to the reduction of risk propagation.
Colon’s model analyzes how firms produce and interact through supply chain relationships. Credit: Jan Buchholtz (cc) via Flickr
Drawing robust conclusions from such models is a real challenge. On this matter, I benefited from the experience of my IIASA supervisors. Their scientific intuitions greatly helped me focusing on the most fertile ground. It was particularly exciting to borrow techniques from evolutionary ecology and apply them to an economic context. Conceptually, how economic agents co-adapt and influence each other shares many similarities with the co-evolution of individuals in an ecological environment. To address such complex issues, I strongly believe in the plurality of approaches: by illuminating a problem from different angles, we can hope to see it more clearly!
Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.
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