It is interesting, isn’t it, how we revisit things.
In 2007 I wrote my masters thesis on ‘real options’ (a form of financial valuation technique), arguing that it was a useful method for companies to gauge the value of utilising the Clean Development Mechanism (CDM) of the Kyoto Protocol. Real options thinking takes an unconventional view of uncertainty, proposing that rather than trying to quantify the extent of uncertainty in financial project analysis, an alternative is to describe the value of having options in the face of this uncertainty. These can then be described in a technical language and even quantified. In fact, the greater the uncertainty, the more valuable options are.
This interest in dealing with uncertainty was rekindled as I bumped up against energy and economic modelling for climate mitigation policy. I offered to write a paper on uncertainty for the programme I was involved with, and was paired with a hard-core modeller who was experimenting with monte-carlo simulations. I was uneasy, and I couldn’t articulate why. (The paper itself somehow morphed into one on complexity thinking for climate mitigation policy two years later).
Today, having just submitted a paper to a complex systems conference in the UK, it came to me. My uneasiness was not so much with the tools, as it was with the paradigm. Modernist thinking dominates climate mitigation policy analysis, and within this paradigm uncertainty is something to be identified, quantified, contained. The emerging complexity paradigm proposes the opposite, articulated through the principle of ‘antifragility’. This principle holds that, apart from being a constant feature of complex systems, uncertainty is necessary and productive. Experimentation and innovation should be prized, a high failure rate can be a good thing.
There is an echo of this in real options analysis – and I’m now intrigued to better understand the link.