April 2011

As we know, there are known knowns: there are things we know we know. We also know there are known unknowns.”

Donald Rumsfeld
U.S. Secretary of Defence, 2001-2006

Abstract

In this article, we discuss a conceptual framework on the social management of risk and highlight the role of the community sector in that process. We introduce the topic of risk, illustrate how it is distinct from the concept of uncertainty, and show how different social actors assess risk differently. Next, we introduce the “social management of risk” approach, which takes a broad view of the potential actors involved in pursuing societal objectives in relation to risk. Finally, we discuss the role of the community sector is the social management of risk. While this framework is presented in the context of social policy, it can be generalized to any situations where social actors respond to and manage risks in a multi-player environment.

Introduction

Risk is endemic in our world and forms a powerful influence, both constructive (as an enticement to positive gains) and destructive (as adverse events beyond our control undermine our well-being). People are exposed to (or concerned by) many of the same risks. The management of these risks has long been a preoccupation for us as individuals, and for our families, and the larger communities and societies in which we live.

While the last century saw unprecedented improvements in our collective ability to deal with many of the adverse risks encountered over the course of our lives, it also saw the emergence of new risks that we continue to grapple with. As well, it revealed that our perception of risks is at least as important as – and often at variance with – the ostensibly objective properties that we can also attribute to them.

If anyone needed a reminder that the pattern of risk and risk perceptions is not constant over time, they need only look at the world-wide financial and economic turmoil of recent years, and a seemingly regular stream of epidemics and both natural and man-made disasters. It is undeniable that significant progress has been made in our ability to manage a wide range of specific risks. There are, however, many more risks over which we still have limited mastery, including many poorly understood systemic risks that ensure that something akin to the “mutation” of risk (e.g., the tendency for mastery of specific risks in one area to spawn increased risks in others) will continue to exist and will need to be addressed. It is even arguable that the technical distinction often made in the academic literature between “risk” and “uncertainty” may need to be rethought.

Risk Versus Uncertainty

Much of the finance literature on risk management rests on a technical distinction between "risk" and "uncertainty" that can be difficult to make in practice. In particular, "risk" is viewed as involving quantifiable probabilities that are believed to be sufficiently stable that patterns of gains and losses associated with particular events - typically frequently occurring events - can be reliably predicted with a fair degree of accuracy, making "risk management" instruments (such as insurance and many other forms of contingent financial derivatives) viable business propositions and defensible policy options for governments. "Uncertainty", however, is usually used to refer to situations where the probabilities of adverse or positive events (or of their intensities, public perceptions, and other attributes) are not known and not readily knowable in advance, making the assumption of responsibility for managing the fall-out from inherently uncertain events a distinctly more hazardous undertaking.

Though this distinction between "known unknowns" and "unknown unknowns" (in Donald Rumsfeld' s now famous phrase) in principle marks the boundary between ostensibly scientific "risk management" strategies and more chaotic "muddling through" strategies that inevitably characterize coping with genuine uncertainty, in many cases it itself rests on assumed realities that may be unknown and unknowable. This is particularly true of situations that can be characterized as complex systems in which there are many independent and interacting players and whose behaviour, as described by chaos theory, is inherently difficult or impossible to predict. In such cases, even seemingly long periods of relative stability and equilibrium within particular, familiar sub-systems (and the seemingly predictable probabilities of positive and adverse events that accompany them) may be subject to violent discontinuities triggered by developments in other, less well understood, sub-systems. The inherent difficulty of disentangling "risks" (that can be managed) from "uncertainty" (that one has to muddle through) is undoubtedly a major issue in risk management.

Objective Versus Subjective Assessments of Risk

Much of the academic literature on risk effectively bears on a distinction between “objective” and “subjective” assessments of risk. Different people (and, by implication, different social actors) view risks differently – and in ways that can result in their having (and acting on) quite different interests in how risks are “managed,” including the appropriate balance between prevention of adverse risks, mitigation of impacts when those events nevertheless occur, and coping with residual impacts.

Where different people have different perceptions of (and levels of aversion to) risk - as well as different capacities to bear such risk - opportunities may be created for socially beneficial innovations by both private and public policy entrepreneurs.

For example, success in offering instruments and strategies to manage adverse risks that are objectively and reliably less costly to produce than the perceived benefits that accrue to beneficiaries generates potential risk arbitrage opportunities. In other words, it generates a potential surplus in the form of either profits (in the market sector), public recognition (in the case of community-based action), or heightened public satisfaction with risk-management policies offered by governments.

In all these spheres, the successful underwriting of risks accruing to others depends on three key conditions being met:

  1. a greater capacity to bear adverse risk on the part of the underwriter than on the part of beneficiaries (those whose risks are being underwritten);

  2. a level of risk aversion on the part of the underwriter that is lower than that of beneficiaries (and of alternative underwriters); and

  3. a greater ability on the part of the underwriter to accurately assess or control the objective probability of adverse events.

While governments almost invariably have substantial capacity to bear risk (because of their ability to pool risk over large numbers of people, including both present and future taxpayers), family members, members of the broader community and market sector actors may at least sometimes be less risk averse or have a greater capacity to assess or control risks.

The "Social" Management of Risk

The “social management of risk” (hereafter referred to as SMR) refers generically to an approach that takes a broad view of the potential actors involved in pursuing societal objectives in relation to risk. Though by no means limited to thinking about social policy, Figure 1 illustrates SMR’s distinct approach to meeting social challenges, notably through a wide range of interventions by a diverse “ecosystem” of actors working sometimes autonomously, and sometimes in conjunction with others.

In particular, the SMR approach acknowledges that a wide range of social actors have always played a significant role in helping individuals manage a wide variety of risks and that direct interventions by governments have long been supplemented – and, in fact, predated – by the efforts of:

  • individuals themselves;

  • their immediate and extended families;

  • their local communities and broader social networks (ranging from local community-based organizations to the broader voluntary sector – including unions, profession-based associations, religious communities – as well as informal networks of friends and acquaintances both “in real life” and, increasingly, online); and

  • market sector organizations (including employers and intermediaries in the insurance and broader financial sectors).

Since the SMR approach involves a sometimes uncoordinated and sometimes orchestrated coming together of a large number of actors and their multiple efforts, it has a somewhat broader conception of the role of government policies. In particular, direct interventions by governments may not always be dominant (or even particularly central) elements in an SMR strategy. For example, governments may be better placed to mobilize resources and orchestrate large-scale responses to more-or-less homogeneous challenges that occur simultaneously. But families and informal social networks of which individuals form part (as well as formal organizations in the community and market sectors) may be better placed than governments:

  • to take measures – tailored to the circumstances “on the ground” – to prevent risks that are idiosyncratic (or very localized in nature) from materializing

  • to identify when such risks nevertheless materialize

  • to mobilize resources from the family or community to respond quickly and in context-appropriate ways to mitigate damage or help cope with the situation

  • to use the more immediate reciprocity of family or community support to build stronger social networks (and directly enhance well-being more generally)

  • to experiment with a wide range of alternative strategies and adapt quickly to changing circumstances on the ground

Moreover, the relative strengths and weaknesses of various social actors (or, at least, our understanding of those strengths and weaknesses) are themselves evolving. This may be particularly true as increasing numbers of perceived risks may be the manifestations of complex processes that resist the one-size-fits-all solutions that governments have traditionally been most comfortable with, while others may have systemic aspects requiring large-scale interventions.

For these reasons, an SMR approach may imply the need for government policy makers to pay at least as much attention to facilitating interventions by others (those better placed to play key roles in particular circumstances) as they pay to how they themselves intervene directly in support of citizens (Figure 1).

Figure 1. The SMR Approach

Image:april11_peloquin_1.jpg

The Community Sector as Agents of SMR

Multifaceted and diverse in its form, function, and scope (though often geographical in range, or “place-based,” given the power of face-to-face interactions), the “community sector” constitutes a highly heterogeneous class of social actors that straddles the spaces occupied by families, the market sector, and governments (Figure 2).

Although there are a variety of different ways in which one can classify, organize, and name the sector, it is important to note that it can involve informal networks (interest-based networks of friends, acquaintances, colleagues, co-religionists, etc.) as well as the formal community-based organizations that are often the focus of attention for both policy makers and researchers.

Yet the importance of informal networks as sources of support cannot be underestimated. As a source of help in dealing with many risks, the breadth, depth, and intensity of one’s connections and reciprocal obligations to others can be as important as formal community institutions (and typically more so) and even, in many cases, as important as families.

Figure 2. The Community Sector

Image:april11_peloquin_2.jpg

Taken together, community sector networks and organizations occupy a broad (and often unique) range of “ecological niches” in responding to the needs of individuals and society. With membership extending beyond kinship, the community sector can provide social support through a more diversified portfolio of resources than families alone, sometimes with levels of commitment and intensity that can exceed those found within families. The primary social orientation of the community sector also distinguishes it from the market sector, which, although it too can be a major source of self-support and social support, is driven predominantly by the financial bottom line. Often flexible and well attuned to the realities “on the ground,” community networks and organizations are also typically seen as key sources and vectors for social innovation. As noted by Gardner (2011), comprehensive community-based initiatives have significant strengths that may make them much more effective than traditional approaches when tackling complex problems.

Conclusion

In this article, we have introduced a conceptual framework on the social management of risk, which emphasizes the pursuit of broad societal objectives. While this approach was presented in the context of social policy and was supported by an example from the community sector, it is relevant in any situations where social actors respond to and manage risks in a multi-player environment. In these situations, the diversity of players, acting together with varying degrees of autonomy and coordinated action, provide a distinct and powerful approach to managing risk.

Further Reading

For an expanded version of this article, emphasizing the role of the community sector in the social management of risk and its impact on government policies, see the February 2011 issue of Horizons, the research journal of the Policy Research Initiative.

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