The Risk Cascade – 1

In risk management, we generally identify a risk and then assess the potential impact of the risk and the likelihood of the risk occurring with that impact.  We usually stop there.  

However, there are often inter-dependencies between risks that will result in further consequences if the initial risk materialises; these are not generally identified and so no preparations are made.  They are sometimes referred to as second- and third-order consequences, or alternatively cascade risks.  

According to research company Gartner, no more than 10% of organisations consider further inter-related impacts, and those are usually banks who are required by their regulators to consider scenarios for their capital and liquidity adequacy assessments.

In 1980s America there was a drive to increase college education: more people going through higher education is a good thing, right? But a lot of people could not afford to go to college so the government provided subsidised student loans.

The first-order effect of this was that college enrolment increased.

The second-order impact was that colleges increased their fees as students could just get bigger loans.

The third-order impact was that with more people getting a college degree, the value of a degree decreased and employers started demanding higher levels of education from job candidates.

A further third order impact was that students were saddled with debt which itself became a drag on the economy as they could not then buy a house or a car or consume as much as they otherwise might.

You might wonder if the risks were thought through, or even if it was a good idea in the first place…

Data Source: Google, http://www.gartner.com

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