World Economic Forum (#WEF) Global Risk Report 2012 (part 2—Methodology) (1)


The World Economic Forum’s Global Risk Report 2012 was described in the overview has having the following methodology.

a)  Identify global risks, which are risks that are global in geographic scope, cross-industry relevance, uncertainty as to how and when they will occur, and high levels of economic and/or social impact.

b)  Categorize the global risks into five Risk Categories: economic, environmental, geopolitical, societal and technological.

c)  For each Risk Category, rank each risk according to likelihood and severity.

d)  Using the ranking, identify the risks of greatest systemic importance as the Centers of Gravity for each of each Risk Category.

e)  Identify Critical Connectors which are risks that are connected to the multiple Centers of Gravity, and thus link all global risks into one coherent system.

The purpose of this post is to go into detail about steps a) through c) were achieved.

Steps  A, B.  Identify Global Risks and Categorize Them

A survey was done of 50 global risks with 469 world-wide expert and industry leaders, with the question being asked about what the a) perceived impact and b) likelihood for each risk would be over a 10-year time horizon.   The experts were asked answer on a scale from 1 points to 5, with 1 being the lowest impact or likelihood, and 5 being the highest impact of likelihood.   (The survey for the 2012 Global Risk Report has been refined from previous editions where only 37 global risk factors were considered.)

These 50 global risks were put into the following five categories

1.  Economic

2.  Environmental

3.  Geopolitical

4.  Societal

5.  Technological

Step C.  Most Likely and Most Severe Risks for 2012

Based on the responses from the experts, the top five MOST LIKELY global risks for 2012 were the following:

1.  Severe Income Disparity (4.03)—Economic

2.  Chronic Fiscal Imbalances (4.03)—Economic

3.  Rising Greenhouse Gas Emissions (3.88)—Environmental

4.  Cyberattacks (3.80)—Technological

5.  Water Supply Crisis (3.79)–Societal

The higher the number, the greater the likelihood, with the remaining 45 global risks being less than the five listed above.   The top factors seem to be risks relating to the global economy, followed by an environmental risk (greenhouse gases), a technological risk (cyberattacks), and a societal or infrastructure risk (water supply).    The current list of most likely risks for 2012 differs from the list for 2011, which included 4 environmental factors and one geopolitical factor.   This shows that while the environment still remains at the top of the list, those relating to the global economy have risen in prominence this year.  A surprising entry in the list of most likely risks is that of cyberattacks; technological risks have not been among the list of most likely global risks since 2007.

Based on the responses from the experts, the top five MOST SEVERE global risks for 2012 were the following:

1.  Major Systemic Financial Failure (4.08)—Economic

2.  Water Supply Crisis (3.99)—Societal

3.  Food Shortages Crises (3.93)—Societal

4.  Chronic Fiscal Imbalances (3.87)—Economic

5.  Extreme Volatility in Energy and Agriculture Prices (3.81)–Economic

The higher the number, the greater the severity, with the remaining 45 global risks being less than the five listed above.   The top risk relates to the global economy, followed by two societal or infrastructure risks, and then two additional risks related to the global economy.   The current list of most severe risks for 2012 differs from the list for 2011, which three economic risks, 1 environmental risk and one geopolitical risk.   This shows that while the economy still remains at the top of the list, those relating to infrastructure have risen in prominence this year in terms of perceived severity.   The top five risks in terms of severity were listed as being a combination of economic and societal risks for every year since 2007 except for last year, so these have regained attention in the minds of decision makers.

Just from going through the first three steps of the methodology, one can gain an understanding of  the different types of risks that are being considered, the ones that are considered the most critical, and how this perception of risk has changed in the recent past.

 In the next post, I will describe the methodology the report uses to show how these factors are linked, which is part of the process of understanding the economy of global risk. 

 

 

 

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