Eighth Economic Defence Course digged into the topic of risk

Scenarios support strategy work

Decision-makers must be able to take decisions under conditions of radical uncertainty, where the risks are high and changes can come quickly and forcefully. But what should one do when the predictive power of traditional statistical models evaporates and the world is suddenly completely different from the one from which the models’ data was collected? According to Eeva Vilkkumaa, it is best in such situation to give up on trying to predict the future.

‘In times of radical uncertainty, it is essential to switch from predicting to instead outlining different possible futures. These scenarios are, at best, both concrete and credible, yet offer differing descriptions of the future. In long-term strategy work, the construction of scenarios usually requires that many uncertainties be taken into account, and that several alternative trajectories be determined for each one.’

Scenario-based strategy work can be done from two different perspectives: preparing for different future scenarios or steering the operating environment towards the desired future. The preparedness approach is particularly needed when there are limited opportunities for influencing the future. There is often scope for such influence, however, which means that a strategy which focuses purely on preparedness is sub-optimal. Typical strategy measures aimed at shaping the operating environment include regulatory intervention, the development of radical innovations, and company acquisitions. A strategy based purely on shaping the operating environment, on the other hand, is a risky undertaking, as the future may well turn out to be completely different from what was hoped.

‘In my own research, I have developed decision-analytical methods that help towards simultaneously taking into account both the preparedness perspective and efforts to shape the operating environment. These methods help to identify the ways a company can deal with different future scenarios while also steering the company’s development in the desired direction,’ Eeva Vilkkumaa explains.

Dangerous talk about harmless debt

In his presentation, Professor Matti Keloharju raised the question of whether we are living in a ‘new age’ in which the traditional laws of economics no longer apply. He wondered why this tale of a new era is being told, even though history shows that there is no basis for it.

‘There are many examples from history of similar pronouncements of a new era – which later proved to be wrong. Among other examples, the famous American economist Irwing Fisher predicted that stock prices had permanently risen to a higher level – just days before the huge stock market crash of 1929.’

Stories also play a role in political decision-making, as decision-makers have little time to get into the details. In such situations, an exaggerated story can tempt people to act in accordance with the story’s plotline and, for example, share out the economic pie in a different way. Stories can be harmless, but Keloharju warns against basing one’s own finances, or economic policy, on exaggerated stories.

‘In politics, it is easy to hand out money by alleging that everything is different this time. For example, the story of the harmless debt is a dangerous one,’ Keloharju pointed out, reminding the audience that some things stay the same even in times of radical risks and crises.

‘Even if there are changes to the constraints on economic operators, the economic equilibrium and economic institutions, the basic laws of economics are unlikely to change.’

The Economic Defence Course was organised jointly by Helsingin Sanomat and Aalto University Executive Education (Aalto EE), which provides coaching and development services for business leaders and managers. The partnering organisations were The Finnish Business School Graduates, Academic Engineers and Architects in Finland TEK, and Elo Mutual Pension Insurance Company.

Economic Defence Course website (in Finnish): https://taloudenpuolustuskurssi.fi/