Risk Accumulates Where No One Is Looking For It, by Charles Hugh Smith

You never know from where the snowflake that triggers an avalanche is going to come. From Charles Hugh Smith at oftwominds.com:

All this decay is so incremental that nobody thinks it possible that it could ever accumulate into a risk that threatens the entire system.

The funny thing about risk is the risk that everyone sees isn’t the risk that blows up the system. The mere fact that everyone is paying attention to the risk tends to defang it as everyone rushes to hedge or reduce the risk.

It’s the risk that accumulates under everyone’s radar that takes down the system. There are several dynamics driving this paradox but for now let’s look at the paradox of optimization.

The paradox of optimization is that to optimize efficiency and output (i.e. profit) resilience must be sacrificed. This leaves the system vulnerable to collapse when the system veers beyond the parameters set in stone by optimization.

Resilience is the result of a number of costly-to-maintain features. For example, redundancy: to optimize the supply chain, get rid of the higher cost suppliers and depend entirely on the lowest-cost supplier. This sole-source optimization works great until the sole-source supplier encounters a spot of bother, or one of the sole-source supplier’s component manufacturer encounters a spot of bother. By the time the entire supply chain has collapsed, it’s too late to reconfigure a factory or increase the production of marginal suppliers.

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