The knowledge society is one of seniors and juniors rather than bosses and subordinates. The information society is more than just technology; it includes social, cultural, institutional, moral, and political dislocations during our transition from a brute-force industrial society, says

Peter Fingar in Extreme Competition.

The financial markets that we have constructed are now so complex, and the speed of transactions so fast, that apparently isolated actions and even minor evens can have catastrophic consequences, he cautions.

After decades of progress and a drop in real economic risk, the average annual standard deviation in market index was not lower, but higher, during the past 20 years than it was 50 years earlier, notes the author, about the S&P 500.

Closer home, too, the charts have been volatile, and returns, erratic. “Risk should be diminishing, but it isn’t.”

Another important observation that Bookstaber makes is that assets under management by hedge funds have grown over six-fold, over the past five years, from $300 billion to more than $2 trillion, not counting “the operation of quasi-hedge fund proprietary trading desks at firms like Goldman Sachs or Deutsche Bank.”

Hedge funds are able to extract differentially higher returns. But it’s a zero-sum game, so someone else is paying for them with comparably sub-par returns, he reasons. “Maybe it’s you.” Scary! Bookstaber likens hedge fund to ‘the lowly cockroach’ — ‘a prime case through which to study risk management’.

What he finds remarkable about the cockroach is “not only that it has survived for so long, but that it has done so with a singularly basic and seemingly suboptimal mechanism.” The insect’s risk management structure is extremely coarse, describes the author.

“The rule that cockroach obeys is so simple that it depends only on its giant fibre nervous system; it is a reaction that does not need to be filtered through its brain, but rather goes directly from the sensory hairs that detect the puff of air to the thoracic ganglia controlling its leg motion.”

On the contrary, the finely tuned approach to risk, the approach that would seem optimal perhaps to financial planners, may in the long run prove suboptimal, concludes Bookstaber.

“The more intricate risk-management structures may actually make the situation worse, leading to greater complexity rather than simply a less robust response.”

And an approach that is coarse and less complex, like the cockroach’s, may be the best long-term strategy. “The danger to the system is the system,” unless we can fix our ills with ‘simpler financial instruments and less leverage’.

Too worrisome to ignore.

“It is much more than that. Innovation is the successful creation and delivery of a new or improved product or service in the marketplace.” Innovation is the process that turns an idea into value for the customer and results in sustainable profit for the enterprise, they explain.

“Innovate or die,” reads the title of a chapter that guides you through ‘the exponential economy’ — a development that is more important than globalisation. The phrase “includes those increasingly large segments of the economy improving in price performance at rapid, exponential rates, including computers, communications, biotechnology, and consumer products.”

What drives the exponential economy is ‘the transition to a knowledge-based economy, where one idea builds upon another at increasing speed’.

Knowledge compounds, remind Carlson and Wilmot. “Globalisation hastens this process by providing more ideas. Ubiquitous, high-speed communication lets us gather those ideas faster.”

Working on improvement is not enough. Switch to the ‘exponential improvement process’ that the book advocates, especially if you are accumulating knowledge to make something better.

Discipline number 1 is to “work on an important need, where you can stay ahead of the exponential wave of improvement in your activity.”

Everyone in the enterprise must be focused on creating new customer value, insist the authors. “Work on what’s important, not just what’s interesting — there’s an infinite supply of both.”

Helpful guide to wannabe innovators.

D. MURALI

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