“ Economists should not predict but propose ”

People like predictability. From time immemorial, we have tried to capture reality in clear models that give us control of our world. At least that’s the idea. This sense of control, according to Theo Kocken, is largely an illusion. And in this illusion lies another great danger: Companies that believe that all risks can be eliminated ignore the fundamental uncertainties that still lurk.

Theo Kocken (56) has been dealing with risks for about three decades. After various risk management positions at Bank Nederlandse Gemeenten, ING and Rabobank, he founded Cardano in 2000, a company which covers retirement risks. Since 2010, he has also been a professor of risk management at the VU.

He has also written several books and articles on risk management and pension funds, is a much sought-after speaker, and has directed several films including “ Boom-Bust-Boom ” with Monty Python’s Terry Jones and a long list of leading speakers. such as Nobel laureates Daniel Kahneman and Robert Shiller., Paul Krugman and Willem Buiter.

Overall, Kocken is one of the most influential thinkers in the field of pensions and risk. And these risks are structurally poorly addressed, he recently told Jeroen Broekema, who spoke with Kocken in his Leaders in finance-podcast: “I see that people are simply wrong to take risks. They constantly monitor risks very closely using statistical models and are then surprised by what happens. “

The problem is, people tend to overestimate themselves and their ability to control the world. We do reality models and then think we can predict what’s going to happen.

People present themselves as entrepreneurs by stating that they think in terms of opportunities. According to Kocken, that’s not always a good idea. “What I always say about finance is: we shouldn’t think in terms of opportunities at all. As an econometrician, I was trained in opportunities and found in practice that these opportunities were always poorly evaluated: we don’t know them.

Instead, according to Kocken, we should think in terms of the consequences: “What is it that I don’t want? What can’t I lead as an organization, what risks should I eliminate and what risks can I accept? “

From forecast to proposal

This does not mean that all risk should be avoided – on the contrary: Kocken tries to make it clear that risk is an inevitable part of life. To best deal with this fundamental uncertainty, it is essential to look beyond economic models: it is necessary to move from forecasting to proposals. We should not think that we know what is going to happen, but imagine what could happen.

“Economics must also become a science because it is now more of a kind of astrology.”

“At ING, we were already more involved in thinking about scenarios,” says Kocken. “Think bigger and imagine worlds and think about how you will act when things go wrong.”

However, due to regulations, this method of risk management has increasingly disappeared, with all its consequences. “We got more and more regulations that said, ‘You have to calculate things like this and that and you have to follow these rules.’ That was also one of the reasons for the financial crisis, because we started to relying too much on rules and one-dimensional formulas. “

The illusion of certainty

Kocken wanted to do this differently. That’s why he founded Cardano. The company manages the risks without giving the illusion that these risks can be completely excluded. With the company, he wishes to contribute to a society “resilient in the face of this fundamental uncertainty”.

“Later, I also started to realize more and more that this was an area of ​​complexity,” he says of the philosophy behind Cardano. “Thinking in terms of complexity and chaos theory – that the world is continually floating between order and chaos and how to deal with it – that fits the mission very well.”

Kocken also tries to contribute to this mission from his role as a teacher. And he does not shrink from strong criticism from the academic world: “Economics must also become a science because it is now no longer a kind of astrology”.

Black Swan?

According to Kocken, education actively helps maintain the idea that the world is doable and predictable. As the world proves the opposite time and time again. For example, Kocken is amazed at the number of people completely surprised by the financial crisis of 2008.

“I still read people every week who call him a black swan. Then I think, “Black swan? It has happened so often. When I worked at ING, I saw it perform continuously in countries like Argentina and Brazil. When you read books by John Kenneth Galbraith, you can read the story of all these booms and busts. They are all the same. If you read Hyman Minsky, you can see exactly how the process continues on constructive debt and the euphoria that comes from that debt. So are people surprised? Then I think, “What’s wrong with our education?” “

Rather than giving the illusion of predictability, education needs to fuel our imaginations so that people are not caught off guard whenever something unexpected happens. “People no longer resist uncertainties. They can no longer imagine themselves. Predictability is no longer imaginable. Imagining something is much nicer than predicting. The forecast is for astrologers and the proposal is for economists.