Managing Life´s Risk in a Fractal World.

Managing Life´s Risk in a Fractal World

The most persistent illusion in leadership is the belief that stability is the natural condition of life.

We build strategies on continuity. We assume liquidity will remain available, counterparties will be reliable, geopolitical balance will be durable, and growth will be linear. When disruption occurs, it is described as exceptional, an interruption of the norm.

Experience suggests the opposite.

Having worked in the financial markets for over 30 years, and experienced life at international financial institutions, with regulators, entrepreneurial ventures, boardrooms, endurance sports, military life, 36 years of marriage, and fatherhood, I concluded that stability is temporary, not the baseline. Volatility is. Risk is not sporadic, it is structural. Stability is cyclical. Risk is not episodic, it is embedded in the architecture of complex systems.

Life, in this sense, is fractal.

A fractal is a pattern that repeats at different scales. When you zoom in and out, the structure remains the same, and the geometry of risk across time behaves in exactly the same way. The structure is preserved whether it is observed from a distance or in proximity, only the magnitude varies. 

The dynamics that destabilise countries are the same dynamics that destabilise corporations or cause the collapse of banks. The leverage dynamics that destroy the balance sheets are the same dynamics that undermine personal financial lives. The scale changes. To survive in life, we need to embrace risk, nevertheless, it is of vital importance to understand its nature in order to manage it and create systems that will enable us to attain long-term, sustainable success.

We speak of crises as interruptions or rare and unexpected anomalies that disturb the otherwise predictable order of our lives, and therefore, We design strategies around continuity of growth, and stability, based on historical underlying assumptions that might have already lost their relevance, build scenarios on ever upward trajectories, and make personal and professional commitments as if the very nature of life is stable and predictable. However, the patterns do not.

I began my career in the financial markets in 1993. Since then, I have witnessed many events described as unprecedented events: currency collapses, sovereign defaults, big hedge fund failures, asset bubbles bursting, systemic banking crises, inflation returning after decades of dormancy, sovereign debt bailouts, global pandemics, terrorist attacks that reconfigured global geopolitics, and many other events that have reshaped our world. However, each time it seemed familiar, similar. The crisis event is declared exceptional, unpredictable, and unique in its severity, and yet the underlying architecture  is familiar.

During the 1990´s,  when working for big investment banks, I saw  the birth of many complex financial products, where one of the selling points would be the solid underlying structure upon which they were built, probability, correlations, essentially,  statistical analysis that would show that these products could withstand the violence of any event that had happened in a recent past, oblivious to the fact that extreme events of higher magnitude were not rare, but would happen with greater frequency.​

During the Global financial crisis, I recall the market and its players still relying on the assumptions used in mathematical models and spreadsheets and still believing in their accuracy, however, the underlying assumptions, such as liquidity, counterparty risk, and mathematical models to measure risk, underpinning the global financial system, were changing fast in real time. The process that had been initiated in the 1990s and the fragilities embedded in the financial markets and ultimately in subprime markets  were revealed by the crisis of 2008. The crisis did not create the fragility of the system, but just revealed what was already present.

In spite of the architecture of the system's failure looking familiar, we are not able to predict the exact form or timing, nor the trigger, of its occurrence. Normally, a “crisis” does not occur solely because of an event or trigger, but because fragilities are embedded within the system, even when we have a situation where damage is purposefully caused by the creation of a single event upon one person, corporation, or country.

​I have learned from markets that risk and volatility are not the same. Volatility is visible information, and risk lurks hidden in the shadows.

​The Global financial crisis of 2008 felt catastrophic to those who were exposed to it. Institutions collapsed, liquidity disappeared, and confidence in the market and its players vanished at extraordinary speed. However, structurally, it followed a classical pattern seen before. Leverage had been present and increasing as the complexity of products and structures, which would help hide the leverage embedded in the system, along with a distorted perception of risk. Adequate governance mechanisms were not in place or were not sufficiently independent, and liquidity was thought to be infinite. When the trigger arrived, the fragility of the system and the magnitude of the distortion were too big for the system to absorb and cope with. The scale was bigger than in previous events, but the architecture was not new.

This architecture repeats itself across different crises and events. Similar geometry, different scale, and narrative. This is what I mean by a fractal world.

This same pattern is not confined to financial systems, it's present in corporations, boardrooms, entrepreneurial endeavours, and in our personal lives.

Therefore, we must prepare not only to manage volatility but also to learn how to create systems to manage risk.

Military education taught me an early lesson that, later on, the markets and my life as a founder and business owner  confirmed.  Preparation must occur in calm conditions, not in chaos. You do not create the conditions to overcome a crisis while already in stress, you prepare for the event throughout your life’s journey, purposefully building the resilience to overcome the next “contraction” cycle or the next crisis. In a fractal world, stress is not exceptional. It is structural and follows a certain architecture, but varies in time scale and magnitude. Resilience is built by overcoming daily, weekly, monthly, yearly, or even over decades, obstacles and challenges that life throws at us.

Moreover, success in life, as in endurance sports, depends not only on intensity but on sustainable pacing, fueling, and mental composure to overcome short-term challenges and reach the long-term objective. We can not eliminate the discomfort of the challenges that we face, we can only build a system, where the self is included, that can absorb the sometimes unbearable discomfort of reality.​

Leadership operates in the same way. Entrepreneurs often fail not during the good days, the growth days, but when liquidity tightens, clients’ sentiment changes, internal conflict arises, and when fatigue accumulates, therefore,  resilient systems and structure have to be prepared by and to the entrepreneur to overcome the challenges of a fractal world.

If volatility, risk, and discomfort can not be totally eliminated, then the objective can not be to achieve total safety, but to have the capacity to adapt.

By accepting that risk and volatility are structural, we have to focus on identifying and managing the existing fragilities of the systems, and our own, and concentrate on identifying patterns that would enable us to adapt and not to try to predict when the next crises might arise.

We do not inhabit a stable world occasionally interrupted by crisis. We inhabit a volatile world temporarily stabilised by cycles. Internalising this reality changes the way we design strategies. Leaders who accept this reality maintain liquidity longer, strengthen governance earlier, moderate leverage, resist euphoric narratives, and manage their energy across cycles.

The world is fractal, build adequate systems and a mindset.