TMI | THE SOUTHAFRICANTREASURER 31 NEXT GENERATIONTREASURY bipartisan politics.” We gain insights on the nature and effects of change by looking at the individual components of this statement. The initial economic effects of the pandemic were dizzying – economies were literally stopped in their tracks, followed by mass lay-offs andmarkets spinning out of control. Massive central bank intervention and fiscal helicopter money drops reversed the situation. The aftermath of this is inflation at a scale not witnessed in roughly four decades. Asset bubbles and rampant inflation serve to create huge societal inequality. As the fiscal stimulus unwinds, we find ourselves in a lower growth environment amidst a higher inflation regime – an uncomfortable economic environment with inequitable societal impacts. Unwinding monetary stimulus created through central bank balance sheet intervention leads to illiquidity that potentially serves as a precursor to financial instability. Another cause of concern is the increased fragmentation of political systems and leadership. Herewith the punchline – significant efforts were extended during the pandemic in the pursuit of minimising its impact everywhere, but at what cost?The aftermath will be costly, but have we in effect fuelled an all-consuming fire? Collective adaptation to change The pandemic provides an excellent example of collective human adaption to change. Fromour own experience, we know change creates uncertainty, complexity, ambiguity and volatile emotions and reactions. (We normally associate these experiences under a common understanding of ‘risk’). On a collective basis, these effectsmay becomemultiplied. Think about the globe’s collective response to climate change if youwant to have some sleepless nights. Change also brings opportunity, growth, and disruption, however. Innovations in politics, healthcare, and technology have delivered enormous value to society. Consider a worldwithout democracy, the internet, or vaccinations, for example. Change is neither uniformly good nor bad. How canwe therefore assess this ephemeral constant? One answer lies in the concept of risk homeostasis. Our bodies have a self-regulating process, namely homeostasis, which serves tomaintain our overall stability while adjusting to conditions appropriate for our survival. Consider a thermostat that regulates room temperature as an example of amechanical system. To be clear, homeostasis does not meanwe settle at an equilibriumand are stuck there, rather it is about our response to change, both internally and externally. We are therefore forever inmotion, evolving and exploring, adapting to changes. On a similar basis, given that the concept of ‘risk’ is generally fairly nebulous, we adjust our perceptions thereof. Frequently, we will adjust tomarket conditions, or a new system, believing it reduces overall risk. What if we aremerely shifting our perceptions and are takingmore risk, albeit inadvertently? An example of destructive risk homeostasis in action is a fleet of taxi drivers newly fittedwith ABS-brakes, which leads tomore collisions as the drivers believe they are now ‘safe’ and can, therefore, drive faster. In the example above, given that roads were less congested during the Covid-19 lockdowns, drivers responded by takingmore risk. Inmarket parlance, the perceived safety enhancements enabled by the ABS ‘HEDGE’ encouraged the drivers to add leverage. In practice, this probably reduced the number of bumper bashings but increased the chances of a write-off. Alternatively, what actions wouldmaintain the risk of bumper bashings but mitigate the odds of a write-off? Now if you had to choose which of these two outcomes enhanced the long-termsustainability of the industry, we suspect the latter wouldwin hands down. How dynamic systems respond to change Static systems and processes are generally doomed to extinction in an evolutionary sense. Dynamic systems respond to change and evolve accordingly. In a biological context, variability drives evolution through natural selection. Life is constantly responding to changes in conditions to deliver adaptation and, occasionally, to suffer extinction. Some, perhaps most, change is either constructive or immaterial. Failure lies in the so-called ‘tails’ – the events that are hard to quantify and seldom seen or experienced. Failure is typically a function of the volatility, uncertainty, complexity, and ambiguity surrounding Dynamic systems respond to change and evolve accordingly. EBENMARÉ Absa Asset Management and Associate Professor, Mathematics andAppliedMathematics, University of Pretoria Eben Maré is responsible for the Absolute Return funds at Absa Asset Management. Spanning the last 30 years, some of his previous roles include Head of Absolute Return Investment portfolios at Stanlib, Head of Fixed Income at Absa Asset Management, Head of Market Risk at ABSA Capital, Treasurer at Nedcor Investment Bank and Portfolio Manager at Genbel Investments. He holds a Ph.D. in Applied Mathematics. He also serves as associate professor in Mathematics and Applied Mathematics at the University of Pretoria.
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