Systems thinking in finance and navigating interconnected risks

“At the heart of systems thinking lie three deceptively simple concepts: stocks and flows, feedback loops, and delay. They sound straightforward enough, but the mind-boggling business begins when they start to interact. Out of their interplay emerge many of the surprising,” Kate Raworth, Doughnut Economics: Seven Ways to Think Like a 21st-Century

Systems thinking is a problem-solving approach that views issues as part of a broader, interconnected system rather than just focusing in on an isolated component of a problem. By understanding how each different element of a system communicate and influence one another, better positions firms to find sustainable, longer-term value and resilient solutions to highly complex problems.

The financial sector is a classic example of an interconnected system built around short-term views and integrated with many other sectors, such as the real economy, politics, and wider society. Yet, when something needs to be fixed, there is a tendency to view the problem as linear and for it to be fixed as quickly as possible which forces siloed thinking, tackling the symptoms rather than curing the disease. While this may yield short-term benefits, it can result in unintended longer-term consequences that manifest in other areas—think of the 2008 financial crisis, where a narrow focus on high returns led to systemic failure.

If we were to take a step back and look at a problem again, this time looking at it as it would sit in an interconnected system and obtaining the views from a wider variety of stakeholders, there will be many cases where the problem is no longer linear and the time-frame of interest is longer and therefore a systems-thinking approach to addressing it is more effective.

The planet's financial, economic, and ecological systems are intricate and deeply interconnected, and because of this, we need to adopt a holistic, systems-thinking approach, involving an understanding of the relationships and feedback loops within these systems. The assumption that the macroeconomic model will exponentially grow is based on the flawed assumption that our planet’s resources are infinite to support such growth. In short, the books don’t balance, and in a VUCA (volatile, uncertain, complex and ambiguous) world, traditional approaches to management and decision-making are falling short.

Systems thinking, scenario planning, and agile methodologies are among the strategies that leaders need to employ to navigate through VUCA environments effectively.

As the financial landscape becomes increasingly complex and interconnected, there's a growing need for approaches that can navigate this complexity effectively and sustainably. Systems thinking offers a lens through which we can better understand the intricate web of interdependencies that define our financial system. By adopting a systems-thinking approach, we can move towards solutions that are not just effective in the short term but are also resilient and sustainable in the long term.

Should you require expert assistance or access to a trove of helpful resources, you can contact Zoe Keen or read more blogs here.