Strategy and Risk Management

I mentioned in a recent post that I had been corresponding with a former co-worker. He's a retired Navy officer - let's call him Sheikh - and we tend to write an E-mail or two back and forth most days. We share a lot of interests in international affairs, and though he's a Naval War College graduate, he's very gracious to ask me my take on various issues relating to strategy and international relations. Today he asked me a very interesting question: how should risk management factor into strategy? Long-time readers of this blog will know that his question is a confluence of two disciplines I've spent a great deal of time studying, so I wrote a lengthy response, and I thought I'd share an expanded version of it here.

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My impression is that the potential relationship between risk management and strategy is lost on most strategists, and on nearly all political leaders (most of whom are conversant in neither risk management nor strategy). Sheikh is right, one would think that risk management and cost/benefit analysis would play a significant role in strategy. Clausewitz discusses it a bit in Book I, Chapter 2 of On War:

Still more general in its influence on the resolution to peace is the consideration of the expenditure of force already made, and further required. As war is no act of blind passion, but is dominated over by the political object, therefore the value of that object determines the measure of the sacrifices by which it is to be purchased. This will be the case, not only as regards extent, but also as regards duration. As soon, therefore, as the required outlay becomes so great that the political object is no longer equal in value, the object must be given up, and peace will be the result.

Clausewitz's treatment of the issue refers specifically to treating for peace in a conflict which is already underway, but the concept stands. Meanwhile, as I noted recently, Thucydides - writing more than two thousand years before Carl von Clausewitz - characterizes strategy in terms of "fear, honor, and interest". These factors are difficult to quantify. And, given that people are willing to sacrifice a lot for political power, and given that strategy is all about achieving political objectives, it shouldn’t be surprising that some leaders are willing to make strategic sacrifices that are disproportionate to the gains.

In a perfect world, you’d have both strategists and actuaries working together to compose and revise strategic plans based upon the costs of historically similar campaigns, the quantified benefits, and the likelihood of particular contingencies – e.g., the post-Cold War American posture of preparing for two simultaneous campaigns, notionally expected to take place in the Gulf and on the Korean Peninsula. Those plans would then drive the reconciliation of ways, means, and desired ends.

Instead, many states tend to come up with one or more "national strategies". In America, that's the White House's National Security Strategy, the Secretary of Defense's National Defense Strategy, the Chairman of the Joint Chiefs of Staff's National Military Strategy, and Congress' Quadrennial Defense Review; as far as I can tell, the United Kingdom, does this through one such document, the National Security Strategy. Russia's new strategic release is getting a lot of attention lately, as is the 2015 National Security Strategy from the White House. World renowned strategist Lawrence Freedman, who wrote one of the most difficult books on strategy that I've ever read, recently gave a lecture in which he was pretty dismissive of such documents, and I think he had a point: at least in the case of the American documents, they tend to have a lot of words without providing much substance. (A couple of years ago, I posted a bunch of links about these documents, and you can go check them out.)

I’m also reminded of an anecdote. My postgraduate advisor, who had worked as an analyst at the British Ministry of Defense before he began teaching, recounted a story from 1982 in which he had opposed the Falklands War (despite being a Thatcherite Conservative) on the grounds that the cost was disproportionate to the potential gain from retaking the islands from Argentina. He said that, at the time, he’d been of the mind that Her Majesty’s Government should have compensated each of the islanders to the tune of one million pound (I may be inflating that, but the concept stands) and relocated them back to Britain, which would have been less costly than the campaign itself. He said that in time, and particularly with Britain’s spectacular success, he came to understand Maggie Thatcher’s wisdom in pressing the issue.

As I wrote that anecdote, I got to thinking that risk management and strategy are probably sort of like intelligence and strategy, or perhaps another corollary would be science and policy. People made a big deal out of how the Iraq War was supposedly a mistake because the intelligence was allegedly faulty. (The more accurate version of that story is seldom reported, but that's another discussion entirely.) In reality, the intelligence informed the decision to invade Iraq, but it wasn’t as simple as “the intelligence is this, therefore we will do that”. In fact, I think that risk management was a poorly advertised counter to the intelligence narrative: no, there wasn’t a high degree of confidence in the intelligence, but after 9/11, the level of risk the West was willing to accept from rogue states, and the level of risk of another 9/11-like attack, changed the strategic risk calculus. I want to present a non-military example would be climate change. Climate change is a controversial topic, and I don't want to get into that controversy. For the sake of arguments, let's assume that the world is going to warm by several degrees in the next century, and that man-made pollution has played a significant role in that outcome. For many, the argument is simple: because climate science says that X is going to happen, we must obviously do Y to prevent it. I’ve been impressed by economist Bjørn Lomborg, who is more confident in the climate predictions than I am, but who seems to take a very pragmatic attitude. He suggests that climate change isn’t the world’s most pressing risk, that the world can get more bang for its buck by trying to solve other problems (Malaria, for instance); and by preparing for a potential shift of a few degrees, rather than trying to retroactively fix the climate. He notes, sensibly in my opinion, that efforts to prevent climate change will be extremely costly with little or no chance of actually making any difference. It's a similar concept: even if you have the data entirely right, other factors are going to influence the policies which are developed to respond to the challenges in question.

So, I think that with strategy, as with other aspects of policy, it’s important but difficult to balance the pure quantitative picture with some of the more subjective factors – like fear, honor, and interest.