Wednesday, April 09, 2014

Wargames and crisis management


What was the Fed thinking in the summer of 2008?

There was no real planning or preparation for crisis. They did not have contingency plans for the post-Lehamn fallout just has they did not have a clear understanding of what the failure of a TBTF institution would mean….

I find this mind-boggling. For 150 years modern militaries have used war-games, scenario planning, and other strategic tools to prepare for nearly all contingencies. The plans themselves are not the key product of these exercises. It is the development of a collective mental framework and the exploration of messy problems not given to pat answers.
Williamson Murray in Military Innovation in the Interwar Period:

The U.S Navy’s approach to war gaming was similar to that of the German Army. Neither military force used exercises or war gaming as a device to justify current, ‘revealed’ doctrine or as a means to exclude possibilities. In other words, exercises aimed at illuminating possible uses for military forces and at suggesting what questions one might ask; they did not aim at providing ‘solutions’ or answers. In peacetime they were an educational vehicle for the officer corps. In war, gaming aimed at illuminating possibilities . For example, the German game for the Meuse crossing, which occurred in March 1940, came to no resolution on the critical question of whether the German armor should make the breakthrough without waiting for supporting infantry divisions to come up.
This lack of resolution was far from fatal. Two months later the Germans crossed the Meuse under Guderian in a victory which ensured the utter defeat of France and Britain. (See A Neglected but Significant Anniversary for the Meuse battle and its importance)

Nor did the lack of resolution in wargame mean that the effort was wasted. Quite the opposite.

T. N. Dupuy in Understanding Defeat:

The plans and preparations had been so good that [Guderian's] corps headquarters issued orders for the assault across the river simply by changing the date on an order they had prepared in an earlier wargame and issuing it without further change.
See also:

Alistair Davidson, Why Wargaming is useful:

This need to push managers to consider wider extremes is one of the reasons that scenario analysis is talked about so much. But there is theological split in the world of scenario creation and use. Some scenario consultant are quite adamant that scenarios should be stories not numerical models. These professionals are reacting against the phenomenon that spreadsheet sensitivity analysis is sometimes confused with scenario analysis. The use scenario analysis to drag resistant managers kicking and screaming into considering the unthinkable, the Black Swan, and the fat tailed distributions or risk.

But if that battle has been won and managers now understand the vocabulary of and the differences between sensitivity analysis and scenario analysis, then there is a next generation modeling opportunity, i.e. to translate the stories of a scenario into the impact upon a business.

The impact upon a business may like the wargame reveal not just the sensitivity changes under different scenarios, they may also imply more complex differences in states

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