We Believe...Kind of

The concept and practice of diversification to mitigate risk, increase stability and foster resilience has been applied in various aspects of society.  Examples are in:

Economics:

Not only must a country’s gross domestic product (GDP) be balanced among sectors, but key elements of its economy must be varied, flexible, and readily applicable to a variety of economic opportunities, and areas of overconcentration must continually be identified and mitigated. Policymakers should work to achieve greater economic diversification, in order to reduce the impact of external events and foster more robust, resilient growth over the long term. (1)


Social-Ecological Systems:

"...diversity in general increase the capacity of social-ecological systems to tolerate disturbance, learn and change. This capacity will be one of the most crucial assets of societies in the coming times of rapid global change." (2)

       

Financial Investing:

Don't put all of your eggs in one basket". By investing in only one security you take on a great deal of risk of that investment under performing. By spreading your portfolio over several different investments this risk is reduced, thus reducing the overall risk of your portfolio.(3)


Stability in Ecosystems:

A question may also come regarding diversity and does it create more stable environments. Below Nature Education explores the Diversity-Stability Theory and how biologically diverse ecosystems may be more adaptable in changing environments.

The figure below illustrates the the impact of climate changes from year to year can impact same vs diverse species communities.  One community, "blue" is adversely impacted during a warm year while "green" is adversely impacted during a cold year.  In both instances, the mono-species communities are weakened, which in a worse case can lead to an unstable community whose viability is threatened.  In the example of the diverse community, the "blue" and "green" species serve to fortify the community with a, "when you are weak, I am strong" disposition that maintains stability despite change in environmental factors outside of the community's control.  This community may have a better chance at adapting during change and building resilience by the various species "informing" each other as to their ability to withstand the environmental changes. (4) 
 

C
onceptual diagram showing how increasing diversity can stabilize ecosystem functioning (4)


Like many biological theorists believe when it comes to ecosystems, a great deal of organizations believe that the diversification of their assets, investments, and markets in which they compete provide a stable foundation for which to thrive, minimize risk and mitigate damage if faced with a crisis.  Ironically, they fail to proactively and aggressively apply the same strategy to their human capital; which are often the architects of the strategy and decision-makers during crisis.  They unknowingly expose themselves and their organizations to risk by not adhering to their own tenets of success when it comes to their people.  Many are quick to say, “our greatest assets are our people”, yet at times fail to see the impact “sameness” has on their success during times of change and crisis.

While there area numerous examples of accepted industry practices, theories, and admonitions encouraging diversity; the voice and application is not as strong in the area of human capital, in the context of risk and resilience.  




1) Resilient, Stable, Sustainable The Benefits of Economic Diversification, Booz & Co.

2) Norbert  & Cumming  (2008). Complexity theory for a sustainable future. New York Chichester, West Sussex: Columbia University Press.

3) Benefits of Investing in Mutual Funds, TD Waterhouse, http://www.tdwaterhouse.ca/products-services/investing/td-direct-investing/mutual-funds/benefits.jsp

4) © 2011 Nature Education All rights reserved. Used under Terms of Use http://www.nature.com/scitable/viewTermsOfUse

5) Reinmoller, P & van Baardwijk (2005). The Link Between Diversity and Resilience. MIT Sloane Management Review; Harvard Business School Press

Comments