Insurance Hypothesis
Organizations can apply the insurance hypothesis by maintaining multiple revenue streams, customer segments, and business models that respond differently to market conditions.
Monocultures optimize for the present. Diverse systems prepare for futures they cannot predict.
In 1955, ecologist Robert MacArthur proposed that diverse ecosystems should be more stable than simple ones, not despite their complexity but because of it. In a diverse system, if one species fails, others can compensate. In a simple system, every species is critical - there are no backups. Biodiversity insures ecosystem function against environmental variability, just as a diverse financial portfolio insures against market volatility. The analogy is more than metaphorical - both systems face the same mathematical reality: when components are imperfectly correlated, the system-level variance decreases even as component-level variance remains high.
Business Application of Insurance Hypothesis
Organizations can apply the insurance hypothesis by maintaining multiple revenue streams, customer segments, and business models that respond differently to market conditions. When one business line suffers, others compensate, maintaining organizational function through portfolio diversity.