This article is authored by Dr. Rick Nason, Principal of RSD Solutions and Associate Professor of Finance at Dalhousie University, Canada.
Regardless of what you think of Rumsfeld’s policies during his tenure in President Bush’s inner circle, a case can be made that he was a risk guru. What the heck am I talking about you might ask?! It’s really quite simple – namely his well known quote, (reprinted below), automatically qualifies him for the Risk Hall of Fame of Quotable Quotes.
"As we know, there are known knowns,
There are things we know we know.
We also know there are known unknowns.
That is to say we know
there are some things we do not know.
But there are also unknown unknowns,
The ones we don't know we don't know."
Donald Rumsfeld, February 2, 2002
Mr. Rumsfeld’s quote was widely ridiculed by the media, and taken as a sign by the general public that he had truly lost it. However, every experienced risk manager understood completely and intuitively the message that Mr. Rumsfeld was trying to convey. The three buckets of data (i. known known, ii. known unknowns, and iii. unknown unknowns) are the cornerstones of any successful risk management strategy. The problem is that as practitioners and academics we really only know (no pun intended) how to deal with the known knowns, while we develop increasingly sophisticated yet mostly ineffectual methods for dealing with the known unknowns. To compound the problem, the preferred method of dealing with the third cornerstone (unknown unknowns) is some combination of prayer, hope or keeping an updated resume so a new position can be found quickly when the inevitable happens. Unfortunately the unknown unknowns almost inevitably become the most significant elements with hindsight.
The above paragraph might give you the impression that I am incredibly jaded and cynical about the current state of risk management profession. In reality the opposite is true. The fact that there are known knowns implies that there is a body of knowledge that we can draw upon to deal with a portion of the risk management issues that we face. The existence of known unknowns presents us with a set of intellectual challenges that stimulate and allow the field to grow in relevance and importance. However it is the unknown unknowns that imply that risk management is a field for creativity – a field for futurists and wild dreamers and schemers, if you will.
The diversity of mindsets, and the diversity of knowledge skills needed, makes the study and practice of risk management so exciting. Understanding and practicing risk management provides a full body workout for the mind. The known knowns require linear and often quantitative type thinking. The known unknowns generally require both linear and non-linear algorithms combined with quantitative and qualitative measures. The unknown unknowns however require the full spectrum of human thought, from deterministic to stochastic, qualitative to quantitative and rule-based heuristics to free-form creativity.
Unfortunately, (or fortunately for those who can break out of the mold), current corporate policies, often based on traditional academic dichotomies of right and wrong, do not usually stimulate, foster or allow for the type of creative, non-linear, out of the box thinking required to successfully grasp the three elements of risk management. The evidence for this of course is the ridicule that Rumsfeld faced upon uttering his now famous statement.
It has often been said that a genius is never understood in his own time. While there are likely to be legitimate and serious doubts about many of Rumsfeld’s political policies for generations to come, it is my prediction that his quote from above will eventually be seen for the risk management genius that it is.
Regardless of what you think of Rumsfeld’s policies during his tenure in President Bush’s inner circle, a case can be made that he was a risk guru. What the heck am I talking about you might ask?! It’s really quite simple – namely his well known quote, (reprinted below), automatically qualifies him for the Risk Hall of Fame of Quotable Quotes.
"As we know, there are known knowns,
There are things we know we know.
We also know there are known unknowns.
That is to say we know
there are some things we do not know.
But there are also unknown unknowns,
The ones we don't know we don't know."
Donald Rumsfeld, February 2, 2002
Mr. Rumsfeld’s quote was widely ridiculed by the media, and taken as a sign by the general public that he had truly lost it. However, every experienced risk manager understood completely and intuitively the message that Mr. Rumsfeld was trying to convey. The three buckets of data (i. known known, ii. known unknowns, and iii. unknown unknowns) are the cornerstones of any successful risk management strategy. The problem is that as practitioners and academics we really only know (no pun intended) how to deal with the known knowns, while we develop increasingly sophisticated yet mostly ineffectual methods for dealing with the known unknowns. To compound the problem, the preferred method of dealing with the third cornerstone (unknown unknowns) is some combination of prayer, hope or keeping an updated resume so a new position can be found quickly when the inevitable happens. Unfortunately the unknown unknowns almost inevitably become the most significant elements with hindsight.
The above paragraph might give you the impression that I am incredibly jaded and cynical about the current state of risk management profession. In reality the opposite is true. The fact that there are known knowns implies that there is a body of knowledge that we can draw upon to deal with a portion of the risk management issues that we face. The existence of known unknowns presents us with a set of intellectual challenges that stimulate and allow the field to grow in relevance and importance. However it is the unknown unknowns that imply that risk management is a field for creativity – a field for futurists and wild dreamers and schemers, if you will.
The diversity of mindsets, and the diversity of knowledge skills needed, makes the study and practice of risk management so exciting. Understanding and practicing risk management provides a full body workout for the mind. The known knowns require linear and often quantitative type thinking. The known unknowns generally require both linear and non-linear algorithms combined with quantitative and qualitative measures. The unknown unknowns however require the full spectrum of human thought, from deterministic to stochastic, qualitative to quantitative and rule-based heuristics to free-form creativity.
Unfortunately, (or fortunately for those who can break out of the mold), current corporate policies, often based on traditional academic dichotomies of right and wrong, do not usually stimulate, foster or allow for the type of creative, non-linear, out of the box thinking required to successfully grasp the three elements of risk management. The evidence for this of course is the ridicule that Rumsfeld faced upon uttering his now famous statement.
It has often been said that a genius is never understood in his own time. While there are likely to be legitimate and serious doubts about many of Rumsfeld’s political policies for generations to come, it is my prediction that his quote from above will eventually be seen for the risk management genius that it is.
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