Partner, RSD Solutions Inc.
Have you ever wondered what some of the great thinkers might have thought about our current practices of risk management? While reading on a topic totally unrelated to risk management (?), namely religion, I came across this wonderful description about how Plato and Freud thought about the ability of humans to reason. I quote:
“Plato argues that the highest form of human nature is reason, and that reason works to make our passions subservient in order to reach our true end. Freud, by contrast, argues that reason is not supreme but is the handmaiden of passions.“[1]
Now what made this passage particularly interesting and timely for my tiny brain is that I had just finished Akerlof’s and Shiller’s book “Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism” (Princeton Press, 2009). In this book, Akerlof and Shiller argue that the “Animal Spirits” of humans often override the assumed rationality of the economic man and thus we get economic events such as the recent economic crisis.
When thinking of these “Animal Spirits” or the passion versus rationality divide in the context of risk we quickly realize that it is a rich avenue for thought and exploration. We tend to think of risk managers as being rational, controlled and analytical. Passion is seldom a word that is associated with the risk manager, much less the risk department. But is a risk manager truly devoid of passion? Are senior managers devoid of passion when they make judgments about risk? What about Board Members? The answer of course (when framed in this blunt way) is that risk managers, mangers, and even Board Members are always making decisions based at least as much on passion or animal spirits as they are reason and rationality.
A follow-up question is to ask whether or not this is a bad thing? To that I would argue that the question is a moot point, as there is little to nothing that we as risk managers can do about it. However we do need to be cognizant of it, and incorporate the fact somehow into our analysis and suggestions. That requires empathy as well as creativity – along with a host of other skills.
In several recent talks (see for example “Beyond Behavioural Finance”) I have argued that risk managers need to think like sociologists. Perhaps we also need to spend a bit of time boning up on our philosophy.
[1] Foster, Richard J., and Gayle D. Beebe, 2009, “Longing for God: Seven Paths of Christian Devotion”, IVP Books, Downers Grove, IL
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