Thursday, July 1, 2010

Follow-up of “The Fantods of Risk: Essays on Risk Management” Part 1

Part 1:  Three Unsolved Problems 

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

In a previous blog I reviewed H. Felix Kloman’s book “Fantods of Risk:  Essays on Risk Management”, published by Seawrack Press, 2008.  The Amazon link is http://www.amazon.com/Fantods-Risk-H-Felix-Kloman/dp/1436302269/ref=sr_1_1?ie=UTF8&s=books&qid=1276378958&sr=8-1

As a follow-up to my review, I thought I would post a couple of thoughts that Kloman’s book produced in my own little brain.  I hope you find these blogs interesting so that you will be inspired to go get Kloman’s book.  The field of risk management needs more people to know about Felix Kloman, his writing and his books.

In this blog I would like to point out Kloman’s “three problems that remain unsolved”.  Before I get to his three problems, what would you answer if asked what three problems of risk management were that remained unsolved? 

If you are like most risk managers, you would probably have a hard time limiting your list to just three problems of importance that you thought remained unsolved.  Probably within your own organization you can come up with at least 10 risk problems that you believe are core and that you would give your eye-teeth to have solved. 

Perhaps it is ironic that as risk managers we are trained to think of problems.  Perhaps the title of CRO should be more aptly named Chief Worrier and Problem Spotter.  However that leads into the first unsolved problem that Kloman states (they are on page 101 if you are following along).  Paraphrasing, Kloman states that the first unsolved problem of risk management is that of “seeing risk as a negative result”.  I suspect that many risk managers (without the experience and insight of Kloman) are now scratching their heads and saying “Huh?!?!?  How in heck can that be an unsolved problem of risk management, much less a major unsolved problem?”  Next time you use a mathematical model that incorporates standard deviation or variance, then you might be able to see the disconnect.

I will never forget the first time I went to a risk conference sponsored by an auditing organization.  I was one of the few people in attendance who had never conducted an audit.  However I was reasonably confident in my knowledge of risk.  I found out real quick that I was real stupid, or else I had entered the wrong conference!  How the auditors thought about and acted on risk was dramatically different from my views.  Later I learned the insurance risk masters thought very different yet again.  Likewise one of my best friends is an expert in workplace safety and a “risk-expert” as well.  He and I have a difficult time conversing on risk issues since we speak the same words, but they seem to have very different meanings!  This brings up Kloman’s second unsolved problem of risk management – namely that risk is limited to specific areas of expertise.  Taking the liberty to expand on his idea, I take this as a call to develop more universal standards and concepts of risk that can be used and applied across disciplines.  (You might interpret Kloman’s view of this concept very differently than I did.)

When asked what you organization’s risk unit’s objective is, the responses will likely vary widely within any given organization.  Different managers (from outside the risk unit) will have their own responses, with the likely theme that the risk unit is the “Department of No!”  If you ask the risk unit what it believes its goals and objectives are, you are also likely to get a range of responses.  This brings us to Kloman’s third unsolved problem of risk management which is that the goal of risk management is too restricted.  More accurately Kloman states that the goal of risk management has become “corrupted” on “improving shareholder value”.  I will let you read Kloman’s response to this problem (I have to admit that I am not sure that I am in 100% agreement with him on this point). 

I asked you at the start of this blog what you thought were the three greatest unsolved problems in risk management.  Now the interesting question is this:  did you have the same problems as Kloman?   

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