The Human Factor (Vicente Series Part 1)

by Rick Nason, PhD, CFA
RSD Solutions Inc.
www.RSDsolutions.com
info@RSdsolutions.com

In 2003, Kim Vicente wrote a book called the Human Factor: Revolutionizing the Way We Live with Technology. It is a delightful read about design and the interface between humans and technology – the “human-tech” interface. The Amazon link is here.

http://www.amazon.com/Human-Factor-Revolutionizing-People-Technology/dp/0415978912/ref=sr_1_3?ie=UTF8&s=books&qid=1282915483&sr=8-3

While the book is not about risk management per se (although it has lots of examples drawn from risk management including the Chernobyl disaster through to the Walkerton water tragedy in Canada) it does have a lot of lessons to teach those of us in risk management – including those of us in financial risk management and enterprise risk management. As such I plan on writing a series of blogs inspired by this book – thus the Vicente Series.

To begin I think it is relevant to consider how we design our risk management systems so that they can be related to by managers and other stakeholders. As an example, let’s look at one of our most basic financial risk management statements – accounting statements. In fairness to accountants, I realize that their objective is not risk management per se. However their objective is to give an accurate reading of the financial state of a company. Now this raises a question – does anyone outside of a few experts really understand bank financial statements?

One of the issues that became clear during the financial crisis when financial institutions were attempting to merge – or at least prevent themselves from collapsing, is that no one really understood what the true financial state of a firm was. Firms such as Lehman and Bear Stearns fell more based on rumour rather than an accurate assessment of their financial health. The “merger” of Merrill Lynch into Bank of America was obviously not based on a full and clear understanding of the financial state of either firm.

If something as basic as financial accounting proves to be so baffling to its users, what does it say about the rest of our risk management systems? Are they really designed any better to help the “human-tech” interface? Are your risk systems designed for the “human-tech” interface? More from Vicente in future blogs.