Follow-up of “The Fantods of Risk: Essays on Risk Management” Part 2

Riskipedia


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.

Does your organization have a Riskipedia?  What the heck is a “Riskipedia”?  Well Kloman has hit upon the idea of a Riskipedia as a resource and mechanism for all employees (and perhaps stakeholders) of an organization to input their views on risk assessment in the organization.

Such a transparent self-analysis and reporting of risk assessments would definitely increase the transparency and relevance of risk monitoring in the organization.  It would also dramatically help develop a risk culture within an organization. 

The idea of a Riskipedia has some other precedents.  For instance McKinsey (as well as other consulting companies) go to great lengths to create a database of consulting projects that future consultants can use as learning templates as they develop ideas for similar situations and assignments.  Having such a database greatly aids in efficiency and institutionalizes and synergizes knowledge.  (Great Scott!  That last sentence sounds like something out of one of my MBA classes – sorry about that.)

How would your organization use a Riskipedia?  Would it be useful?  Would it be allowed?  (Is transparency something your organizations talks about but rarely practices?)  Who would be the most frequent users and / or contributors?  Would its use increase or decrease with time?  Would it make the organization less risky?  (Whatever that means.)  Fun questions and a neat idea.

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?   

Review of “The Fantods of Risk: Essays on Risk Management”

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDsolutions.com

Quite a while ago a purchased a slim volume of risk essays titled “The Fantods of Risk”.  This book of essays is written by Felix Kloman who has probably one of the most extensive backgrounds in risk, and is an acknowledged leader in the field of risk management.  I have had the pleasure of meeting Mr. Kloman in person, and his knowledge, and more importantly his understanding of risk management, is impressive.  It was with great anticipation that I started reading his essays.  Unfortunately, since it is a slim volume, my housekeeper put it in my stack of academic papers – which I only sometimes choose to look through.  (The academic stuff only gets looked at when I need help going to sleep.)  In any case, my completion of the book was much delayed – my loss!

This wide ranging collection of essays is a true treat to read.  They touch on a variety of sources, and attack risk from a broad assortment of angles and viewpoints.  In its breath of topics it can be compared to Taleb’s “Black Swan”, except Kloman does not spend the majority of his words trying to convince you how smart he is like Taleb does.  His musings on risk itself are also much more multi-dimensional than Taleb’s.

I really liked this collection of essays – if for nothing else Kloman is one of the few writers who (like myself) defines risk as having both an upside and a downside component.  (See for example my earlier blog posting, “What is Risk?”)  Kloman is also a fan of letting critical thought, rather than rigid process determine the proper risk responses.  He convincingly makes the point that it is unreasonable to expect risk to be eliminated – something that I wish the regulators would try to understand.

The one unfortunate aspect of the book is that it was published in 2008 (which means that it was probably completed in 2006).  It would be fascinating to have Kloman’s thoughts on the crisis included in this collection.  His writings on various risk topics (such as the overreliance on mathematical techniques) are very prescient. 

Although H. Felix Kloman is already well known in risk management circles and is a respected practitioner and thinker, I fear that this book will not get the attention that it deserves.  Hopefully it does not wind up ignored on your “academic” reading pile!

Here is the Amazon link. (it is also available in Kindle format)   http://www.amazon.com/Fantods-Risk-H-Felix-Kloman/dp/1436302269/ref=sr_1_2?ie=UTF8&s=books&qid=1275868820&sr=8-2

Watch for a series of future blogs were I plan to expand on several of the points that Felix Kloman puts forth.