The Checklist

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDsolutions.com
info@RSDsolutions.com

I recently reread an article in The New Yorker by Atul Gawande titled “The Checklist”[1].  The article was expanded into a book called the Checklist Manifesto.  Here is the Amazon link for the book.  http://www.amazon.com/Checklist-Manifesto-How-Things-Right/dp/0805091742/ref=sr_1_1?ie=UTF8&s=books&qid=1277070911&sr=8-1

The premise of the article is that in a hospital setting – particularly the intensive care unit – that a simple checklist can save lives.  To use a simple checklist in such a complex and fast paced environment with a full team of highly trained professionals might seem like carrying a squirt gun while driving a fully armed tank into battle.  What is the use of such a flimsy and simplistic device as a checklist when the situation is covered by experts who have performed the necessary routines hundreds if not thousands of times?  The use, as Dr. Gawande shows is that it works and is very effective at saving lives in the hospital.  Case closed!

It only takes a moment’s thought to realize that if a checklist is useful in the intensive care unit of a hospital, then it might also be useful in the risk management operations of a company.  While I will be the last one to be a proponent of bureaucracy, there are definitely some areas of risk management that could benefit from the use of a checklist.

As one example of where a checklist might be considered useful, consider the case of conducting a hedging transaction.  This relatively straightforward process involves dozens of decisions and factors.  Admittedly some of the decisions are trivial (for example does the bank counterparty have an up-to-date ISDA agreement in place with the company?), but others are more subtle (such as the completion of the analysis of what it does to potential credit flexibility with the bank counterparty).  If one of the decisions or factors has been missed, then potentially a serious negative risk situation may arise.

As Dr. Gawande argues, checklists do not have to be overly complicated or time consuming to be effective.  What counts is that the checklists are available for the critical procedures, and for those procedures they cover the necessary components that help to ensure a successful intervention.

What areas of your organization do you think might be able to benefit from a checklist?  For each of the checklists, what might be the steps included?  How much more effective and efficient might your risk management operations be because of this simple tool?

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[1] Atul Gawande, “The Checklist”, December 10, 2007, The New Yorker

Can of Worms

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDsolutions.com
info@RSDsolutions.com

The Economist really put one out there two weeks ago.  On its website, the well known British based newspaper had the audacity to ask “Should MBA students care about their professor’s research?”  http://www.economist.com/node/16291542?story_id=16291542

Before I fall into this lake of quicksand a few disclosures are in order.  Although I do research I am not the most prolific referred published academic on the face of the planet.  To be frank, for the field of finance the bar to get into a top journal is so far adrift from the practice of finance that it seems nonsensical to attempt to publish.  (I am sure that will make me popular with the editors of the Journal of Finance.)  Also in the interest of full disclosure you should know that I teach ERM, as well as Derivatives (and a variety of other finance courses) in a variety of business school programs.  Oh, by the way, I also win teaching awards … funny.

In my opinion my field of finance (under which risk management generally falls) suffers from a major case of physics envy.  For a long time B-School professors were thought to be the weak link of the academic food chain.  Research was traditionally based on anecdotal evidence.  That all changed with the construction of financial price databases.  Finance was the field to lead business academics to scientific respectability with quantifiable studies.  Ever since, the academic field of finance has become addicted to quantification to the almost total exclusion of all else. 

My background is actually in physics, and indeed it was the ability to use my physics training that led to my changeover to finance.  However my adopted field has gone way too far – in my opinion.  In finance and risk management we need to realize that not everything can or should be quantified.  Some of the greatest problems do not have numbers attached (or they might have numbers but not enough to get the desired level of statistical significance required for publication.)

The irony of the importance placed on publication is that little if none of the academic literature is, or could be, read by the vast majority of practitioners.  Even the practitioner publications in finance have become too mathematically sophisticated to be read by practitioners, with the exception of the few who might have advanced degrees in math or physics. 

The irony of the Economist article is that even fewer MBA students have any hope of understanding the concepts that are put forth in the top finance journals.  How many MBA students (not specialized Financial Mathematics students) have a background in stochastic calculus, or econometric techniques such as generalized method of moments which are the minimum entrance requirements for understanding current research?

I understand the argument that you do not need to understand the math if the research has useful conclusions.  My counterargument is that the vast majority of top level research has math as the end point and any practical applications are simple a happy accident of the research.  Think I am out of it?  Then send me a note telling me a piece of academic research in the last 5 years that has made a difference in your operations.  (I am sure that there are useful research articles, but unfortunately it takes a long time for them to bubble up and attract attention as they are generally not considered to be sexy enough for the top journals.)

Qualitative risk management and enterprise risk management in particular are relatively new fields of academia.  (Yes, I know that insurance studies, as well as the study of derivatives have been around since business schools have been popular.)  Therefore there might be a hope that risk management does not fall into the trap of worshiping the academic quant gods.

Follow-up of “The Fantods of Risk: Essays on Risk Management” Part 3

Two Quotes (Well, Ok Three)

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

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 want to focus on two different quotes of others that Kloman uses in his book.

“I’ve come to the conclusion that there is nothing good that doesn’t have bad consequences and nothing bad that doesn’t have good consequences.”
Pete Seeger
The second quote is:

“We cannot legislate for the unknown consequences of consequences of consequences.”
Isaiah Berlin

Now, the question to ask yourself is:  “when was the last time you read a book that quoted both Pete Seeger and Isaiah Berlin?”  That is what makes this collection of essays so interesting and useful for the risk manager.

For those in the risk community who think this is stretching it, Kloman also quotes the well known academic risk textbook writer Carol Alexander,

“Quantification will never be a substitute for good risk management”. 
Carol Alexander
There, hopefully that makes everybody happy.  (Probably not, but then again is the goal of risk management to make everybody happy all of the time?)