Translators Needed

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

Two things this morning got me thinking.  The first event was a conversation with a journalist about counterparty risk issues facing corporations.  The second event was when I was writing a review of the Corporate Residency MBA program at Dalhousie University (where I teach).  These two totally unrelated events got me thinking about one of the first finance interviews I had almost twenty years ago.

The issue that arose with the journalist concerned the gulf or divide between those who have experience in the financial markets, and those that have the required mathematics skills to analyze new products.  Those with the mathematics skills rarely have the necessary experience to appreciate the subtleties and nuances that define capital markets.  Those with the experience likely had mathematical training that seems quaint by today’s standards and thus the new financial math is both literally and figuratively all Greek to them.

The redesigned MBA program at Dalhousie University is an attempt to better integrate business knowledge with business skills and intuition.  Business school bashing is a popular sport lately, with familiar critiques such as H. Mintzberg’s “Managers Not MBAs” argument.  Ultimately the argument is about the gulf between people who know things, and people who can do things.  The MBA program at Dal is in part designed to solve this issue.

When I was interviewed almost twenty years ago, I was asked why a financial firm would want to hire a PhD who’s only significant work experience was in sales (as well as being a tennis teaching pro).  A good question that caught me a bit off guard with its bluntness.  My answer was that with the combination of my math skills and my sales experience that I would make a good “translator for the quants”.  The answer must have been acceptable as I got the job, and the rest, as they say, is history.

I believe that what we currently need in risk management is more translators.  Not necessarily for the quants – although a lot of what stands for quantitative risk management certainly needs translating for the typical audience – but between those with wisdom and those with knowledge.

Knowledge is not wisdom, and wisdom is not necessarily built solely on knowledge.  There are many ways that we can splice this but wisdom, if you will, is the street-smarts of risk management.  Street smarts is built up from battle scars, experience, intuition, creativity, alertness, and plainly being wise.  Knowledge is book smarts.  Street smarts cannot be learned from books, and knowledge (in my sense of the word) cannot be easily learned from experience.  Thus the need for translators.

Rephrasing Seth Godin

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

I am a fan of Seth Godin’s blogs. http://sethgodin.typepad.com/. On July 3 last, his blog was titled “The non-optimized life” The blog talks about the trade-off between trying to optimize your life and getting on with it (my phrasing).

That seems a lot like the state where risk management is today. I have talked before in many places about the misplaced emphasis on optimization in risk management - in particular see my presentation on “Have We Lost The Plot” http://www.rsdsolutions.com/rick-nason039s-presentation-prmia-toronto-april-2010-quothave-we-lost-plotquot .

In risk management we need “to get on with it” rather than increasing our efforts to optimize the mathematics, optimize the organizational structures, optimize our risk metrics, and most of all optimize our regulation around financial products.

Optimization is a fool’s errand, and the sooner we recognize it as such, the better.