Is There a Risk Paradox?

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

As risk managers we are all aware of the credit paradox of banks. Banks become good at lending to a specific type of industry and then they start to attract more credit clients from that industry. This in turn gives the bank even more expertise in that industry, and thus they attract even more clients from that industry, and so on and so on. Eventually however the bank becomes too concentrated in that industry and that creates the credit paradox problem.

Now, here is a question – as risk managers, do we also develop risk paradoxes? Do we become so good at analyzing one type of risk that we start to make all of our analytical and conceptual techniques look the same? Do we become so focused on one aspect of risk that we miss the bigger picture? Do we become so mutually enamoured of a small number of methodologies that we as an industry introduce systemic risk into the system (for example see credit derivative analytical techniques, see LTCM, see VAR etc.)

Honda Recall

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

As my sixteen year old, newly licensed daughter just recently “purchased” (purchased in parenthesis as it was with significant assistance from her “parent units”) a used Honda, I read with interest the news stories about the Honda recall.  Honda is recalling a variety of its models for an issue dealing with the mechanism that prevents you from removing the key in the vehicle unless the vehicle is in “Park”.

I am not at all mechanically inclined.  Therefore the specifics of this go over my head.  However I do know enough to know that ultimately this is a redundant safety system.  In other words, the vast majority of people automatically put their car into park before removing the key and walking away from the vehicle.  In fact most people do this without consciously thinking about it.  Thus the mechanism that Honda is recalling their vehicles to repair is really quite redundant or not needed in the vast majority of cases.

Now, this brings up a related and interesting question – “What redundant risk management systems do you have in your organization?”  I am not questioning the legitimacy of redundancy – redundancy in risk systems is usually a good thing (although they can be overdone – material for a future blog).  The issue I am questioning is how many backup systems do you have for risk management that you rarely if ever think about?  I suspect in many ways quite a few. 

This leads to a further question.  Would you know if those redundant systems were still working?  I have been driving a car for over thirty years (I’ll leave you guessing whether I started driving before I was old enough or not).  Putting the car into Park before turning off the ignition and removing the key is second nature to me.  It is simply part of the natural sequence of steps that one takes when leaving a car.

My daughter has had her license for a week.  Is it possible that putting the car into Park before removing the keys and leaving the vehicle is not second nature to her yet?  Of course!  Would she know about the redundant key mechanism that prevents her from doing so?  Of course not.  If I had been driving her Honda for the last 5 years with the faulty redundant key system, would I have noticed a problem – no.  Therefore is it possible that my daughter could leave the car in gear, and walk away from it and thus leaving the car – and others – in peril.  You bet.

Redundant safety systems are easily forgotten.  Perhaps it is time to check your redundant risk management systems and see if they are still working and / or relevant and / or working as expected.  Meanwhile I will be checking the details of what specific years Honda is recalling.