The Perfect Calm

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

November 19, 2010

The past three years have been the perfect storm for financial institutions in terms of their risk management.  Chaos (folly) seemed to be the operating mode during the height of the financial crisis.

What about corporate financial risk though?  It seems to have been lost in the shuffle of the daily business news and perhaps understandably so.  Relatively speaking, exchange rates have been calm – although the recent saber rattling about currency wars might be shifting.  Interest rates for most of the world were at record lows before the crisis and, since, central banks have been playing a game of limbo dancing to see how low they can drive their domestic rates.  It seems that only commodity prices and perhaps demand have been relatively volatile.

Has the recent past then been a case of the perfect calm for corporate financial risk?  Will the lessons learned from the financial institutional mess translate to the corporate world?  (Were there lessons learned from the experiences of the financial institutions?)  One thing for sure is that the road to recovery (hopefully there will be a road to recovery) is likely to be interesting risk wise.

Fuzzy Or Garbled

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

Just finished reading an older (1997) book called “The Universe and the Teacup” by K.C. Cole.  She made an interesting point in this very readable and entertaining mathematics book about how “fuzzy logic is associated with garbled thinking”.  Fuzzy logic of course is a branch of mathematics that does not subscribe to the normal black and white thinking that we have commonly come to associate with mathematics.  Fuzzy logic, which has many wide-spread practical applications, basically asserts that while some answers and measurements are more correct than others, there is not an absolute value or answer to some questions and equations.

The interesting thing about this is that when you think about it, most of your daily actions are based on fuzzy thinking.  How did you decide what to have for breakfast this morning?  How did you decide what e-mail you would open up first?  When asked by a colleague how your day was going, how did you decide to respond?

Fuzzy logic is not garbled thinking.  Fuzzy logic is reality.  Perhaps it is our insistence in risk management on strict black and white absolute value thinking that is garbled.