The Judgment Deficit

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

On my most recent plane trip I read a Harvard Business Review article by Amar Bhide that I have been meaning to read for some time.  The article is titled “The Judgment Deficit” (HBR, September 2010, pp 44 - 53).  

In this article, Bhide essentially points out that we have surrendered judgment to models and rule based thinking.  While he points out that there are times and situations where rules or models are appropriate, they can never capture the complexity and value of human judgment.  I wholeheartedly agree with him.  The article points out deficiencies in having computer models make lending decisions as well as other examples from the banking sector, but the surrender of human judgment to models (and even worse -  audits) is endemic throughout risk management – whether in the financial sector or not. 

As Bhide argues, it is time to get back to basics and get back to using human judgment.  A great judgment to start with is to read Amar Bhide’s article.

NYT not WSJ

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

 

When I worked on a trading desk in New York I always made it a point to read the New York Times rather than the Wall Street Journal.  Those who know me will laugh and wonder why – I am not what you would call your typical NYT person. 

There are three main reasons why I did so:

1. Everyone else read the Journal and thus if there was something worth knowing about in the WSJ, I was sure to find out about it through the chatter on the desk
2. It gave me a different point of view and something different to talk about on the desk and with my customers (most of whom also read the WSJ) 
3. The NYT frequently left me angry after reading its editorials which I often did not agree with.  I figured it was good to get out of my comfort zone on a regular basis. 

 

Does everyone in your risk department read the same newspaper?  Do they easily and comfortably get into groupthink having their ideas continually and consistently generated from the same source?  Do their sources for information generate a broad portfolio of ideas?  (Are a lot of ideas a good thing?)  Do they ever wander outside of their comfort zones?  Do they get passionate about ideas?

 

 

Face it

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I was reading a very interesting Harvard Business Review article by Amar Bhide that I have been meaning to read for some time.  The article is titled “The Judgment Deficit” (HBR, September 2010, pp 44 - 53).  I will outline the article in my next blog as I believe it is an important article that has a lot of relevance for risk managers. 

The point I want to make in this blog is about a quote from futurist Paul Saffo that Bhide puts in his article.  The quote is: “Face it, innovation is an elite activity”.  What bull%$#^! was my first reaction.  And then I realized that we now depend on the almighty financial engineers and risk doctors (of which I am one) before we dare make a move.  Crap – he may be right was my second reaction.  Sad is how I currently feel.

Lamborghini sales exceed forecasts in Saskatchewan and Iowa: WSJ June 2015

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Difficult to believe? This “news” headline maybe more the reality than you think. Followers of this blog know that we have blogged about the new normal of high and volatile agricultural commodity prices consistently since the beginning of this year. Indeed in the first two months of the year some basic commodities have experienced some wide swings, with agriculturals generally rising and industrials generally falling (an economic slowdown warning sign?). However, according to American Jim Rogers of Rogers Holdings in Singapore we are still in the early stages of the bull market in agricultural commodities and have a long way to go to reach inflation adjusted historic peaks. His arguments are sound; increased wealth in the emerging economies, erratic weather patterns and more people. In the longer term Mr. Rogers foresees “farmers driving Lamborghini’s and stock brokers working for them” for wealth will be created down on the farm once again. It is perhaps not surprising that the world's uber rich are buying up agricultural land. 

If you work for a firm that represents commodity end users ask yourself; How has the corporate risk management strategy changed to reflect this new normal of volatility with the added long term uptrend in commodity prices? 

 

For more on commodity prices in perspective from CNN Money follow the link below:

http://tinyurl.com/4m9kexf 

For more from Jim Rogers follow the link below:

http://www.bloomberg.com/video/67100110/

 

School Trip Risk Assessment

by Stephen McPhie, CA

Partner, RSD Solutions Inc. 

www.rsdsolutions.com 

info@rsdsolutions.com 

 

My daughter brought home a form for me to sign to give her permission to go on a school trip.  The form included that statement that a risk assessment was available upon request.  My initial feeling of comfort that risk had been assessed gave way to wondering what this actually meant.  Was the trip going to be less risky because a standard risk assessment form had been filled out?  Do people filling out the forms truly document, assess and rank all the risks and devise and action plan to eliminate or lessen the risks?  Do they actually visualise and understand the risks?  Or do they just hurriedly slap down a few of the same token things each time to satisfy the beast? 

I can just about remember ancient times when I was a kid and went on school trips. No risk assessment forms were filled out.  Teachers would instinctively know the risks and exercise due caution.  We would be made to walk in a line two abreast with a teacher at the head of the line and another at the back.  Periodic head counts would be made.  We stopped and regrouped before crossing roads.  And so on and so on.  The teachers had instinctive and practical risk awareness – although it was not formalised or policies written or bureaucracies created. 

In fact, across the public sector, the term “risk assessment” is seen and heard everywhere these days.  It seems to be the favourite buzz phrase.  But is it accompanied by a culture of true risk awareness?  It seems that complaints about the heavy burden of bureaucracy and form filling are as common as the term “risk assessment”.  Are such complainers really embracing an effective risk culture? 

Unless there is a fundamental risk culture instilled within an organisation with commitment from the top down and bottom up, forms and bureaucratic prescriptions are useless.  In fact, they may become counterproductive by taking attention away from the real risk issues and instil a false sense of comfort, thus increasing risk. 

The lesson for businesses is that risk management must be a qualitative exercise that is going to be different for each organisation.  Off the shelf solutions can be valuable and have their uses but they must be made to fit the organisation as a tool and not the other way round.  Paying your cash and imposing a system is not a substitute for a proper commitment and culture.

 

Déjà vu. $4.00 gas ($1.40/litre in Canada) looms on the horizon

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

If you love roller coasters, 2011 is certainly setting itself up for a wild ride stemming from commodity price volatility.  Events in the Middle East, the US Federal Reserve's quantitative easing and globally low interest rates are providing an unstable combination of market volatility triggers.  Of note recently is the upward march of oil with Brent now trading above $105 USD.  Predictions from the markets of a 10% price increase in gasoline for the summer are given a 1:3 and prices of $4.00 at 1:10 (in California it may be occurring as this blog appears).  For those folks that drive to work and for those firms that have energy as one of their main cost drivers how do you plan cope – what is your risk management strategy to retain as much of your income as possible and thus keep cost down?  One analyst has noted that between $3.00 and $4.00/gallon "real pain" hits the US consumer. What is your company's tolerance?

 

For a read of the original Fortune article follow the link:

http://tinyurl.com/6zq7xm9