Howard and Peter

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

I recently re-read Ayn Rand’s book the Fountainhead.  The book – which was first published in 1943 is the sister novel of her perhaps more famous novel Atlas Shrugged.  

Two of the main characters in the book are Howard Roark and Peter Keating.  While the book has many plots and sub-plots, and can be read on a number of different levels, the main plot of the book follows the careers of these two gentlemen as they make their way in the field of architecture. 

Peter Keating is the epitome of success.  He graduates at the first of his class and has the opportunity to work for the most prestigious firms.  He succeeds by making only minor adjustments to the classic architecture that has come before him.  He succeeds by providing people with architecture that is familiar and comfortable for them. 

Howard Roark however struggles as an architect.  His designs are bold, innovative and treat each project on its own individual merits, rather than an assignment to tweak the mould of what has been done before.  

The author makes it perfectly clear who the more talented architect is – it is Roark, however it is Keating who gets the publicity, the praise and the rewards. 

 In risk management do we reward those who develop solutions based solely on tweaking what has been done before, or do we reward bold thinkers who develop innovative solutions and techniques that are appropriate and unique to the situation at hand?  

You will have to read “The Fountainhead” to find out what ultimately happened to Howard and Peter.  In risk management we are still writing the story.

We need an Anti-Von Restorff Effect

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

You don’t recall the Von Restorff effect from your studies?  Neither do I.  Likely my students don’t either.  However my students do recall (and they have the cell phone photos to prove it) the day that I showed up to teach my class in a bathrobe and slippers (normally I teach in a suit and wearing a dress shirt and bow-tie). 

The Von Restorff effect is our tendency to remember the highly unusual.  The common place we casually ignore or process without thinking.  For example you likely cannot recall many details about your commute to work today – assuming it was a commuting day like any other day.  If something significant happens – like you meet your favorite celebrity on the subway and start a conversation, then you are likely to remember many details from that encounter.

 In risk management we are similar in our thinking.  For example, as I write this the world is concerned about the consequences of the earthquake in Japan, and just to make it specific about the consequences on the safety of the nuclear power plants in Japan.  The media in particular tries to draw parallels with Chernobyl and Three Mile Island.  This is the Von Restorff effect taking place in which we recall (and by inference try to draw parallels) from other unusual events happening. 

Understanding, recalling and interpreting history is undoubtedly a useful exercise.  We all recall and appreciate the well worn statement that those who forget history are doomed to repeat it.  The issue is what parts of history do we tend to recall the most and to put the most emphasis on? 

In risk management, we tend to deal with the unusual, or the potential of the unusual happening.  This is particularly true for those who take the view that risk management is dealing with downside risk.  However we need to ask the question of whether we focus too much on the unusual, and let the usual run its course without sufficient attention to detail.  In making our risk management plans are we too focused on the outlier effects and their potential to occur again, without appropriate planning for the usual?  Do we need to make sure that we do not subconsciously submit to the Von Restorff effect?  Do we need an anti-Von Restorff effect?

World’s risk strategy hedge: $700 billion. Needed: Possibly. Used: No

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

One could argue that for the Western free democratic world, its hedge strategy for peace and global harmony is the US military machine which with a price tag of $700 billion per year is an expensive form of insurance.  However, as the US’s reluctance to provide a “no-fly” zone over Libya has demonstrated (to some), the risk parameters of the US government are changing and the desire to use the insurance that the US taxpayers have provided the world is dwindling.  At one time “humanitarian interventions” – going into jurisdictions, like Kosvo, where the citizens were being prosecuted – was deemed acceptable and a done deal.  No longer. 

So, it appears that the US is paying for a form of risk management beyond its needs or willingness to use.  Is this the situation in your firm?  Are you over-hedging or alternatively are you paying for a hedging strategy that you will not likely use?  In the case of the US, if your risk profile changes so to should the required hedge. 

For more information on the topic, follow the link below to an Economist article:

http://tinyurl.com/6jjksvh

Want to dream the impossible dream? Don’t sleep.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

According to a recent study in the Neuroscience journal a lack of sleep leads to overly optimistic decisions and a greater willingness to take on risky behaviours.  Brain scans showed that those who experienced broken or shortened sleep had increased activity in the parts of the brain that assess positive outcomes and reduce activity in processing negative results.  In other words a tired person is more likely to think the impossible is possible.  Sadly according to the report, coffee or exercise will not alter their distorted view.  To quote from the report:

"Using a risky decision-making task, we showed that sleep deprivation shifted most persons' bias from avoiding loss to pursuing gain"

We have discussed in out blogs the need to separate out the risk team from the day-to-day (chaotic) operations of a business.  Perhaps this is another reason.  Of course it will be the risk manager's duty to make sure their team is not over worked and is well rested,... but that may be a hard sell.

For more on this story from the Independent newspaper click on the link:

http://tinyurl.com/4mgmtzt

Loonie’s flight: Profit by default for some, but not for the value-adds

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

As pointed out by Peter Hall, Chief Economist at the EDC, Canadian corporate profitability is on the rise, with 2010 showing an overall increase of 7.9%.  At a macro-level it seems that the ascending loonie is having little impact on exports but sadly there is a disconnect lying just below the surface (no pun intended).  The significant rise of commodity prices has helped Canada’s miners, food exporters and the firm’s that touch those sectors but has left the high value-added manufacturers in their wake.  

With a solid generational up-trend in the demand for commodities the Canadian dollar will continue to strengthen forcing value-added manufacturers to refine operations and seek new markets.  This takes time: time that through well thought out and executed risk strategies you can buy.  So this maybe a good time for the marketing department to meet up with finance and the risk team to determine future needs and expectations. 

 

To hear more on this subject follow the link to EDC’s weekly commentary:

http://tinyurl.com/6dqab55

 

When project completion is in sight; negativity is not

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

According to a study conducted at George Washington University by Jaclyn M. Jensen entitled “The Consequences of Completion: How Level of Completion Influences Information Concealment by Decision Makers”, the closer a project is to completion the less likely knowledge of a significant problem is to effect the action of decision makers. In fact even when the test project was barely off the ground with only 10% complete, 37.5% of the test subjects said they would not bring forward negative news. This simple experiment helps support the need for a independent risk management team working directly with C-level or senior management and at the same time being involved, and in contact with, all significant operations of the company. 

How independent is your risk team and how are they keeping their finger on the daily corporate pulse? The other issue here is how does your firm and its staff deal with adverse occurrences that could jeopardize a much touted project and how can they not fall into mode of behaviour seen in the above experiment?  Finally, just how approachable is the risk team? Does your staff feel that the risk team is working with them or for C-level?