Downside risk protection: A bargain (?) at $278,000 USD per job

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The so-called Great Recession is an excellent case study in the failure of financial risk management caused by group think and the “perfect” algorithm.  The handling of the Great Recession is an excellent case study in political risk management.  In one instance we have the failure of developing good downside risk management with too few resources and in the later – perhaps caused by realizing the former – dedicating (possibly) too many resources to mitigate downside risk.  In a recent report released by President Obama’s own appointed White House Council of Economic Advisors it was revealed that the US government spent around $278,000 per saved job during the recent recession.  What is feared now is that with over $600 billion in additional debt the US economy will now move forward with restricted upside risk potential.

 

The knee-jerk reaction is atypical of business management when things go wrong (or right) hence the case for an independent voice of reason (?) gained through risk management staff.  Better still, from external sources (but that is another story).  The other point I wish to make is that downside risk has benefits and costs, and while those benefits are desirable is management aware of the costs both today and tomorrow of reducing the pain of downside risk too much? 

 

For more on the US government’s economic downside risk protection and the thoughts of the WH Council of Economic Advisors, follow the link:

http://tinyurl.com/3bf62xc

 

 

Risk as a Craft

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Is risk management a craft?  Should we have a guild and apprenticeships?  Can risk management be codified, or is risk management one part science, one part art, and one part intuition gained through extensive experience?

 

I believe that risk management is a craft.  Despite the prevalence of risk management programs I believe that you only learn risk management through experience.  (Yes – I design and instruct in several different such programs at the undergraduate, graduate, executive education levels and in many different professional programs).

 

I am obviously biased in making that statement.  Our company RSD Solutions after all is formed on the backbone of professionals with extensive experience who have been there and done that.  Based simply on credentials there are many other directions we could have chosen to go into – but we chose risk management based on our experience.  That is an important and significant difference.

 

Often risk managers are chosen based on credentials.  Credentials are important, but credentials are only starting points.  Credentials are only starting points for gaining the sufficient experience necessary in order to be eventually claimed a craftsperson.  It is time for the profession to start to act as a craft, and less as a science – with all of the implications this implies.

 

Risk Managers in Conversation

Contributed by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

From the July 5, 2011 Wall Street Journal, Pepper and Salt Column.  No need to write anything else.  All is self-explanatory.

 

 

Jazz and Bowling

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Seth Godin a while ago (September 12, 2010) asked the question “Why jazz is more interesting than bowling” in his blog.  A strange but a very interesting question.  Before you sign off of this blog, I want you to risk 40 seconds of your life to read Seth’s blog in its entirety, and then ask yourself a simple question that I pose below.  

Why jazz is more interesting than bowling

Bowling is all about one number: the final score. And great bowlers come whisker-close to hitting the perfect score regularly. Not enough dimensions for me to be fascinated by, and few people pay money to attend bowling matches.

Jazz is practiced over a thousand or perhaps a million dimensions. It's non-linear and non-predictable, and most of all, it's never perfect.

And yet...

when we get to work, most of us choose to bowl.

Interesting little blog isn’t it?  Now you are probably asking yourself, “Why did Rick include this in a risk blog?”  The answer is that I wanted to ask you; “when you go to work as a risk manager, are you bowling or jazzing?”

 

Here is the link to the blog which I have pasted below in its entirety. http://sethgodin.typepad.com/seths_blog/2010/09/why-jazz-is-more-interesting-than-bowling.html 

 

Risk as a Craft

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Is risk management a craft?  Should we have a guild and apprenticeships?  Can risk management be codified, or is risk management one part science, one part art, and one part intuition gained through extensive experience?

 

I believe that risk management is a craft.  Despite the prevalence of risk management programs I believe that you only learn risk management through experience.  (Yes – I design and instruct in several different such programs at the undergraduate, graduate, executive education levels and in many different professional programs).

 

I am obviously biased in making that statement.  Our company RSD Solutions after all is formed on the backbone of professionals with extensive experience who have been there and done that.  Based simply on credentials there are many other directions we could have chosen to go into – but we chose risk management based on our experience.  That is an important and significant difference.

 

Often risk managers are chosen based on credentials.  Credentials are important, but credentials are only starting points.  Credentials are only starting points for gaining the sufficient experience necessary in order to be eventually claimed a craftsperson.  It is time for the profession to start to act as a craft, and less as a science – with all of the implications this implies.

ASRS,… (?)

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Don’t you just love it when people throw around acronyms like “ASRS” and just assume you know what the heck they are talking about?  I don’t, but I wanted to get you riled up so you would read this post.  Hopefully my tactic worked.

 

ASRS stands for “Aviation Safety Reporting System”, and it is the system to report “near-misses” of aviation accidents.  Kim Vicente in his multiple award winning book “The Human Factor: Revolutionizing The Way We Live With Technology” (Vintage Canada, 2004), describes the ASRS and outlines the attributes of this database that make it so effective for airline risk management.

 

·         Reports are de-indentified so blame cannot be assigned and there can be no retribution.  This increases the likelihood of reports being submitted and being submitted accurately and completely. 

·         The reports are voluntary and confidential.  Anyone can file a report.

·         Reports are analyzed by experts who are generally retired pilots.  This means that the reports are analyzed by people who understand the context of flying, and the fact that they are retired means they can look at the issues objectively.

·         The goal is to “find out what’s to blame, not who’s to blame” (emphasis is Vicente’s). 

 

Does your company have an “ASRS”?  Should your company (or industry) have an ASRS?  Can you come up with a better acronym that will sound as mysterious as ASRS?

Doing nothing is not a strategy; Canadian exporters exempted

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Recently Peter G. Hall, Vice-President and Chief Economist at the Canadian government’s Export Development Corporation stated in his weekly e-newsletter that when it comes to exporters dealing with the “soaring loonie” a survey showed that:

 

“(of the) current coping strategies, the largest group of respondents, at 28%, is simply riding out dollar movements. Cost-cutting is the preferred route for 20% of exporters, while 10% have a hedging strategy. At 7%, a small minority is having success passing on the cost of a higher dollar by increasing selling prices.”

 

So almost 50% of respondents are either effectively doing nothing or hoping that cost cutting in a commodity appreciating world will reduce the risk to their firm of feeling the pain of a strong Canadian dollar.  Cost cutting can work but sadly the costs being cut are probably adversely effecting moral, staff training or future market opportunities; as for “winging it”, that to may limit future growth and profitability. 

 

Why do so few firms go with a hedging (arguably the more sensible route for some) strategy?  The common reason we at RSD have found is a misunderstanding of the strategy or the lack of internal corporate skill sets and the discomfort of senior staff acknowledging this.  Is that where your firm stands?  And is that really a justification for doing nothing or slashing and burning operations to effectively stand still?