Who is Risk’s Steve Jobs

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

We all already miss Steve Jobs.  In fact it may be argued we miss him too much as media articles are asking if we are making him a saint.  That is another issue for another time as far as I am concerned.

 

My question is “Who is Risk’s Steve Jobs?”  Who is the individual who has had the force of character to change the risk industry?  Who has created a paradigm shift in risk products and services?  Most interestingly, what risk manager has been a massive failure and let go rather unceremoniously from their own company, to only come back and have an even greater triumph?

Risk Sim

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Everyone who has been to business school is familiar with business simulations.  These computer models simulate economic conditions and the competitive environment of one industry or another.  You spend the weekend, or time during an offsite competing against either the computer, or your peers to see who can run the most successful company according to the simulation.

 

Business simulations are fun, and students and training participants enjoy them up to a point.  Simulations attempt to get participants to learn how to juggle the multitude of factors that affect the outcomes of business decisions. 

 

Business simulations function by taking a set of rules, and correlations between rules and create outcomes based on the participant’s decisions. They are based on a set of assumed cause and effect relationships. If a simulation is played for too long of a period of time (or too many rounds), then it has been my experience that participants start to focus on reverse engineering the simulation, rather than thinking about making good decisions.

 

This raises an interesting question; “Can we create a risk management simulation?”  In other words, can we create a realistic simulation that allows a risk manager to develop their skill at making risk based decisions?  Are there a set of well known rules and correlations – cause and effect mechanisms, that will allow the construction of such a simulation?

Italy – Credibility or Fundamentals

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Credit default swaps for Italy have surged over the last few weeks as the Italian government of Silvio Berlusconi seems to be occupied elsewhere.

In the Voxeu article Credibility is not everything, Paolo Manasse notes that many analysts have argued that the Eurozone emergency meetings could restore creditability if they came out with an all encompassing program.  However, this may not work in Italy where the problem is not credibility, but continued deterioration of the fundamentals.

For Italy, self-fulfilling prophecies may generate opposite and unpredictable outcomes for the same level of fundamentals.  This can result multiple equilibria such as a favorable debt/GDP and primary balance depending on market expectations which may suggest solvency or insolvency depending on prevailing market view. 

The favorable prospects of Italy joining the euro and reducing currency risk allowed the average cost of debt to drop from 10% to 4% in 1996 and the interest bill declined from 12% to 4% of GDP.  This allowed for a significant improvement of the budget and a strong reduction of the debt ratio.  However, this progress was squandered due to a deterioration of fundamentals since 2004.  The debt to GDP level is now back to 1996 levels and the primary balance is near negative territory.  It is only a matter of time before market rates move higher on worsening fundamentals.

The market gave too little consideration to fundamentals such as the debt/GDP ratio and primary surplus, assuming that Italy’s default and possible exit from the euro was inconceivable.  If you look at history, bond yields could return to levels last seen in 1996.  The prospect of Mr. Berlusconi resignation is necessary at this point, however, it is hardly a substitute for taking decisive action for fiscal adjustment.

Italy provides a good lesson for risk management.  Risks can return when we least expect them and the risk manager cannot get distracted from their primary job –managing risk. 

For more on this story follow the link:  http://www.voxeu.org/index.php?q=node/7187

1952

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

 

One of my guilty pleasures is going through old magazines – particularly old business magazines from the 50’s and 60’s.  It is a very useful exercise in that you frequently observe that the factors and practices that made companies successful 50 and 60 years ago are the same factors or practices that make them successful today.  In essence there are a set of best business practices that are timeless.

 

This raises an interesting, and perhaps troubling point.  What risk practices are timeless?  What risk practices that we currently utilize would have also been considered to be best risk practice in the 1950’s?  What risk practices from the 1950’s are still considered to be best risk practices?  What risk practices from today will be considered best risk practice in 2060?