Exceptions

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

We have all heard the saying, “the exception that proves the rule”.  I have to admit that I have never really grasped the meaning of this statement, although I realize it is always said when there is a clear exception to a rule.

 

In risk we always have to deal with exceptions.  In fact I would argue that exceptions are the rule of risk management.  Without exceptions there would not be a field or an industry of risk management.  Without exceptions we would not have schools or degrees in risk management.  Without exceptions I would have to find something else to blog about.

 

The tough question of risk management however is how do we deal with exceptions.  How do our risk models incorporate exceptions?  The toughest question of all perhaps is deciding when to abandon the risk protocol for an exception – in essence deciding when an exception is exceptional (assuming that is not an oxymoron).

Backtesting

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Coming from a background in investments (and nuclear physics), we always talk about back-testing a new idea.  In other words, how would have the world unfolded (differently, better, worse) if we implemented (did not implement) a given strategy.  Back-testing however seems to be a rarity in the world of risk management (with the possible exception of financial risk management).  Perhaps this is a major oversight of the profession. 

 

I realize that back-testing operational or strategic risk is tricky.  A lot of assumptions need to be made, and models of outcomes need to be constructed.  Perhaps however it is the exercise of working through the necessary assumptions and constructing the models that would make it such a useful and valuable exercise.

ERM Course – I Need Your Help

Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

I am putting together a new Enterprise Risk management Course for my MBA students.  I would love to hear suggestions from my readers as to what I should include.  Any suggestions you have for readings, papers, topic suggestions would be most welcomed. 

 

I have put together now four major ERM courses and this will be my 5^th version where I have started from scratch.  The one interesting thing about teaching ERM is that the field is still so young and still rapidly evolving that each new version allows for a fresh look at things.  I look forward to hearing your suggestions.

 

Steve Jobs as Risk Manager

Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com 

 

Just finished the Steve Jobs biography.  Interesting book about an interesting person.  Not sure if it is a biography on how to be a manager (rip people apart, be ruthless, demand nothing but perfection, be a rebel, think differently, be obsessed with design, be obsessed) or how not to be a manager (see previous set of parentheses).  Interesting to think though about what Steve Jobs would be like as a risk manager.  Would his qualities be an asset, or a liability?  

Tebow Stats

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com 

info@RSDsolutions.com 

 

Like many of you I sat and watched with a sense of expectation as Tim Tebow played awful for three quarters against the Chicago Bears last weekend.  I kept watching the game in part because Tebow (and the Broncos in general) were playing in such a mediocre fashion.  We all know the script – Tebow sucks statistically for three quarters and then in the fourth quarter comes to life to impossibly pull the game out of the hat for a win for the Broncos.

 

I suspect that the dismal performance of the Broncos for three quarters, only to pull out the game after coming from behind is making Rolaids addicts out of the Broncos coaching staff and management.  The fans however seem to love it.  The only stat that fans know about in the final analysis is who won.  The vast majority of fans are not at all concerned with how the win occurs.  A win is a win.  Stats are simply things to debate in the off-season when there is nothing else to talk about.  Broadcasters, coaches and managers seem to be the only ones concerned about performance statistics.

 

Now shifting back to risk management, which they tell me is supposed to be the purpose of my rambling – but thankfully short – blogs.  Are risk managers more concerned about stats (i.e. VAR, risk weightings, volatility levels etc.) or are we more concerned with outcomes?  The answer should be obvious, but I am not sure that it is.  In my working with risk managers, they often seem more concerned that their numbers look good, and less concerned about the actual outcome (assuming of course that the numbers looked good beforehand).  Perhaps risk managers should be more like the fans and more concerned about outcomes. 

 

Sometimes the numbers suck, but the desired result occurs.  Sometimes the numbers are great but the outcome sucks.  Sometimes uncertainty occurs.  (Did I say “sometimes” in the previous sentence – I meant “always”.)  Stats are stats, and wins are wins.  Sometimes (always) it really is that simple.