Hiring Diversity (Part 4 of 4)

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

We all understand the power of diversity and the evils of groupthink that is caused by a lack of diversity in thought, opinions and ideas.  However have you taken time to look around at the key members of the risk team at your organization?  (By the way, the key members of your risk team may not be a part of the risk team.)  How much diversity is there in your risk management system?  When you closely examine the structure you will see two, perhaps three distinct clusters of individuals – perhaps the wise old experienced ones who hold the institutional knowledge of how things have been done for the last century, and those with advanced degrees of some shape or form that generally are quantitatively based.  No offense, but that is not the most diversified of portfolios.  To rectify the situation I propose at least four new hires for your organization’s risk system.  Unfortunately I expect few will take my advice, but for those that do I strongly believe that there will be unexpected rewards and pleasant surprises.

 

In no particular order …

 

Each risk system should have an ecologist.  An ecologist understands how nature works, and how it works in all of its complex glory.  The biologist Robert May shook up the field of ecology back in the 1970’s by introducing the study of complexity into biology and in particular in natural systems.  Complexity theory is now a major part of ecology and for this reason your risk system needs ecologists.  Business is its own type of natural system, and it is evident (although largely unrecognized) that complexity applies to business just as much as it applies to ant colonies or species population dynamics.  Ecologists can help your organization make this critical leap in thinking.

Hiring Diversity (Part 3 of 4)

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

We all understand the power of diversity and the evils of groupthink that is caused by a lack of diversity in thought, opinions and ideas.  However have you taken time to look around at the key members of the risk team at your organization?  (By the way, the key members of your risk team may not be a part of the risk team.)  How much diversity is there in your risk management system?  When you closely examine the structure you will see two, perhaps three distinct clusters of individuals – perhaps the wise old experienced ones who hold the institutional knowledge of how things have been done for the last century, and those with advanced degrees of some shape or form that generally are quantitatively based.  No offense, but that is not the most diversified of portfolios.  To rectify the situation I propose at least four new hires for your organization’s risk system.  Unfortunately I expect few will take my advice, but for those that do I strongly believe that there will be unexpected rewards and pleasant surprises.

 

In no particular order …

 

Each risk system should have an artist.  An artist does not see things as they are, but as they might be.  An artist sees things in new ways that are creative, novel and not bound to tradition.  A good artist creates paradigm shifts.  An artist helps an organization visualize.  A good artist is not committed to just one style or medium.  An artist helps an organization capitalize on Nason’s First Law of Risk Management.  (You say you forgot Nason’s First Law of Risk Management?  I will refresh your memory:  the mere act of visualizing a risk automatically increases the probability and magnitude of it occurring if it is a good risk, while decreasing the probability and severity of it occurring if it is a bad risk.)

 

 

Systemic Risk, Shadow Banking and Governance

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The costs from the recent financial crisis in terms of asset write-downs by financial institutions, wealth destruction and the lost output and job creation have refocused regulators attention on the role of hedge funds in the management of systemic risk.

 

Andrew Patton, Tarun Ramadorai and Michael Streatfield note in a recent VOXEU communique (9th April) Are Voluntary Hedge Fund Disclosures Reliable? Discuss some of these issues. In the wake of the financial crisis, the Securities and Exchange Commission (SEC) proposed a rule requiring US-based hedge funds to provide regular reports on their performance, trading positions, and significant counterparties.  

 

Currently, hedge funds are part of the unregulated shadow banking system that perform financial intermediation (estimated at 50% of total intermediation process) and account for a significant portion of trading volume (over 50%) in different asset classes.  Before the policy is implemented, Patton et al argue that such a move will benefit both regulators and investors.

 

Recent policy debates on the pros and cons of imposing stricter reporting requirements on hedge funds have raised various arguments. The benefits of disclosures include market regulators having a better view on systemic risks in financial markets, a better understanding of asset price dislocations, and investors and regulators being able to better determine the true, risk-adjusted performance of funds. Costs include the administrative burden of preparing such reports, and the risk of leakage of valuable proprietary information on trading strategies that may be derived from portfolio holdings.  

 

The authors’ analysis suggests that mandatory, audited disclosures by hedge funds, such as those proposed by the SEC last year and due to be implemented in 2012 would be beneficial to regulators.  They also suggest considering whether these reporting guidelines could also apply to disclosures to prospective and current investors.  Currently they only apply to the funds' disclosures to regulators...  They conclude that such information would help hedge fund and other investors make more informed investment decisions.

 

The IMF estimated that global financial institutions wrote down over $2 trillion in the value of assets on their balance sheet from the financial crisis from 2007 to 2010.  If you add the loss of potential economic output and job creation the cost of the crisis makes it very expensive.  The implementation of governance in the management of systemic risk is much less costly than the alternative.

 

For more on this follow the link: www.voxeu.org/index.php?q=node/7858

 

Hiring Diversity (Part 2 of 4)

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

We all understand the power of diversity and the evils of groupthink that is caused by a lack of diversity in thought, opinions and ideas.  However have you taken time to look around at the key members of the risk team at your organization?  (By the way, the key members of your risk team may not be a part of the risk team.)  How much diversity is there in your risk management system?  When you closely examine the structure you will see two, perhaps three distinct clusters of individuals – perhaps the wise old experienced ones who hold the institutional knowledge of how things have been done for the last century, and those with advanced degrees of some shape or form that generally are quantitatively based.  No offense, but that is not the most diversified of portfolios.  To rectify the situation I propose at least four new hires for your organization’s risk system.  Unfortunately I expect few will take my advice, but for those that do I strongly believe that there will be unexpected rewards and pleasant surprises.

 

In no particular order …

 

Each risk system should have a sociologist.  I know that I have blogged and spoken on this several times before, but the point needs repeating.  A sociologist studies how groups of people behave.  The emphasis here is on groups.  Understanding how individuals behave is important, but how individuals behave is not the whole story.  In fact there is a lot of evidence that individuals behave very differently in the presence of a group.  We know this.  Yet what do we do about it?  Answer – nothing.  Organizations are groups of people.  An industry is composed of groups of people.  The economy is composed of groups of people.  Yet we focus on the individual and assume that things scale.  Things do not scale when it comes to people.  People are complex, and groups are complex adaptive systems.  Groups are not the sum of the individuals – and for that matter there is never an “average” individual.  A sociologist helps the organization understand this in new and novel ways that the old embedded employees cannot see and ways that the math wizards can never imagine.  A sociologist is a valuable risk team necessity.

 

Hiring Diversity (Part 1 of 4)

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

We all understand the power of diversity and the evils of groupthink that is caused by a lack of diversity in thought, opinions and ideas.  However have you taken time to look around at the key members of the risk team at your organization?  (By the way, the key members of your risk team may not be a part of the risk team.)  How much diversity is there in your risk management system?  When you closely examine the structure you will see two, perhaps three distinct clusters of individuals – perhaps the wise old experienced ones who hold the institutional knowledge of how things have been done for the last century, and those with advanced degrees of some shape or form that generally are quantitatively based.  No offense, but that is not the most diversified of portfolios.  To rectify the situation I propose at least four new hires for your organization’s risk system.  Unfortunately I expect few will take my advice, but for those that do I strongly believe that there will be unexpected rewards and pleasant surprises.

 

In no particular order …

 

Each risk system should have an epidemiologist.  Yes – someone who studies and understands the growth of health issues throughout a region, a country or even the world.  An epidemiologist understands that things spread.  They also understand how things spread and they appreciate the fact that the spread is not always by the usual causes.  They also understand the models for spread are not always linear and predictable.  They know about creating firewalls and how containment strategies work and also how they fail.  They also know how to connect the dots going backward – not because each health crisis is similar (they’re not, they are all unique) – but so they can learn lessons that will help and provide clues when the next inevitable threat of a crisis rears its head.