Roadwork

 

*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*

My daughter just came in from a run.  She, along with my wife, are in
training for a 5k race (please sponsor them).  My daughter has been going to
the gym very faithfully and I am really proud of her for her dedication and
tenacity.  She has been a real trooper. 

This was one of her first runs outside as the weather has not really been
conducive to outside running – expect for the addicted runners who will
train in any kind of weather.  My daughter had been putting in the miles
(kilometers) on the treadmill at the gym.  When she came back from her
outside run, the first words out of her mouth were "that was a lot tougher
than running on the treadmill!"

There is a lot of validity in that statement.  As someone who used to run, I
can attest to the fact that running on a treadmill can make anyone look like
a marathon guru after just a few short weeks of training.  The treadmill
keeps your pace for you, and provides a consistent running path that is
always smooth.  While a treadmill can simulate hills and whatnot, it is not
the same as the real thing.  A treadmill is a model of running outside, and
I have discussed many times the danger of assuming a model is the real thing.

Risk management structures are like treadmills.  They can simulate the real
thing, but at the end of the day they are a simplification that gives one a
false sense of confidence, and a false sense of understanding.  Just as a
treadmill cannot simulate wind conditions, the psychology of being around
other runners, pebbles on the road, traffic, etc., risk models also have
their subtle but important differences from the real world of risk
management.

Running outside is different and more difficult than running on a
treadmill.  Risk management is different and more difficult than risk
modeling.