Danger, Risk, Opportunity

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

I am currently reading Aaron Brown’s book, “Red-Blooded Risk: The Secret History of Wall Street”.  http://www.amazon.com/Red-Blooded-Risk-Secret-History-Street/dp/1118043863/ref=sr_1_1?s=books&ie=UTF8&qid=1360434108&sr=1-1&keywords=red+blooded+risk.  I had read one of his earlier books, “The Poker Face of Wall Street” and quite enjoyed it.

From his Amazon bio, Mr. Brown states: “I'm the author of "Red-Blooded Risk" and "The Poker Face of Wall Street," and a co-author of "A World of Chance."  My day job is working for AQR Capital Management.  I also am a columnist for Wilmott and Quantum magazines, and write for a lot of finance and poker periodicals; as well as teach classes and speak at conferences.  I serve on the Editorial Board of the Global Association of Risk Professionals and am a member of the National Book Critics Circle.  In past lives I've been a professional poker player, trader, finance professor, portfolio manager and head of mortgage securities.”  In other words, he has some credibility to write about issues of risk.

One of the points that Mr. Brown makes early on is the difference between risk, which is two-sided in that bad or good things may happen, and danger, where only bad things may happen, and opportunity where there is the possibility of something good happening.

As readers of my blogs, or those who have attended my seminars, or been one of my consulting clients know, I am zealous in that risk managers must understand that risk is two-sided.  As I have said numerous times, risk is the possibility that bad or good things may happen, and thus risk management is managing to increase the probability and magnitude of good risk occurring while managing so as to decrease the possibility and severity of bad risk events happening.”

Risk managers, regulators, senior managers, as well as other stake-holders cannot confuse risk with danger – although that is what is constantly done.  Risk can be good or bad, while danger is always bad.  Risk is a part of business, and companies need risk in order to grow and thrive.  Confusing risk with danger changes the risk management function – and not for the better.

Anti Risk Homeostasis

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

I have written about risk homeostasis several different times before.  (Here is one link to an article in RMA Journal, http://www.rsdsolutions.com/quotis-your-risk-system-too-goodquot-article-rick-nason-published-rma-journal)

Risk homeostasis basically says that no matter what actions we take to reduce risk, the response of an organization (or individuals) will act to counterbalance it so the total amount of risk remains more or less the same.

This morning I got to witness a case of anti-homeostasis – in other words, by taking on a risky venture, the system will act so as to reduce the risk.  I guess I need to explain that confusing statement.

The east coast of Canada where I live is being hit with the intersection of the storms that have shut down the east coast of the US, and a second storm that has crippled central Canada.  In a nutshell the weather here is UGLY!  My daughter however had to get to her job where she serves an essential function (note: virtually all businesses are closed due to the storm).  As a parent you always worry when your kids are driving, but particularly so when the driving conditions are bad.  Today the driving conditions are about the worst I have ever seen them.  (Driving is currently banned in Boston which is getting just one of the two storm systems we are getting.)

As I waved good bye to my daughter this morning I had the normal parent worries about their children.  About ten minutes after she left there was a phone call from my daughter.  Recognizing the number on caller ID I picked up the phone with trepidation.  It was my daughter calling from her car (hands free of course).  She wanted to tell me to stop worrying.  There was an extra compliment of snow-plow trucks on the highway she said, but there were no other cars.  Most people simply considered it way too dangerous to drive.  The consequence is that my daughter had a relatively decently cleared road to herself so the net effect was that the drive to work was probably less dangerous than it would have been on a typical summer day when the road conditions were excellent.  In other words, dad had little to worry about because of anti-risk-homeostasis.

Taking a Break

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

It has been a while since I have written a blog – almost two months in fact (Ed. note: some subsequently written blogs have been posted earlier than this one).  While I generally enjoy writing blogs, it can occasionally become a grind trying to come up with ideas that are both interesting, and hopefully fresh.  No one wants to read the same ideas again and again.  To that end I decided to take a bit of a break and do some reading (and writing) away from risk management.  I think we all need that a bit – that is we all need a break from the day to day grind of the same ideas being rehashed again and again.  It is why academics get sabbaticals – an opportunity to take a break and to build up a set of different ideas based on different perspectives.

Perhaps it is time that more risk departments offered sabbaticals as well.  Much of the risk thinking seems to be the same ‘ole thing.  Perhaps taking a break to gain a fresh perspective will help to improve the quality, creativity and enthusiasm of the thinking.

Manage Not Solve

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

I was listening to a radio conversation about the Middle East while driving my car last week and one of the political pundits came out with a line that made me pull over so I could write it down before forgetting it.   The line was; “leaders must learn that the Middle East situation is one that cannot be solved – it must be managed”.

This is a very profound statement.  With all of our education, systems and certifications, we impulsively assume that there must be a solution to all problems or issues.  When faced with a risk issue we look for “solutions” and “fixes”.  Not a correct approach.  Most risk issues are complex – not complicated.  The Middle East situation is complex – not complicated.

Complex situations cannot be solved – they must be managed.  I know it is hard for the ego to comprehend that our superior brains, and our superior training, and our superior qualifications and certifications do not give us enough intellectual ammo to solve all risk issues.  However they do give us more than enough intellectual power to manage most issues.  However we must take a step back and become content with managing rather than solving.

Resolutions

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc

Psychologists tell us that by now, the vast majority of people who made New Year’s resolutions have already broken them.  The spirit may have been willing, but the flesh was too weak.  Did your risk management function have the equivalent of any New Year’s resolutions?  Have they been broken yet?