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.

Expectations

 

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

As I write this, it is Saturday morning – late Saturday morning I might
add.  Already I have knocked off three items from my weekend to-do list. 
That is a good thing I suppose.  However I am a bit miffed – or miffled as
Tony Soprano would say.  All week long my regional paper has been promising
me (and of course all of their subscribers) that we would absolutely love
their revamped weekend format that is being introduced today.  The problem
is they still have not delivered the freaking thing.  I cannot read and
enjoy my Saturday paper unless I have it.

Normally I would not be upset about my Saturday paper being late (actually I
probably would as I look forward to the fact that I can read through it
leisurely – note, it is not the content that is important, it is the fact
that I can do something – anything – at leisure).  What has raised my
ire is that for the last three weeks, the paper has been raising expectations
about how great the new format was going to be this weekend.  You simply
cannot raise expectations and not deliver. 

But what about your risk management function?  What expectations have you
created, or not created?  Are you delivering on those expectations?  Or are
you disappointing by failing to deliver?

Meanwhile, with the last sentence on this blog I can now cross off four
things on my to-do list.  Perhaps not having a weekend paper to start my
weekend off on a procrastinating note is a good thing.  (Apologies of course
to Martha.)

Case Studies

 

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

As most people know, I am also a Business School professor as well as a risk
management consultant.  One of my favorite teaching methodologies is the
case method.  The case method forces students to think rather than just know
things – which in business and in risk management is a critical distinction
to keep in mind.

I was taught a very specific method for working through case studies, and it
is very applicable to risk management.  The method, or process, is to first
define the problem.  Most students immediately jump in and start the
analysis by crunching numbers or developing strategy maps.  That is putting
the cart before the horse.  The second step is to determine the focus.  In
other words, from whose focus are you going to work through the case?  Note,
that in determining the focus it is quite possible that you will be forced to
change the problem statement, as the problem is very likely focus dependent.

Most students appreciate that this might be a good thing to do, and then they
start the analysis.  However, the next step in the process is still not to
start the analysis.  It is to define the criteria by which you will choose
the optimal solution.   Before you have the decision making criteria, you
will not know what analysis to do.  Again, the cart would be before the
horse.  So often students start the analysis without first thinking about
the criteria, and as a result a faulty portfolio of analytical techniques
leads to a sub-optimal solution.

The next step is – you guessed it – is still not to start the analysis. 
To prevent biases, and to prevent getting locked into an answer before you
have done the proper due diligence, you need to develop a list of
alternatives.  After a good list of alternatives is developed, */then/* you
can start the analysis.

In risk management we too often start with the analysis without a recognition
of (a) the problem, (b) who (or what) the focus of the problem is centered
around, (c) what the criteria will be for choosing a solution or decision, or
(d) what the full list of possible alternatives are.  Risk management needs
to take a page from B-school basics.