One Forty-Thousandth

 

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

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I took a bit of a break last week to get away and try to squeeze a little bit
more summer out before it is gone for good.  As part of that I had a nice
leisurely stay at my sister's cottage.  Like all good cottages (and
doctor's offices) she has a stack of old magazines, which in my brain dead
state of mind I started to peruse.

While looking through one magazine that was five or six years old (maybe
older, maybe newer) I came across a car ad for a mid-priced car that had as a
header in bold letters "1/40,000 of a second".  It was an ad touting how
accurate the clock in the car was.  Now I am not so thick as to miss the
point that the ad is trying to get across – namely if they spend that much
effort on getting the clock to such a fine degree of accuracy, how well must
the rest of the car be put together.  However the rest of the ad gave no
indication of how well the rest of the car actually was put together.  The
entire ad focused on the clock! 

Now I don't know about you, but I really do not care if the clock in my car
is accurate to within one forty thousandth of a second or four seconds. 
Furthermore I can't tell the difference and neither can you.  Thus this
car company is wasting its time, and its energy on telling time.  Its energy
and its focus is totally misdirected.  Very accurate, but misdirected.

Now that I am back from my mini-vacation I cannot help but wonder how much
risk management is like that car company.  That is, how much risk management
is putting a lot of energy and effort into measuring some aspect of risk to a
very precise degree, when in reality it is focusing on the wrong things?


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Football – The Other One

 

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

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I just read a brief review of a new book that looks at the mathematics of
football – soccer that is for those of us on the west side of the
Atlantic.  The name of the book is The Numbers Game, and it is by academics
David Sally and Chris Anderson.  I have not read the book, but apparently
they conclude that it is the weakest player on a soccer squad that is more
significant to the success of the team than its strongest player. 

This is a somewhat counterintuitive result as the focus of any team is always
on the superstars.  The media sports pundits are always debating which
superstar will outperform and bring their "A game" to the big match. 
The bit players – the role players – barely get mentioned.  However as
the analysis apparently shows it is the role of these bit players to make a
play – or not – that are most significant in determining the outcome.

I suspect the same is true in risk management as well.  We focus on the big
risks – the superstar risks – and frequently underplay the role and
importance of the bit player risks.  However it is often how the "bit
player" risks "perform" that determine success or failure for the
organization.


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Cerebral Leaps

 

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

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In an article in the September 27, 2013 edition of the Report on Business
magazine, published by the Globe and Mail newspaper, there is a fascinating
article on the Bank of Canada's Governor Stephen Poloz.  The article is
written by journalist Kevin Carmichael.  It is one of the few articles that
have emerged that has provided a bit of a personal insight into the still
relatively new Governor.

The wide ranging article covers several issues, but there was one comment
made that just popped out at me, and one that I thought was rather
refreshingly honest for a public figure to make.   In talking about the
actions of the bank of Canada during the 2008 financial crisis, Poloz
comments,  "We were fighting fires, but it was not a cerebral leap
forward."

How often are we honest enough to admit to ourselves, much less others, that
we are simply fighting fires, rather than making "cerebral leaps"
forward?  How often do we confuse the two activities?  How much focus, time
and energy do we put on fighting fires versus "cerebral leaps" forward? 

What would the current state of risk management and risk regulation be if
more risk managers, executives and regulators put more focus on "cerebral
leaps" and less on fire firefighting?


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