Relevance

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

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I am known as a bit of a thorn in the side of some of my academic
colleagues.  The issue is that I believe that a lot of the research (and
teaching) that is being done in finance, and in risk management in particular
is being done more for the benefit of the researchers than for the benefit of
society.  I will defend pure / theoretical / academic research until the end
of the world.  However when almost ALL of the research is purely academic
then I think there is a problem.

One of my colleagues is on a task force looking at the relevance of
research.  Knowing my arguments for more relevant research he out of the
blue popped into my office a short time ago to ask what MY definition of
relevant research is.  I have to humbly admit that I did not have a
ready-made answer for him, and indeed the question caught me totally
off-guard.   My answer was along the lines of "research that has a 50%
probability of being implemented in some way by a manager within five
years".  I was not totally satisfied with that answer, but it was the best
I could do on the spot.  I have however thought about the question a fair
bit over the week or so since my colleague approached me with the question.

Upon further reflection I would like to change my response to "research
that attempts to answer a question that a manger should be asking".  This
response however also raises issues.  One major issue is that many managers
do not know the questions they should be asking.  Like lawyers, managers
tend to ask the questions that they already know the answer to, rather than
the questions they suspect might not have an implementable answer.  Another
related issue with this definition is that the answer to most great
management (and risk management) problems is "maybe". 

Management, and risk management in particular is a messy and complex field. 
Academics however – with their need to publish or perish – are much
better suited to answering complicated questions than complex questions. 
Research results of "maybe" do not get published, and thus do not get
rewarded.  Additionally, frequently only complicated questions have readily
available data, while with complex questions the data is often missing,
nebulous or fuzzy at best.

The best questions of risk management deal with unknown unknowns, or risk
culture, or why people act in irrational ways, or why the best laid plans of
mice and men fail.  These are great questions that have so far proven to
have not so great answers.  However that does not mean that we should not
keep asking those questions and trying to find "better answers", even if
we cannot find "answers".


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