Steve Jobs once famously said that “you cannot connect the dots
going forward”. Every risk manager at
some level understands this. The fact
that the future unfolds in an unpredictable manner is in some way the reason
that the discipline of risk management exists.
It is however a lot easier to connect the dots going backwards – but
this exercise has some hidden traps.
Connecting the dots on what happened is a way to deconstruct a risk
event and learn from it. This (to coin a
phrase from the ‘90s Martha Stewart) is a “good thing”. However it often becomes a bad thing for
several reasons.
Firstly, we are often shallow in connecting the dots going
backwards. We find a few major
correlations, and we assume these correlations are the cause. In reality it is often the much more subtle
and more hidden catalysts that are the loosely connected dots that as risk
managers (and regulators) we need to be looking for and learning from. The reality is that we often superficially
take the first few major dot connections as our answers. Risk is much more nuanced than that. (I will leave the obvious issue of
correlation not necessarily being causation out of the discussion for now.)
Secondly we assume that the same dots will exist going forward. This is frequently incorrect. The dots, and their connections going forward
are usually not the same. Risks and how
they arise evolve, adapt and change. The
same dots will not necessarily produce the same connections and in turn produce
the same results. The effect is
compounded when we include the fact that we likely did too superficial of a job
analyzing the dot connections from the previous risk event – as discussed in
the previous paragraph.
Risk management is not an “if-then” management
exercise. Fortunately, or unfortunately
(depending on your point of view), risk management is not a connect-the-dots coloring
book. (I really enjoyed connect-the-dot
coloring books as a kid.)
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