Measurement Risk

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

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Risk managers are well aware of model risk.  For instance, every risk manager can cite the well-worn adage that “all models are wrong but some are useful”.  However how often do we consider measurement risk, namely the risks that arise from inaccurate measurements, or the fact that the measurements are not measuring what we (want to) believe they are measuring? 

Models are only as good as the measurement of the data that is put into them.  Risk decisions are only as good as the measurement of the data on which they are based.

Contentious Truths

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

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Peter Thiel, the founder of Paypal, provides in his very interesting book on start-ups called Zero to One, a very thought provoking interview question; “What important truth do very few people agree with you on?”

In risk management there are very few “truths” although a lot of risk management is presented as the truth or often justified by mathematical analysis which also falsely passes as the truth.  Therefore it might be a good idea to ask managers “what important risk idea do very few people agree with you on?”  The answers might be surprising and surprisingly good!

Protection Paradox

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

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"We have lost the balance between short-term safety and long-term health.  In outdoor play, risk doesn't mean courting danger, but rather giving kids the freedom to assess their surroundings and make decisions, allowing them to build confidence, develop skills, solve problems and learn limits," said Dr. Mark Tremblay, chief scientific officer of the non-profit ParticipAction, which releases the annual Report Card on Physical Activity for Children and Youth.[1]

The report continues to talk about what it calls “the protection paradox”.  Basically by overprotecting our kids, we are setting them up for greater danger in later life.

I believe there is a direct comparison in many corporate risk management policies.  By not allowing employees to take risks, not only do corporations stifle the creativity of their employees, they also stunt their employee’s ability and flexibility to deal with risk.  Risks, both good risk, and bad risk are a part of the corporate world.  By having too strict risk policies, corporates have “lost the balance between short-term safety and long term health”.  Something to think about.

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[1] As reported in the Toronto Sun, http://www.torontosun.com/2015/06/09/canadian-kids-get-d-minus-for-physical-activity-report  (accessed, June 25, 2015)