Definitions

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

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This week the latest economic statistics for Canada will be reported.  GDP growth in particular will receive extra attention as Canada is in the middle of an election, and also as there has been negative GDP growth due to the fall of oil prices.  The big debate will be whether or not Canada is in a recession.

The spin doctors from all political parties are all over this, as is the media.  In essence everyone wants to know whether or not Canada is in a recession.  The question is; what is the technical definition of a recession?  While GDP growth has been negative, it is more of a technical issue due to the change in the price of oil.  If oil was back anywhere near $100, then it is likely that this is a non-issue.  After all, economic activity has not really changed, employment has not really changed, and absent the media constantly stirring the issue up it is also likely that consumer confidence has not really changed. 

Too often in risk management we also get caught up in definitions.  Rarely however is the precise definition important.  Also if a definition can only be understood or implemented by a professional then it is likely to be of very limited use.

Ronald Reagan was one who did not have time for definitions as he famously demonstrated the uselessness of economic classifications and definitions by asking simply “are you better off than you were four years ago?”  Not a bad risk question to ask as well.

911

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

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Last weekend Vancouver was hit by a storm which knocked out power for many and created the general chaos that such a storm normally causes.  One of the outcomes of the storm was that the 911 emergency phone system was overloaded.  You might think this was because there was a very large number of emergencies to report; however that was not the reason.  The reason for the overload of the 911 system was that the power company`s reporting system was inoperable.  In other words, when people could not get through to the electric utility company they phoned 911 instead to find out when their power might be repaired and turned back on.

My first thought upon hearing this on the news report was `what a bunch of self-centered ninnies`.  However upon further reflection I realized this happens all the time.  A system or tool that is easy to use, will be used, and furthermore will often be used in quite unintended ways.  Risk systems are not immune from this.  Indeed, one could right correctly categorize the 911 emergency phone system as a risk tool.

Life preservers become seat cushions, derivatives bought as financial hedges become tools of market speculation, Value at Risk becomes a measure for determining compensation, the computer assisted traction system of an SUV becomes an excuse to make an unnecessary trip in a blizzard – and the list goes on and on.

Is your risk system being misused?