Spring Cleaning

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

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It’s that time of year again when many homes go through a spring cleaning.  The broken stuff gets tossed, while the unused stuff gets sent to the charity bin at the shopping centre.  Spring cleaning is a lot of hard work, but almost everyone likes the look and feel of their house much better after it is done.  Clutter is gone, things are easier to find, the rooms seem brighter and smell cleaner and overall the house seems fresher and more optimistic. 

If spring cleaning does that much to improve a house, how much will spring cleaning your risk management do for your corporation?  What parts of your risk management are broken and should be sent to the trash?  How much has been unused for so long that no one can remember why that particular process was put in place to begin with?  What corners need a deep cleaning to get out the accumulated dirt that gets missed by the more casual cleanings?

Spring cleaning freshens and improves a house and it freshens and improves risk management as well.

Data

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

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Colin Powell – “Experts often possess more data than judgment.” 

Our current management world is data driven.  The era of big data is here and it will continue to get even bigger (no pun intended).  However, have you stopped to think about what exactly data is?  In essence, data is history.  Data is numerical recordings of what happened.  In many cases what happened is relevant for what will be – history tends to repeat itself.  I would argue however that for the most valuable cases, that is cases in which humans need to make a decision, what happened is not relevant for what might be.  Paradigm shifts – for example – give no respect whatsoever to history.

As a risk manager in the era of the religion of data, your role is to decide for what risks is the future a continuation of the past, and for what risks is the future yet to be designed.  It is not a trivial task, and it is a task that cannot be done with data.

Fears

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

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It was Franklin D. Roosevelt who famously said that we “… have nothing to fear but fear itself”.  The same might be paraphrased today as “we have nothing to fear but the regulation of fear itself”.

Fear is a powerful motivating tool, and likely fear is used as a sneaky political trick in many organizations to justify expansions of processes designed in part to mitigate risk and the risk of fear.

One factor that is often ignored is that many people seem to actually like to live in a state of fear.  As a trivial example consider all of the successful horror movies, or the attraction of ever more stomach churning roller coasters.  In the corporate world fear is also attractive to the psyche of many people as it allows them to justify their existence.  If the sky is perpetually falling, then they must be perpetually in place to keep it up.

Ultimately though making decisions out of fear is generally suboptimal.  Furthermore, fear is not risk and neither is risk equivalent to fear. 

There is a critical difference between being fearful of risk, and being respectful of risk.  Professional risk managers embrace and manage risk; amateurs fear risk.