Thermometer or Thermostat

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

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In his book Tribes, writer Seth Godin asks the simple question of whether you are a thermometer or a thermostat?  It’s a great question.  One measures temperature, and one is used to regulate or modify the temperature.  How would you classify risk management at your organization?  Does it measure risk, or does it regulate / modify risk?  Is your risk management a thermometer or a thermostat?

In Theory

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

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In theory ….  When you hear someone say that, you almost expect a “but” is coming very soon.  In theory, a lot of things are true, but in practice, or from experience, we know that they are not true.  Theory and experience are two very different things; a point that should never be forgotten.

How much of risk management is based on theory, and how much of it is based on experience?  How much of risk management theory do we assume is based on experience?  Perhaps more importantly, how much of it is based on relevant experience

The sad truth is that much of what currently passes for best practice in risk management is based on theory, not experience, nor even wisdom for that matter.  As a researcher, I am not knocking theory per se, but theory needs to be respected and understood and utilized for what it is, and as well for what it is not.

In theory, theory is great.  In practice, I will choose wisdom, critical thinking and experience.

Marsha Marsha Marsha

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

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There is a lot to mock about The Brady Show, but if you were raised in the seventies you probably viewed most of the episodes more than once.  (If you have never seen the show, then you really didn’t miss much except a lot of homey corniness, bad and constantly changing hairstyles and an earworm of an opening jingle.)

For those of you who have seen the show, you probably remember the episode where Jan was jealous of her sister and screamed out “Marsha! Marsha! Marsha!” to highlight the fact that everything in the Brady household seemed to revolve around her older sister Marsha.[1] 

If you are a risk manager of a certain level of experience and competence you are likely to exclaim in a similar fashion and with a similar level of envy and exasperation “Data! Data! Data!”.

Jan’s parents, like all good parents, loved each of their children through thick and thin.  However, in any complex situation there are times when things are “thick” and times when things are “thin”.  Just as one child is not superior to another child, one form of risk management is not exclusively nor inherently better than another.

Risk management by data has its place, but it should not be to the exclusion of all other methods of assessing and responding to risk.  Just as a parent does not want to be seen as catering to the needs of one child to the exclusion of the other children, risk management should not focus exclusively on risk control by data metrics.  There is a case to be made that some of the most important aspects of risk management are not measurable – even conceptually.

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[1] For those of you who are wondering, or those who want to go back in time, here is the “Marsha, Marsha Marsha” clip on YouTube  https://www.youtube.com/watch?v=-yZHveWFvqM