by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
A good risk manager really needs to be in three places at once. They need to be firmly rooted in the moment. They need to have a solid understanding of the past and how it helped to develop the current context. Finally they need to be a visionary looking into the future – both near term future and the distant future. Ignoring one aspect leads to ignorance of all.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
My favorite is old-fashioned chocolate dipped cake donuts. Unfortunately, and although I live in Canada – home of the most donut shops per capita – it is hard to find my favorite donut. However this blog is not about the tempting afternoon coffee snack, but instead about the hole in the middle.
Most companies have professionals that are intuitively very good risk managers at the “ground level”. These are front line operators and managers, who although they do not have risk manager in their title or their job description, intuitively and instinctively understand risk management as they go about their daily tasks and operations.
Most companies also have very competent risk managers. These are the managers who do have risk manager in their title and risk management in their job description. These are the people who design risk management systems and processes for the company.
Thus a company has great risk management at the ground level, and also has great risk management at the upper levels. The problem is often is the hole in the middle. The hole in the middle is the lack of a connection between front line workers who understand the tasks and associated risks at hand (but not the strategic risk issues), and risk managers who understand the strategic risk issues and the associated portfolio mathematics (but not the ground level day to day operational issues). A company needs to ensure this hole in the middle is filled efficiently.
Meanwhile, writing this blog has made me want a donut. Perhaps I will get a jelly filled donut if they are out of old-fashioned chocolate cake donuts.
Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Diversity is a big topic in management circles. Studies show that we need diversity in managers, diversity on Boards and diversity in education. What are you doing about your personal diversity? What areas of personal risk management development are you exploring that are new, different, out of the normal – i.e. sources that are making you more diverse?
We all read the same newspapers, look at the same websites, and read the same books. And then we have the collective stupidity to wonder how in heck we got to such a state of systemic risk.
You have all heard about the difference between having ten years of experience or one year of experience repeated ten times in a row. Which class of employee / risk manager do you fall into? What are you going to do about it?
Here is a two week challenge: (1) go to a magazine store and buy the magazine that you think is the magazine that would be the last magazine on earth you would purchase, (2) watch a documentary that you think will be more boring than watching paint dry, (3) go to a lecture at a university in a department from which you have never taken a course, (4) learn a new skill – such as how to knit.
You might say that all of this takes time and energy. I agree, but I will also argue that it creates even more time and energy in your brain and in your risk management efficiency. Oh – and you also get all the benefits of diversity that everyone says that we need – and you don’t even have to worry about the political correctness backlash.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Can you learn to be a good risk manager? Can you learn to be a good golfer? Can you learn to be a good tennis player?
My dad used to be the caretaker for the church tennis courts – back in the days when churches had such things as real clay tennis courts. While I was developing as a competitive junior player he was forced to watch way more tennis than he cared to. He also spent more time reading tennis magazines than he cared to. The upshot of all this is that my dad knew a heck of a lot about tennis. However he was not a tennis player. He never bothered, nor did he have the inclination to pick up a racket and play.
It is the same with golfers. I have a lot of friends who are crazy about the game – reading all that they can and hitting the links or the driving range at every opportunity. They know a lot about the game of golf – but they suck at it.
Knowing a lot about a subject does not necessarily make you an expert. Risk is a subject where a lot of people know a lot about the subject, but like my golfer friends they are not necessarily the best at it. Risk, like golf and tennis is a skill. Yes – it requires knowledge, but knowledge only gets you started. You need the practice, the passion, the wisdom, and a thirst to get better. And that is just the list to starting to be a good risk manager – or golfer – or tennis player.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Everyone who has worked in asset / liability management knows what I mean by a barbell strategy. In simplistic terms, a barbell strategy has a mix of both long term assets as a macro “fixing” of the overall risk of the portfolio, and short term assets to fine tune the hedge of the portfolio. Thus the asset liability hedging is done by a mixture of long term and short term assets.
In our information world, the hedge necessary is keeping up with ideas. Thus it might be prudent to adopt a barbell strategy. That is reading a mix of short term items such as a newspaper clipping service, or a series of blogs, and a different mix of longer more thoughtful articles such as books or more extensive journal articles.
For the risk manager, information and creativity are truly the most critical elements. Does your firm have a barbell strategy (or any risk management information strategy for that matter)?
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Matthew Chapter 25 in the New Testament of the Bible contains the well known story of the master who went on an extended trip leaving three different servants in charge of three different sums of money.
To one servant the master left a large sum of money and the servant managed to double the amount through prudent investment by the time the master returned from his trip.
The second servant who was given a medium amount of money was also able to double the amount for his master through making wise investments.
The third servant was given a small sum of money to manage. This servant was afraid of losing any money for his master, so he went and buried the money in a safe place until the master returned. Upon return the master was furious with this servant for his misguided uber-conservatism.
While I do not believe that Jesus had risk managers in mind when he told this story, but he might have. The question is what kind of a servant are you? Another good question to ask is what kind of a risk master do you serve?
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
As part of my preparation to teach a seminar on advanced investment techniques, I have been reading up on what the latest is in the field of venture capital. In going through old interviews and notes I had compiled the one thing that struck me about venture capitalists that being their desire to have someone leading the company who is flexible. Every venture capitalist hates to have someone who is overly passionate about an idea. An overzealous entrepreneur is likely someone who will not be willing to change course when things inevitably do not go as planned. It is considered far better from the VC’s point of view to have someone who has a general idea, rather than a fully articulated plan that they are determined to stick with through thick and thin.
I believe there is a lesson here for risk managers. As a profession we tend to be like over-planned overzealous entrepreneurs who demand to have every detail thought out in advance. While planning is obviously a necessity, it is possible to over-plan. It is also possible to be overly committed to a plan. That goes for a business plan or for a risk plan. Things will happen. Things will change. Assumptions will prove to be incorrect. Economic shifts will happen. When the inevitable happens, commitment to a plan can be just as costly as not having had any kind of plan at all in place. Just like a venture capitalist, you need to learn to know when and how to be flexible.
Now if we could only get regulators to understand that point.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
This week I had my photo shoot for a speaker series that I am participating in. Each professional photographer has a different style – each of which seems to be more annoying than the previous one. The photographer this week however was different. He came into my office, sat himself down and talked to me. No rushing to get lights set up – no running around the room with a light meter – no assistant with a make-up kit. Yes – he did set up lights, yes he did check light levels, no he did not apply make-up to my ugly mug (probably should have). But he did talk. He engaged me in a conversation. Occasionally while talking he would take a photo or two. But the number of photos was minimal. Then after about 20 minutes of conversation and about a dozen photos he thank me for my time and said he was done! I was shocked! What?! Only a dozen photos or so. I was expecting at least 5 times as many shots.
As he was leaving I asked him why so few photos. His response was very telling. He said, “I believe in understanding my subjects. When I do that I only need a few photos to get a great shot. I don’t need to spray and pray like other photographers”.
Interesting. He actually tries to understand his subjects as people so he can take better photos.
What about risk managers? Do we “spray and pray” with our vast amounts of modeling and analysis and data collection, or do we try to understand the people in our organizations and thus need only a fraction of the data that we normally collect and analyze?
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Faces are complex. Recognizing a face is a very difficult task for a computer – much more difficult than recognizing your retina. Faces convey a ton of information. They convey emotions. They also convey understanding or lack of understanding. Faces are complex (not complicated) and thus are not easily codified. That is why a computer cannot easily deal with them.
Scientific studies have shown that we pay up to 8 times more attention to faces than to objects. I think that is interesting in a world where faceless social media is so prevalent.
Now, here is a question – do risk managers pay more attention to faces or to data? Ha! There is not a single risk management Master’s program anywhere that talks about the importance of faces (or the importance of people for that matter). A long time ago in this blog series, I blogged about risk management by walking around (RMBWA). We need more risk managers to manage by reading and understanding faces. Let the computers take care of the data – let the humans take care of the humans.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
While doing research for my forthcoming book on complexity I came across this modern translation of the Hippocratic Oath. This of course is the famous oath that medical doctors take when they start their practice. I thought it was interesting for this risk blog. Before I explain why, simply read through the oath that I have clipped verbatim from the Wikipedia page on Hippocratic Oath.
A widely used modern version of the traditional oath was penned in 1964 by Dr. Louis Lasagna, former Principal of the Sackler School of Graduate Biomedical Sciences and Academic Dean of the School of Medicine at Tufts University:[8]
I swear to fulfill, to the best of my ability and judgment, this covenant:
I will respect the hard-won scientific gains of those physicians in whose steps I walk, and gladly share such knowledge as is mine with those who are to follow.
I will apply, for the benefit of the sick, all measures [that] are required, avoiding those twin traps of overtreatment and therapeutic nihilism.
I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon's knife or the chemist's drug.
I will not be ashamed to say "I know not", nor will I fail to call in my colleagues when the skills of another are needed for a patient's recovery.
I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know. Most especially must I tread with care in matters of life and death. If it is given to me to save a life, all thanks. But it may also be within my power to take a life; this awesome responsibility must be faced with great humbleness and awareness of my own frailty. Above all, I must not play at God.
I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person's family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.
I will prevent disease whenever I can, for prevention is preferable to cure.
I will remember that I remain a member of society with special obligations to all my fellow human beings, those sound of mind and body as well as the infirm.
If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I do a lot of work on capital budgeting. I teach several classes that focus on it, and of course it plays a major role in several of the training courses that we conduct for various organizations.
I stress that organizations should use a lot of different techniques for capital budgeting including real option analysis, Monte Carlo Simulation, and decision analysis whenever possible. Successful capital budgeting often is the determining point between whether a company is thriving or dying five years down the road.
The capital budgeting task is filled with risk and uncertainty. Given that, it is rare that the risk department is a fully integrated team into the capital budgeting process. There are a variety of reasons for this; the silofication of treasury and finance functions, ignorance of capital budgeting techniques by risk managers, ignorance of risk management by the capital budgeting team, as well as a host of others.
I believe that if there is one area that risk managers could make a positive and significance difference it is early in the capital budgeting process. Sad that this rarely happens.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
This time of year everyone talks and thinks about stress. We hear reports of how suicides are up and the theories that in part they are caused by the stress of the holidays. We meet people who are rushing too and fro, stressed out about getting the right gifts, the coming credit card bill, about getting a good deal on the Boxing Day sales.
As a risk manager your job is to think about the stresses, both present and real, perceived but false, as well as future and potential, that affect the operations of a company or institution. To be sure, corporate stress is different from the stresses experienced by an individual, but the concept is certainly the same.
As individuals we talk a lot of how great it would be to have a stress free life. However is this an appropriate dream for a corporation? Is it an appropriate dream for the risk manager of a corporation?
What worries me in the corporate world is the absence of worry or equivalently (depending on your semantics) the absence of stress. Is it really good to have the absence of worry on a corporation? I propose that when the corporation stops worrying, that is when it is about to be blinded-sided in a catastrophic way.
Rick Nason, PhD, CFA
Partner, RSD Solutions Inc
Just finished the Steve Jobs biography. Interesting book about an interesting person. Not sure if it is a biography on how to be a manager (rip people apart, be ruthless, demand nothing but perfection, be a rebel, think differently, be obsessed with design, be obsessed) or how not to be a manager (see previous set of parentheses). Interesting to think though about what Steve Jobs would be like as a risk manager. Would his qualities be an asset, or a liability?
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Like many of you I sat and watched with a sense of expectation as Tim Tebow played awful for three quarters against the Chicago Bears last weekend. I kept watching the game in part because Tebow (and the Broncos in general) were playing in such a mediocre fashion. We all know the script – Tebow sucks statistically for three quarters and then in the fourth quarter comes to life to impossibly pull the game out of the hat for a win for the Broncos.
I suspect that the dismal performance of the Broncos for three quarters, only to pull out the game after coming from behind is making Rolaids addicts out of the Broncos coaching staff and management. The fans however seem to love it. The only stat that fans know about in the final analysis is who won. The vast majority of fans are not at all concerned with how the win occurs. A win is a win. Stats are simply things to debate in the off-season when there is nothing else to talk about. Broadcasters, coaches and managers seem to be the only ones concerned about performance statistics.
Now shifting back to risk management, which they tell me is supposed to be the purpose of my rambling – but thankfully short – blogs. Are risk managers more concerned about stats (i.e. VAR, risk weightings, volatility levels etc.) or are we more concerned with outcomes? The answer should be obvious, but I am not sure that it is. In my working with risk managers, they often seem more concerned that their numbers look good, and less concerned about the actual outcome (assuming of course that the numbers looked good beforehand). Perhaps risk managers should be more like the fans and more concerned about outcomes.
Sometimes the numbers suck, but the desired result occurs. Sometimes the numbers are great but the outcome sucks. Sometimes uncertainty occurs. (Did I say “sometimes” in the previous sentence – I meant “always”.) Stats are stats, and wins are wins. Sometimes (always) it really is that simple.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I was conducting a class last week when we starting discussing a quote attributed to Einstein that “Elegance is for tailors”. The meaning that I take from this is that as scientists (and as risk managers I consider us to be scientists – although what science(s) we should be is a great topic for a future blog) should be most concerned with the functional and what works, rather than what is mathematically elegant.
There is a lot of finance and risk management that is elegant. The problem is that a lot of it is wrong. It assumes conditions that are only approximately correct (I blogged before on quasi-arbitrage), and thus when scaled up to industrial size the mistakes become huge, rendering the original elegant result not only wrong but misleadingly wrong.
An old saying that I first saw attributed to Riskmetrics rephrases Einstein’s saying as; “It is better to be approximately right, than precisely wrong”. Let’s leave the tailoring to the tailors. (Unfortunately great tailors are a dying breed.)
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I am writing this blog late on a Sunday night as I wait for a connecting flight to get home from an international trip. I am tired, exasperated with the hassles of travel, and hungry yet not wanting to face another airport meal. Those of you that travel a lot know the drill all too well. (The flip side is that I have a really cool job as a consultant, and I get to meet a lot on interesting people who give me great ideas and inspire me.)
While I sit in the airport lounge and think of all the things I have to do, I am reminded for some strange reason of my university days. It must be the Sunday night fatigue, and combined with the time of year of the semester end with all of its stresses with exams and term projects coming due. In any case, I am tired, but have a long layover, and thus I need to get myself to some level of reasonable work efficiency.
Thinking of my university days, I thought I would pick out an old album that I used to listen to while I did my university work. In my university days I always had energy (youth is an amazing thing) and somehow I always got things done. Perhaps instead of the youth it was the music?! At this stage it can’t hurt I thought. I cued up an old university album on my iPad and you know what – the music did revive me, and I am now starting to have a productive evening again.
Listening to an old album inspires old feelings – most of which were good feelings. Indeed the music is inspiring me and I am being quite productive. However it got me wondering if as risk managers we too go back to the old tried and true when creativity and energy for new solutions is lacking. Old favorites are great for a short spurt, but do we want to constantly and consistently live in the past? Or is the old music and the old way of doing things invigorating because it was great and continues to be great? An interesting double sided coin.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
As a kid I was a royal pain (some – maybe most – of the people who know me now might say that not a lot has changed). I was always asking my parents why this and why that. Everything was one big question to me. Fortunately my parents were patient and answered my questions and then when fatigue set in they would send me to the bookstore. My addiction with questions is probably what led me into studying science at school.
Kids in general tend to be very curious. They ask lots of questions, and they ask lots of layers of questions. Kids think their parents are smart, as their parents (and teachers) have answers. It is fun being a kid – ask a question and get an answer. Now as a parent I realize that sometimes the answers were not quite as accurate and true as I originally thought.
Do we as risk mangers ask lots of questions – or do we try to play the role of grownups in always having an answer (no matter how flimsy or inaccurate)? Count how many times today you ask why, and how many times you give an answer to someone else’s question (implied or explicit). What is your question to answer ratio? Are you a parent or a kid? Which should you be as a risk manager?
by Stephen McPhie, CA
Partner, RSD Solutions Inc.
Is the best risk manager the one who has the best solutions? Is it the one with the most experience, the best grasp of technical fundamentals, the one with the best solutions? Is the best risk manager the one who understands the optimum risk appetite for his or her organization? I would contend that it’s none of these. The best risk manager is the one who asks the best questions.
by Stephen McPhie, CA
Partner, RSD Solutions Inc.,
Something does not feel quite right with BRIC. The "R" in fact. This represents a country that has shunned the opportunity for reform that could have been afforded while high oil and gas revenues have been flowing in. One where corruption is rife, the rule of law inadequate at best, the demographics are unfavourable and floods of people are getting out or getting their money out or both. One where an increasingly oppressive regime seems destined to continue for many years to come. Why is it part of BRIC?
Perhaps the "R" should be removed and replaced with "T". Of course, many countries in the developing world have great promise and improving conditions for growth so BRIC represents the large powerhouses among them. T is for Turkey, which looks in a very good position to grow and prosper over the coming decades and which has good looking demographics. Only problem is that BTIC does not flow so easily off the tongue.
What does this mean at the company level for risk managers? Perhaps little but perhaps a lot, depending on sales, supply and investment flows and potential currency movements. Such things should at least be considered in an ERM context.
It would be interesting to hear any comments about my "R" for "T" substitution, especially among any ex-pat Turks!
by Don Alexander, MBA
Associate, RSD Solutions Inc.
The recent confrontation between Greece and EU officials provide a good lesson for risk managers. EU officials continue to minimize potential risks, fail to take realize their magnitude and communicate the problems, and take the necessary steps to remedy the situation. These are all symptoms of a failure of risk management.
Greek Prime Minister Papandreou made a stand, against the proposed Greek debt restructuring, and even though he was forced to backpedal, Wyplosz argues that he did the Eurozone a favor by providing it an opportunity to change course. The Greek government has largely been following the dictates of EU officials to not restructure their debt, but this might have been the least costly remedy if done in a timely manner.
The Greek revolt, even if short lived, is good news on the European crisis front – it might provoke the long-awaited policy turnaround that is necessary to end the Eurozone crisis. It may finally awaken Eurozone leaders to the futility of the path they’ve chosen. One way or another, a disorderly Greek default is in the cards with its attendant contagion for all of the rest of the PIIGS (Portugal, Ireland, Italy, and Spain) and maybe even France. The cost of a default could be much larger than delaying the inevitable Greek restructuring.
Dazed and Confused? Eurozone officials took the wrong path in early 2010, because they did not fundamentally understand the nature and depth of the problem. Perhaps, they did not want to deal with it and brazenly assumed things would revert back to normal. However, the seriousness of the surging debt and slow growth revealed all the flaws hidden in the euro’s first ten years. There is a cost for their negligence.
At that point a real solution is inevitable – one that requires Eurozone leaders and the ECB to play on the same side with credible rules for all. An ECB backstop for Eurozone bonds will be required, but this does not mean underwriting banks and sovereigns. The ECB guarantee should be set to protect the ECB and to force a debt restructuring for countries that face unbearably high interest rates.
Banks will have to be bailed out, possibly with EFSF resources, but in a way that minimizes moral hazard and maximizes taxpayer protection. That means wiping out shareholders and, if need be, unsecured bondholders. The cost of the bailout could reach into the hundreds of billions and does not include recapitalizing financial institutions. A long-term cost is the sustained period of sub-trend growth resulting from the overhang.
Can we learn anything for risk management?
For more on this follow the link: http://www.voxeu.org/index.php?q=node/7222
