*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow Rick Nason on Twitter/* [1]
*/Follow RSD Solutions on Twitter/* [2]
Stress testing is a key tool in risk management. However it seems that the
only stress testing that is done is on the down side. Hardly anyone checks
to see what the extreme situation upside is. But guess what, extreme
upsides also happen.
I firmly believe, for many reasons that I have written about before, that the
job of risk management is to "manage so as to increase the probability and
magnitude of good risk events happening while also managing so as to decrease
the probability and severity of bad risk events happening". Risk
management needs to manage both the upside and the downside.
It only makes sense to test risk strategies to see how they do under extreme
conditions on the downside as well as the upside. Two different risk
strategies can be equally effective at managing the extreme downside, but if
one allows for a better upside, would you not want to know that?
[1] https://twitter.com/rnason_dal
[2] https://twitter.com/rsdsolutions
Friday, September 19, 2014
Thursday, September 18, 2014
You Would Think
*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow Rick Nason on Twitter/* [1]
*/Follow RSD Solutions on Twitter/* [2]
My wife has many lovely qualities and is a very smart woman. An economist
however she is not. Therefore I was somewhat amused when after listening to
the report of how Statistics Canada totally botched the July Jobs report –
a key economic indicator. When the report was initially released the
announcement was that Canada had added a measly 200 jobs. The market
reacted to the totally unexpected number. It subsequently turned out that
the real number (after fixing computer and human error) was a plus 41,700
jobs. In an economy the size of Canada's that is a major difference.
When my wife was listening to this on the news she turned to me and said
"you would think that someone with some common sense would have caught
that".
Yes, you naturally would think that at first blush, but it is all too easy to
see why it would not get caught.
Firstly if a number comes out of a black box we sometimes erroneously assume
it must be correct. Most people reporting economic numbers (or risk
numbers) do not have any clue as to how to actually calculate the numbers by
hand. We rely on the computers and in the process lose an intuitive
"feel" for the numbers.
Secondly the emphasis these days is on people who are university educated
rather than market educated. As a University Professor I am not going to
knock a University education, but even I will acknowledge that a University
education should only be the start of your real education. Degrees and
certification do not and cannot replace market experience.
All too often these days, the people calculating the numbers have no idea how
to interpret them or develop a "feel" for them. Likewise, the people
who use and understand the numbers, all too often do not have an idea of how
to calculate them. This is true in economics and it is especially true in
risk management.
Therefore, unfortunately it is all too easy to see how such an embarrassing
mistake could occur. But it does make you think …
[1] https://twitter.com/rnason_dal
[2] https://twitter.com/rsdsolutions
Partner, RSD Solutions Inc./*
*/Follow Rick Nason on Twitter/* [1]
*/Follow RSD Solutions on Twitter/* [2]
My wife has many lovely qualities and is a very smart woman. An economist
however she is not. Therefore I was somewhat amused when after listening to
the report of how Statistics Canada totally botched the July Jobs report –
a key economic indicator. When the report was initially released the
announcement was that Canada had added a measly 200 jobs. The market
reacted to the totally unexpected number. It subsequently turned out that
the real number (after fixing computer and human error) was a plus 41,700
jobs. In an economy the size of Canada's that is a major difference.
When my wife was listening to this on the news she turned to me and said
"you would think that someone with some common sense would have caught
that".
Yes, you naturally would think that at first blush, but it is all too easy to
see why it would not get caught.
Firstly if a number comes out of a black box we sometimes erroneously assume
it must be correct. Most people reporting economic numbers (or risk
numbers) do not have any clue as to how to actually calculate the numbers by
hand. We rely on the computers and in the process lose an intuitive
"feel" for the numbers.
Secondly the emphasis these days is on people who are university educated
rather than market educated. As a University Professor I am not going to
knock a University education, but even I will acknowledge that a University
education should only be the start of your real education. Degrees and
certification do not and cannot replace market experience.
All too often these days, the people calculating the numbers have no idea how
to interpret them or develop a "feel" for them. Likewise, the people
who use and understand the numbers, all too often do not have an idea of how
to calculate them. This is true in economics and it is especially true in
risk management.
Therefore, unfortunately it is all too easy to see how such an embarrassing
mistake could occur. But it does make you think …
[1] https://twitter.com/rnason_dal
[2] https://twitter.com/rsdsolutions
Wednesday, September 17, 2014
CF18s
*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow Rick Nason on Twitter/* [1]
*/Follow RSD Solutions on Twitter/* [2]
You likely heard the story about the Sunwing charter that was on its way from
Toronto to Cuba had to divert back to Toronto more than half-way through its
flight and "needed" a CF18 escort to do so. The issue was two young
ladies who got into their holiday junket liquor a little too hard and a
little too early.
I understand getting the plane to the ground and offloading the offending
passengers. I also believe that most rational people would also consider
the CF18 fighter jets to be a bit of a safety overkill. My issue / question
is what would the CF 18 jets do?
There was no indication that the stupid drunken vacationers were either
wanting to, or able to take down the plane. Also there was no indication
that they wanted to crash the plane into a crowded area. Nor were they
trying to hijack it. They were simply drunken ninnies. SO what was the
point of the CF18 escort, and what was the expected CF18 escort expected to
do if a worst case did occur. "Roger, we got that – they're trying to
open up another bottle of Jack Daniels – we will fire at once!"
There are only two plausible explanations. (1) Risk management at NORAD has
also been into the Jack Daniels too hard and too heavy, or (2) risk
management at NORAD is desperate for something to do in order to justify its
budget.
[1] https://twitter.com/rnason_dal
[2] https://twitter.com/rsdsolutions
Partner, RSD Solutions Inc./*
*/Follow Rick Nason on Twitter/* [1]
*/Follow RSD Solutions on Twitter/* [2]
You likely heard the story about the Sunwing charter that was on its way from
Toronto to Cuba had to divert back to Toronto more than half-way through its
flight and "needed" a CF18 escort to do so. The issue was two young
ladies who got into their holiday junket liquor a little too hard and a
little too early.
I understand getting the plane to the ground and offloading the offending
passengers. I also believe that most rational people would also consider
the CF18 fighter jets to be a bit of a safety overkill. My issue / question
is what would the CF 18 jets do?
There was no indication that the stupid drunken vacationers were either
wanting to, or able to take down the plane. Also there was no indication
that they wanted to crash the plane into a crowded area. Nor were they
trying to hijack it. They were simply drunken ninnies. SO what was the
point of the CF18 escort, and what was the expected CF18 escort expected to
do if a worst case did occur. "Roger, we got that – they're trying to
open up another bottle of Jack Daniels – we will fire at once!"
There are only two plausible explanations. (1) Risk management at NORAD has
also been into the Jack Daniels too hard and too heavy, or (2) risk
management at NORAD is desperate for something to do in order to justify its
budget.
[1] https://twitter.com/rnason_dal
[2] https://twitter.com/rsdsolutions
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