Howard and Peter

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

I recently re-read Ayn Rand’s book the Fountainhead.  The book – which was first published in 1943 is the sister novel of her perhaps more famous novel Atlas Shrugged.  

Two of the main characters in the book are Howard Roark and Peter Keating.  While the book has many plots and sub-plots, and can be read on a number of different levels, the main plot of the book follows the careers of these two gentlemen as they make their way in the field of architecture. 

Peter Keating is the epitome of success.  He graduates at the first of his class and has the opportunity to work for the most prestigious firms.  He succeeds by making only minor adjustments to the classic architecture that has come before him.  He succeeds by providing people with architecture that is familiar and comfortable for them. 

Howard Roark however struggles as an architect.  His designs are bold, innovative and treat each project on its own individual merits, rather than an assignment to tweak the mould of what has been done before.  

The author makes it perfectly clear who the more talented architect is – it is Roark, however it is Keating who gets the publicity, the praise and the rewards. 

 In risk management do we reward those who develop solutions based solely on tweaking what has been done before, or do we reward bold thinkers who develop innovative solutions and techniques that are appropriate and unique to the situation at hand?  

You will have to read “The Fountainhead” to find out what ultimately happened to Howard and Peter.  In risk management we are still writing the story.

The Judgment Deficit

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

On my most recent plane trip I read a Harvard Business Review article by Amar Bhide that I have been meaning to read for some time.  The article is titled “The Judgment Deficit” (HBR, September 2010, pp 44 - 53).  

In this article, Bhide essentially points out that we have surrendered judgment to models and rule based thinking.  While he points out that there are times and situations where rules or models are appropriate, they can never capture the complexity and value of human judgment.  I wholeheartedly agree with him.  The article points out deficiencies in having computer models make lending decisions as well as other examples from the banking sector, but the surrender of human judgment to models (and even worse -  audits) is endemic throughout risk management – whether in the financial sector or not. 

As Bhide argues, it is time to get back to basics and get back to using human judgment.  A great judgment to start with is to read Amar Bhide’s article.

The Flawed Risk Question

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I am currently teaching an Enterprise Risk Management course to senior people in the MBA Financial Services program at Dalhousie.  I recently got back one of the first sets of assignments and was marking them on a plane ride to visit one of RSD’s clients. 

The marking was going quite well until I came to one student’s answer that gave me pause.  The student started their response to the question by stating – “This question is flawed.”  Interesting I thought.  All of the other students had answered the question without any such trouble.  The point is that the student was correct.  I had asked a quite reasonable academic question, but it was flawed in that the question made some implicit assumptions.  It was flawed in that although it was a good question, but it was not the right question.  It was not an impactful question.  It was not a question that would challenge to the proper degree.  It was not a question that would lead to the core of the issue.  The question was flawed. 

How often do we ask a flawed question?  In risk how often do we ask a flawed question that produces correct, but flawed answers as a result of the flaw in the question? 

The student got a good mark for their response.

Risk Test. Part 2

Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

In a previous blog (Risk Test http://tinyurl.com/4fwypha) I talked about setting up a risk test for your risk function.  I asked what type of questions would be on that test and how you would determine what a passing score would be.

Obviously very few companies will set up a test for their risk function (much less any other part of the organization).  However there is a disturbing fact that would come out if they did.  That disturbing fact is that most of the tests would likely be full of definitions.  In other words the questions would go like “Define how this organization standardizes risk tolerance”, or “What is the company’s risk philosophy?”, etc. etc.

I suspect that a company’s risk test would have very few concepts or very little in the way of testing whether or not risk people actually understood risk, and most of it would be on corporate policies and definitions.  Inefficient, ineffective and sad I think.