Case Studies

 

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

As most people know, I am also a Business School professor as well as a risk
management consultant.  One of my favorite teaching methodologies is the
case method.  The case method forces students to think rather than just know
things – which in business and in risk management is a critical distinction
to keep in mind.

I was taught a very specific method for working through case studies, and it
is very applicable to risk management.  The method, or process, is to first
define the problem.  Most students immediately jump in and start the
analysis by crunching numbers or developing strategy maps.  That is putting
the cart before the horse.  The second step is to determine the focus.  In
other words, from whose focus are you going to work through the case?  Note,
that in determining the focus it is quite possible that you will be forced to
change the problem statement, as the problem is very likely focus dependent.

Most students appreciate that this might be a good thing to do, and then they
start the analysis.  However, the next step in the process is still not to
start the analysis.  It is to define the criteria by which you will choose
the optimal solution.   Before you have the decision making criteria, you
will not know what analysis to do.  Again, the cart would be before the
horse.  So often students start the analysis without first thinking about
the criteria, and as a result a faulty portfolio of analytical techniques
leads to a sub-optimal solution.

The next step is – you guessed it – is still not to start the analysis. 
To prevent biases, and to prevent getting locked into an answer before you
have done the proper due diligence, you need to develop a list of
alternatives.  After a good list of alternatives is developed, */then/* you
can start the analysis.

In risk management we too often start with the analysis without a recognition
of (a) the problem, (b) who (or what) the focus of the problem is centered
around, (c) what the criteria will be for choosing a solution or decision, or
(d) what the full list of possible alternatives are.  Risk management needs
to take a page from B-school basics.  

Mintzberg

 

*/by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc/*

Henry Mintzberg is a management consultant and a business school academic. 
Perhaps he is best known for his book "Managers, Not MBAs".  I really
like, and agree with most of what Mintzberg writes about, although many find
him too controversial.  He has the audacity to claim that business schools
aren't always all they are cracked up to be.  His writing was the
inspiration for an academic piece I wrote and published called "Business
School Myths", which I think I outlined in a blog a few years ago.

Mintzberg, like Drucker, believes that business is more than just knowing a
set of formulas, or a list of best practices.  In essence (and I am greatly
paraphrasing here) he argues that business is about wisdom, intuition and
thinking.  These are ideas I strongly believe in, and ideas that I strongly
believe need to be practiced more in risk management.

In reviewing some of my notes on Mintzberg that I am compiling for a book I
am writing, I came across this quote, which I thought was valuable to risk
managers in particular.  The quote is:  "Certainly we should measure what
we can – so long as it does not bias what we can't.  The trouble is that
it often does.  It drives out judgment, without which all measurement is
useless." 

Do you agree or disagree? 

Warning Systems 2

 

*/by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc/*

In my previous blog I wrote about the stages of warning lights and bells that
exist in my car to warn when the car is starting to lose traction, and then a
heightened set of warnings when the car has lost traction completely.  With
this in mind, I was driving home the other night – on a clear dry road I
might add – when all of a sudden loud warning bells and a big red caution
sign that I had not seen before starting flashing on my dashboard.   What
the heck is going on I thought?!  Thinking it must be something quite
serious, I immediately pulled over to the side of the road.  In any case it
would have been unsafe to drive with those distractions going off.

After I safely got pulled over and parked I started to try to diagnose what
the problem was.  The car was not on fire, and all of the gauges were at
normal settings.  The car appeared to be running properly so I was a bit
stumped (and yes, my seatbelt was correctly fastened).  I took out the
owner’s manual to check on the warning light and bells which were still
activated.   I soon was able to solve the problem.  It was that my
windshield washer fluid was low – not empty, just low.   How
ridiculous!   Having a yellow warning light, maybe, but seriously, a
flashing red light and bells for having low windshield washer fluid
levels?!  This must be something that a regulator thought was a good idea.

Warning Systems 1

 

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

Here it is the middle of April and I still do not have my snow tires off. 
No, it is not a case of procrastination (well actually it is), but a case
that it is still snowing.  (Thanks global warming!)

My car is well equipped for the snow, I have snow tires, and like most cars
these days my car has an automatic traction control system that kicks in when
the car starts to lose traction.  A while ago I was driving with my daughter
(who also is of driving age) and in the slippery conditions the car started
to lose traction.  The traction control system kicked in and a little yellow
warning symbol starting flashing on the dash.  My daughter, who like all
teenagers knows everything, made the brilliant observation that if the car
was starting to skid, the last thing you wanted to be is distracted by a
flashing warning light.  A fair observation in my opinion.

A little further down the road, (a wide road with lots of space on the corner
I might add, and with no cars or pedestrians around), my former dreams of
being a professional rally driver kicked in and I decided to intentionally
swing the car sideways around a corner in order to have a bit of fun.  As
expected the traction control started to kick in and the warning light
flashed.  However I had the car too far gone and thus the traction control
was quite powerless to prevent my somewhat reckless driving.  At this stage
bells started ringing.  At this my daughter piped in, “so you get a
flashing light when you are partially out of control and warning bells when
you are totally out of control.”  She then added, “What kind of an idiot
needs a warning bell to tell them they are skidding out of control?” 
Another fair observation in my opinion.

All too often control systems are like that.  They flash most noticeably,
and distractingly, when the situation is already too far gone.  In those
times, what is needed is focus, not distractions telling you the obvious.

By the way, we made it to our destination and back home safely – although I
now have a new game to play with my car …

Don Alexander memorial

 

Paul Alexander will be holding a memorial service in loving memory of his
brother, Don Alexander, on Saturday, April 20 from noon to 1pm (calling
hours) followed by eulogies with the service concluding at 2pm. The Memorial
will be held at Brockett Funeral Home:

*Address:* 203 Hampton Rd, Southampton, New York 11968

*Phone:*(631) 283-0822

*Website*: brockettfuneralhome.com [1]

[1] http://brockettfuneralhome.com/

Turing Test

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

The British mathematician, World War II code breaker, and one of the 
Grandfathers of the computer developed the Turing Test.  In the Turing Test, 
a person stands before two curtains.  Behind one curtain is a computer.  
Behind the second curtain is another human.  The Turing Test is whether the 
human in front of the curtains can tell which curtain the computer is behind. 

Risk departments for a variety of reasons are becoming more and more 
computerized as more and more risk analytics are deemed necessary.  However 
is your analytics heavy risk management system smart enough to pass for a 
human?  Is your risk management analytics setup smart enough that you only 
need humans solely to feed it data?  Is your Board hoping that the risk 
management "brain" of the company passes a Turing Test?  Or is no one 
thinking of asking this question?  (What are the implications of not asking 
this question?)

Customers

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

All good business units put a focus on the customer.  Who is risk 
management's customer (customers)?  What keeps that customer(s) happy?  
What do the customers value?  If risk management is a business, what is the 
ROA of that business?