Football – The Other One

 

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

*/Follow us on Twitter/* [1]

I just read a brief review of a new book that looks at the mathematics of
football – soccer that is for those of us on the west side of the
Atlantic.  The name of the book is The Numbers Game, and it is by academics
David Sally and Chris Anderson.  I have not read the book, but apparently
they conclude that it is the weakest player on a soccer squad that is more
significant to the success of the team than its strongest player. 

This is a somewhat counterintuitive result as the focus of any team is always
on the superstars.  The media sports pundits are always debating which
superstar will outperform and bring their "A game" to the big match. 
The bit players – the role players – barely get mentioned.  However as
the analysis apparently shows it is the role of these bit players to make a
play – or not – that are most significant in determining the outcome.

I suspect the same is true in risk management as well.  We focus on the big
risks – the superstar risks – and frequently underplay the role and
importance of the bit player risks.  However it is often how the "bit
player" risks "perform" that determine success or failure for the
organization.


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Cerebral Leaps

 

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

*/Follow us on Twitter/* [1]

In an article in the September 27, 2013 edition of the Report on Business
magazine, published by the Globe and Mail newspaper, there is a fascinating
article on the Bank of Canada's Governor Stephen Poloz.  The article is
written by journalist Kevin Carmichael.  It is one of the few articles that
have emerged that has provided a bit of a personal insight into the still
relatively new Governor.

The wide ranging article covers several issues, but there was one comment
made that just popped out at me, and one that I thought was rather
refreshingly honest for a public figure to make.   In talking about the
actions of the bank of Canada during the 2008 financial crisis, Poloz
comments,  "We were fighting fires, but it was not a cerebral leap
forward."

How often are we honest enough to admit to ourselves, much less others, that
we are simply fighting fires, rather than making "cerebral leaps"
forward?  How often do we confuse the two activities?  How much focus, time
and energy do we put on fighting fires versus "cerebral leaps" forward? 

What would the current state of risk management and risk regulation be if
more risk managers, executives and regulators put more focus on "cerebral
leaps" and less on fire firefighting?


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Is your risk focus biased?

 

*/By Stephen McPhie, CA
Partner, RSD Solutions Inc./*

*/Follow us on Twitter/* [1]

/(Repost of blog from July 9, 2013)/

Thinking way back a few years, I recall flying from London to Toronto a week
after 9/11, the first day flights resumed.  From a purely airport experience
it was the easiest journey through London's Heathrow airport I have ever
had.  Both Heathrow and Toronto airports were almost deserted.  Those
waiting for my flight to board were looking suspiciously and a little
nervously at the other passengers.  One man with a beard and obviously
Muslim was the subject, unreasonably, of most looks.

9/11 was clearly foremost on most people's minds.  Few, I suspect, were
concerned about the possibility of structural failure of the plane or by far
the most likely cause of disaster, human error.  I am sure that even fewer,
if anyone, had given a thought to what was the greatest risk to their lives
by a magnitude, which was the drive to the airport. 

People were so focused on one risk that they were almost completely blinded
to the existence of other greater risks that were far more likely to
happen. 

I fly often and don't see it any differently from taking a bus (apart from
the time spent getting to airports and in lines at airports).  The only
slight concern I have is human error – principally by the pilot or
maintenance personnel – which I believe is by far the greatest cause of
plane crashes.  Terrorism is horrendous and tragic and gets the biggest
headlines.  Consequently, it is hard not to be acutely focused on it. 
However, it is very uncommon and kills relatively few people (no consolation
I know for those affected by it).

Is your organization so focused on one or more headline risks that other
factors of greater likelihood and effect are being paid scant attention?  Do
you constantly re-evaluate and question your risks?


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Social Interfaces

 

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

*/Follow us on Twitter/* [1]

I have written before about the need for more consideration of design factors
in risk management.  This is something I am currently doing academic
research on in terms of trading systems.  It is admittedly not new research
for trading.  Major financial institutions spend a significant amount of
time optimizing how a trader receives and transmits information on their
trading screens. 

However, how much do we think about the social interface for risk management
systems?  How socially friendly (and socially usable) are risk management
reports?  How socially friendly and usable are most risk management
metrics?  What about the social friendliness of risk mathematics?  Do you
think the financial crisis of 2008 might have been averted if Gaussian
Copulas were a more socially accessible technique?


[1] https://twitter.com/rsdsolutions

Yes, No, Maybe So

 

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

*/Follow us on witter/* [1]

We like to think that with our advanced intelligence and our advanced
technologies and techniques that we have created a yes / no world.  Perhaps
that is true for simple problems, but for virtually all problems worthy of a
manager's attention or the analysis of an expert, the answer is almost
always "maybe so".


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Are you sure you don’t have FX exposures?

 

*/By Stephen McPhie, CA
Partner, RSD Solutions Inc./*

/(Repost of blog from May 15, 2012)/

So your company operates only domestically and you are satisfied that all
purchases and sales are in domestic currency.  No need then to spend any
more time thinking about exchange rate volatility.  Are you sure?  How
about your major suppliers?  Or your major customers?  Their currency
exposures could affect you greatly. 

If your supplier gets a lot of inputs from abroad, he may be forced to jack
up his prices to you if the domestic currency weakens.  Or if your sell
inputs to a major customer who sells much of his product abroad, you are
vulnerable to him passing on some or all of his currency exposures to you. 
And of course, if your currency strengthens, you may suddenly be hit by a
flood of cheap imports competing with your products.

So are your risk systems geared up to look at the bigger picture?

Pictures

 

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

*/Follow us on Twitter/* [1]

In the September 6 issue of the Wall Street Journal, Stephen Hawking wrote a
short essay that describes the writing of his bestseller A Brief History of
Time.[1] [2]  It is a very interesting account of how a very unlikely book
became a best seller.  One of the aspects of the book that allowed it to
become so popular is that it explained theoretical physics in a way that most
people could (sort of) understand. 

Part of getting a very mathematical subject understandable to the masses is
to minimize the need for advanced mathematics.  In this article Hawking
makes a comment about this that I find to be very fascinating.  He writes,
"I don`t care much for equations myself.  This is partly because it is
difficult for me to write them down, but mainly because I don`t have an
intuitive feeling for equations.  Instead I think in pictorial terms, …"

There are two things I find fascinating about this statement that are also
relevant to risk management.  The first is that the great physicist Stephen
Hawking does not have an "intuitive feeling" for equations.  The second
is that he thinks in pictorial terms.

How many risk managers are concerned about having an intuitive feeling for
the risk situations they are trying to quantify.  How many risk managers,
particularly the most mathematical trained, are concerned with their
intuitive understanding of a situation?  Furthermore, how many risk managers
think in pictorial terms?  I suspect that many senior executives and Board
members think in pictorial terms.  If it is good enough for Stephen Hawking,
it ought to be good enough for the vast majority of risk managers.

------------------------------------------------------------------------------
[1] [3] Stephen Hawking, Stephen Hawking`s Brief History of a Best Seller,
Wall Street Journal, September 6, 2013

 


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[2] #_ftn1
[3] #_ftnref1